ESG Ratings Not Yet a Focus for Indian Banks in Trade Finance Transactions

Only 20% of respondents based in India said ESG would be a significant area of focus


There is a positive momentum towards sustainability in supply chain finance as more banks are utilizing Environmental, Sustainable, and Governance (ESG) rating services in trade finance transactions, finds UK-based finance platform Demica.

However, the survey said banks based in India were less likely to prioritize ESG in the near future, with only 20% stating that it was expected to be a significant area of focus.

There was near-unanimous agreement among respondents based in Australia, Singapore, Thailand, and Taiwan that ESG prioritization would be a key focus over the next 12 months.

The survey results suggest that there may be regional differences in terms of how much emphasis is placed on ESG in trade finance transactions.

The report is based on a survey of 190 supply chain finance professionals based in 40 countries around the world.

The Demica 2023 Benchmark Report finds that the use of ESG ratings has increased from 15% in 2022 to 23% in the current year, indicating a growing commitment to sustainability in the industry.

More banks are looking to incorporate ESG scoring criteria into their programs, with 54% of respondents indicating an interest in offering favorable rates based on these criteria.

The increasing adoption of new technologies by banks is making the sector even more appealing to those interested in ESG and technology.

The survey suggests that banks are recognizing the value of incorporating ESG criteria into their lending decisions and are looking for ways to incentivize sustainable practices among their clients.

The report also highlights the potential benefits of incorporating ESG criteria into supply chain finance, including improved transparency, risk management, and the incentivization of sustainable practices.

However, the survey indicates that translating this focus into concrete action is still relatively slow.

When asked how much banks are expecting to prioritize ESG in the next 12 months, 46% of the banks voted for “somewhat,” 15% voted “not at all,” while only 39% affirmatively voted for “significantly.”

According to the survey, 77% of banks do not use ESG rating services while structuring a transaction, compared to the remaining 23%.

While respondents said they are focusing on offering favorable rates based on ESG scoring ratings to drive ESG in trade finance transactions, the survey also indicates that only around a third of respondents were personally involved in ESG-focused transactions in the past year.

The report suggests that the slightly slow adoption of definitive measures could be attributed to the volatile macro-political and economic environment in 2022.

Rising inflation, higher interest rates, and economic uncertainty have resulted in budgeting challenges for organizations, which may have led to fewer resources being allocated for ESG programs.

In India, lending to renewable energy projects by scheduled commercial banks stood at ₹41.77 billion (~$507.19 million) as of November 2022.  This is a 113% year-over-year jump in comparison to ₹19.61 billion (~$238.11 million), according to Reserve Bank of India (RBI) data.

Last month, RBI issued a framework for financial institutions to offer ‘Green Deposits’ to customers, address ‘greenwashing’ concerns, and help augment the flow of credit to green activities and projects.