As part of the two-year strategic plan our Chairman Daniela Bonzanini introduced in September 2021, the FCI Executive Committee has been contemplating how FCI can introduce the adoption of an Environmental, Social, and Governance (ESG) plan. We have been listening to our members about how ESG has impacted their businesses and have asked what FCI should do.

In general, Receivables Finance (RF), and our members in particular, have an essential role in developing a more sustainable world. In an ever-degrading environment, the kind of world we leave to future generations will depend partly on the incorporation of ESG. Population growth has had a profound impact on sustainability. As we all know population has doubled in the past 50 years to over 7.8 billion people and is estimated to grow to over 10 billion by 2050. And although the world has made great strides in social advances like human rights, the chill of human trafficking, child labour, and other social ills like racism, sexism, antisemitism, and homophobia gives rise to the necessity of ESG in our lives.

ESG refers to the three central factors (ESG Factors) used to measure an investment’s sustainability and ethical impact. The data collected can be integrated into the investment decision-making process. In its earliest forms, ESG typically used exclusionary criteria. For example, they avoided controversial industries such as tobacco, heavy carbon industries like coal, and weapons. In the receivables finance sector, we have heard from members who initially took this approach by terminating contracts with clients who worked in specific industries like coal, tobacco, defence, etc. But it is important to understand what other steps FCI members can take and what role FCI should play. ESG is more than just about the avoidance of specific industries. However, that certainly remains a common approach. However, it should focus more on engaging with its clients to ensure they conduct their business sustainably and responsibly.

One success story can be shared relating to the positive impact reverse factoring programs have on changing mindsets by tackling the entire supply chain ecosystem through an ESG incentive-based approach, setting specific KPIs targeting large anchor buyers and their global network of suppliers. FIs will then monitor the progress of these KPIs, and if on target, the anchor buyer will receive a reduced financing cost. On the other hand, if the anchor buyer does not meet the KPIs, they will see an interest rate increase.

So, we have to ask ourselves some questions. FCI is a non-profit industry association; we are not a regulatory body or have any specific oversight powers. However, we have a voice and should play our part in supporting and encouraging our members to do the same. So, what are some of the areas FCI could support?

• Educate Members: We have an obligation as an industry body to educate our members on the importance ESG plays and the urgency of its implementation. FCI should first develop a White Paper on the inclusion of ESG Strategy in RF. This can include the essential motivators for its adoption, how to build ESG strategies at the member level, and the overall role FCI can play.
• Monitor Evolution: Outline mechanisms whereby members provide annually specific inputs and disclosures to show ESG strategies’ impact in their respective institutions. As we advance, we could publish conclusions from such data in the FCI Annual Review each year.
• Benchmarking: Besides the regulations from the EU, there is also significant scope for factoring companies to help achieve sustainability targets, such as the UN’s Sustainable Development Goals (SDGs). So, should FCI require some form of benchmarking to help guide our members and set expectations?
• Invest Properly: The association itself must integrate ESG factors into our own investment decisions at home, whether it be related to environmental, social, or governance matters.
• Industry Bans: Identify targeted sectors that should be considered off-limits to the RF industry, like those with a significant carbon footprint. As we advance, we can also highlight these and the actions the members took as a centrepiece during our annual meetings.
• Implement a Rating System: Partner with an ESG rating company and potentially rate our members based on specific criteria set by FCI. Make such rating data available to the membership and outside the world to ensure accountability.

The project could be guided in part by the EU action plan on sustainable finance, an ESG regulation on the banking industry that was first raised in 2018, which is divided into three sub-parts 1) climate benchmarking using metrics to measure impact 2) sustainable finance disclosures and 3) the creation of an EU based ESG Taxonomy. EU taxonomy is a classification system establishing a list of environmentally sustainable economic activities, which can play an essential role in helping the EU scale up sustainable investment. Regulated banks in the EU will be responsible for adopting such ESG policies within the next few years. The European Union Federation (EUF) is investigating the impact this will have on the factoring industry within the EU, which FCI fully supports. It is of concern that most of the factoring companies operating within the EU are subsidiaries of banks and, as such, may not set to a different standard than the regulated banks themselves (the concern that these subsidiaries could be required to employ quite restrictive tactics lumped together with other commercial entities in the EU who will be soon be required to do deep dive analysis on their entire ecosystem, not just knowing who they are financing but also knowing where their entire supply chain infrastructure comes from, i.e., office supplies, furniture, computers, etc. And FCI as a Dutch non-profit association, could be subjected to this scrutiny soon.

As I write this article, I am sitting on a commercial flight, somewhere over the Gulf of Mexico, flying into Central America to attend an international banking conference called the FELABAN, one of the largest in the world, expecting well over 3,000 in attendance. But as I travel, I am deeply conscious of my carbon footprint and that which we all have as individuals. I recall one of the members of our Executive Committee stating that if FCI were ever to be “rated” by an external party, we would most likely fail, in part due to our sizeable carbon footprint (the number of flight hours by the FCI Secretariat, consultants, executive and technical committee members, plus just the environmental inadequacies of our headquarters in Amsterdam, which is severely out of date. So, there is an old saying, “the buck starts here” as we need first to get our house in order.

The ESG movement is driven mainly by millennials today, the next generation of investors, employees, clients, and their customers. This generation’s environment, social mindsets, and priorities are much higher than our own. But we have our challenges in meeting these expectations. First, receivables as an asset class have no benchmark index, capital markets play a minimal role in our sector, and our market is fragmented, incorporating many smaller NBFIs. But due to the pressure from consumers, investors, and stakeholders within our industry and amplified by governments and multi-lateral organizations, our members’ shareholders will ultimately require that the industry addresses these sustainability demands.

A recent report by GIB Asset Management states, “Trade in the emerging markets involves the highest usage of trade finance. African and Asian countries also have the highest need for ESG investment. Trade finance practitioners are in a prime position to provide funding where it is most needed. They can influence corporate governance and transparency, help eradicate child and slave labour, and improve gender equality. Trade finance can be a significant contributor towards meeting the UN goals on ESG!”

How can ESG be implemented in RF? It starts with the direct engagement of our members. Hence, we appreciate any of you interested in this subject reaching out to us and letting us know your thoughts. FCI will one day establish a working committee on ESG, so your input would be invaluable. Our industry plays an essential role in financing trade globally, especially in supporting SMEs. However, we also must control the negative impact these companies have on the environment, or at the least be very mindful of our support of them. FCI and our members need to play their part in helping shape the future for a sustainable world.

The article has been taken from FCI In-Sight Newsletter November 2022, written by Peter Mulroy, FCI Secretary General.