Banking innovation for sustainable supply chains: Deutsche Bank working with consumer goods companies to help reduce deforestation
Forest loss makes up roughly 15% of global greenhouse gas emissions – more than transportation. Four agricultural commodities - soy, palm oil, beef and pulp/paper - account for about 50% of tropical deforestation.
The example of palm oil demonstrates that sustainable production of agricultural commodities is one of the major challenges of our times: According to forecasts, global production will double by 2030. Additional cultivation areas will be cleared, leading to negative consequences for the climate, biodiversity and the people living there.
The goal of zero net deforestation
Fifty major consumer goods companies like Unilever, Coca-Cola and Nestle have made public commitments to transform their supply chain practices in such a way that they will help to achieve the goal of zero net deforestation. This means that the production of agricultural commodities must retain the net quantity and quality of rain forests when changes in land use are made. They have set themselves a target to reduce deforestation caused by their supply chains to zero by 2020.
Through the Banking Environment Initiative (BEI), Deutsche Bank together with other international financial institutions are working to help them achieve this goal. A “soft commodities compact” has been concluded between the Consumer Goods Forum (CGF) and the Banking Environment Initiative. The compact sets minimum standards for bank lending policies that align with the CGF sustainable procurement standards for the priority soft commodities. Deutsche Bank and several other banks have agreed to start implementing these standards as part of environmental and social risk due diligence. The cooperation between banks and consumer companies was recently discussed in Davos as well as in a meeting with White House officials.
Sabine Miltner, Group Sustainability Officer of Deutsche Bank, said: “Our partnership in support of the environmental goals of the consumer goods industry is truly an example of Deutsche Bank’s focus on client centricity and innovative sustainable performance.”
The soft commodities compact in practice
To complement the compact’s focus on risk management, the idea for a new banking product has been developed: a “Sustainable Shipment Letter of Credit”. This is a letter of credit for goods that were produced according to approved sustainability standards. This allows trade finance banks to differentiate between conventional and ‘Sustainable Shipments’. In foreign trade, letters of credit (LC) remove the risk that vendors will not be paid for the goods they deliver.
Daniel Schmand, Deutsche Bank’s Head of Trade Finance and Cash Management Corporates EMEA, explains: “Sustainable Shipment Letters of Credit are a banking innovation that can help transform commodity supply chains to deliver more socially equitable and environmentally sustainable outcomes. Deutsche Bank’s leading trade finance business stands ready to work with consumer goods companies and support them in their effort to reduce deforestation.”
Preferential rates can be a driver
The Sustainable Shipment LC has been developed with the input of leading commodity buyers, trading houses, international trade finance banks, development banks, trade finance industry bodies and international NGOs. Important support for this concept has also been created by the International Finance Corporation which has announced that it will offer trade finance banks preferential rates for partial or full guarantees covering payment risk for transactions using a Sustainable Shipment Letter of Credit.
Sabine Miltner added “Deutsche Bank is committed to using its financial expertise to help consumer goods companies reduce deforestation rates and establish environmentally sustainable ways of producing soft commodities such as palm oil”.
Assessing environmental and social risks in palm oil production is an established part of Deutsche Bank's transaction risk assessment. As a minimum clients in this sector are required to provide certification in accordance with the Roundtable on Sustainable Palm Oil criteria. The bank's continued commitment to this approach is reflected in the adoption of the Soft Commodities Compact.
“Sustainable Shipment Letters of Credit are a banking innovation that can help transform commodity supply chains to deliver more socially equitable and environmentally sustainable outcomes.”
The goal of zero net deforestation
The consumer goods companies in the ?soft commodities compact‘ have set themselves a target to reduce deforestation caused by their supply chains to zero by 2020. In January 2015 the Banking Environment Initiative (BEI) published a technical guide that was developed in order to clarify the key term “zero net deforestation”. In that guide the BEI adopts the Consumer Goods Forum’s explanation of the term, which is itself derived from the definition of the World Wildlife Fund WWF.
“Deutsche Bank is committed to using its financial expertise to help consumer goods companies reduce deforestation rates and establish environmentally sustainable ways of producing soft commodities such as palm oil.”
The soft commodities compact
Questions and answers?PDF, 0.6 MB
The Banking Environment Initiative
Paul Polman, CEO of Unilever, explains in a video why he and his colleagues in the Consumer Goods Forum attach such importance to the work of the Banking Environment Initiative in the agricultural commodity sector.