Positioning African Trade Finance for Best ESG Practices 

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With the momentum behind environmental, social, and governance (ESG) standards gaining traction as the focus on climate change takes center stage in global commitments towards a net-zero future, the strangulation of investment in the production of fossil fuels has hindered Africa’s position within global financing portfolios.

“We should be talking about sustainable trade finance rather than fixating on ESG, largely because the debate and standardization efforts have been dominated by global players who sit in western cities,” argued George Wilson, Head of Institutional Trade at Investec Bank, who spoke in Cape Town on 10 March, adding that, “There’s been a misapprehension of two important factors within the African trade finance market, when it relates to ESG sustainability: the first is the market itself and the social context of the African market; and the second is the product, making things difficult from the prioritization perspective.”

As such, the African Continental Free Trade Area (AfCFTA) agreement is expected to leverage the opportunities of an emerging single market to drive and enhance socio economic growth on the continent, facilitating a platform through which trade finance may contribute to the development of emerging economies, deliver credit for importers, and guarantees for exporters, facilitate trade finance transactions, and allow businesses to buy and sell goods more easily in accordance with global ESG standards.

“There are innovative ways for banking institutions and lenders to include ESG-risk ratings, as well as key performance indicators, within trade documentation so that trade facility and trade loan can be sustainable,” stated Kibil Sisulu, Manager of Sustainable Corporate Solutions at ESG research and ratings provider, Sustainalytics, concluding that, “The company will need to manage their ESG profile to gain benefits from that trade facility.”

While small- and medium-sized enterprises offer African countries an opportunity to extend access to trade finance beyond large corporations, discussions are currently underway regarding the introduction of a certification process for smaller providers to the AfCFTA, thus implementing transformative change across international trade and allowing greater connectivity between the various dimensions of global trade.

“One of the challenges of the widening trade finance gap is the availability of client guidelines and the availability of credit,” said Johanna Wissing, Director at global investment bank and financial services firm, Credit Suisse.

With 54 out of 55 African countries having signed the AfCFTA agreement, the continent will need to collaborate and offer transparent, pan-African partnerships between the public and private sectors to bridge the infrastructural gap, which is currently estimated at between $80 billion and $100 billion. Intra-African trade is currently held back due to low levels of financial integration, with a mere 17% of various financial technology applications capable of distributing and sharing data amongst one another.

“When it comes to trade finance, I would say this idea that trade finance in Africa is intrinsically developmental. Every dollar into trade finance is a dollar into the trade finance gap,” stated David Benson, Investment Executive at UK-based development finance institution, the CDC Group.

As such, the AfCFTA Secretariat and Afreximbank, have launched the Pan-African Payment and Settlement System, which is expected to save approximately $5 billion per year in payment transaction costs, facilitating and clearing payments, and providing settlements for cross-border trade throughout the continent. Additionally, the AfCFTA Adjustment Fund will assist in addressing tariff revenue losses and mobilize commercial funding.

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Matthew Goosen

Matthew Goosen

Matthew Goosen is a Video Editor and Content Writer at Energy Capital & Power. He holds an Honours Degree in Film and Media Studies at the University of Cape Town and is currently undergoing his Masters Degree. Born in Pretoria and raised internationally, he has been living in Cape Town since 2013.

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