Lenders want to see a clear strategy for the energy transition, Gunvor Group said Wednesday, while Mercuria Energy Group Ltd. said ESG is now a priority.
Commodity trade finance loans are the lifeblood of trading houses that need to access billions of dollars of capital to fund the buying, blending, transportation and delivery of raw materials around the globe. Most of the largest trading firms have secured loans tied to ESG targets that improve lending rates.
“That is going to be the new compliance or the new credit in the future,” Gunvor Chief Financial Officer Muriel Schwab said at the FT Global Commodities Summit. “We see banks that clearly have decided they will no longer support commodity traders or corporates that do not have a clear path and a clear ambition around the energy transition.”
While many of the top trading houses have started investing in renewables and cleaner fuels, most still make the bulk of their earnings from hydrocarbons. Gunvor, Trafigura Group and Vitol Group have all posted record trading profits during the pandemic, primarily by taking advantage of wild price swings in oil.
Yet ESG concerns loom large for all of them, especially as banks increase the stringency of their lending requirements.
“ESG and various metrics are at the forefront of everything we are doing,” Mercuria CFO Guillaume Vermersch said at the summit.
Mercuria has begun disclosing some of its emissions and Chief Executive Officer Marco Dunand has committed to buying offset credits to neutralize its so-called scope 1 and scope 2 emissions, but not scope 3. The company has also said half of its investment portfolio will be in renewables in the next five years.
Vitol, the biggest independent oil trader, published its first ESG report this year, saying its carbon trading activities had jumped 61% from the year before.
Banks want improved ESG disclosures and target setting, Vitol CFO Jeff Dellapina said at the conference, adding that the pressure from lenders is not “heavy-handed,” since “they’re trying to learn as well.”
The finance chiefs said they’ve benefited from increased access to capital in the wake of a series of scandals in Asia last year that took down several smaller trading houses. Combined with banks’ more rigid ESG demands, the bigger traders stand to gain.
“The banks have exited a number of business relationships and reduced commitments to second-tier clients,” said Trafigura CFO Christophe Salmon, adding that the company’s funding pool has risen by about 10% over the past year. “We have benefited from this trend.”