MSIZI KHOZA: ESG and trade finance are inextricably linked

If we are serious about building an ecosystem that encourages fair and sustainable trade, there has to be a recognition that trade finance and environmental, social & governance (ESG) principles go hand in hand.  

Across the continent there is a substantial focus on assisting women, the youth and small businesses, but the ability to unlock financing for these stakeholders is an ongoing challenge. By narrowing the trade finance gap, we can not only empower a new generation of entrepreneurs, but also help organisations align their ESG goals through sustainable finance products.  

This is where we believe technology and sustainable finance solutioning are such a critical part of the equation when it comes to solving some of the big challenges that the continent faces. The first example of this is the reporting space.  

As the ESG market is maturing, there is large emphasis on the reporting frameworks that are required. Whether you are a bank that is funding a project or the small or medium enterprise beneficiary, this adds a layer of complexity that needs to be considered. We need to identify technologies that allow the sustainable finance ecosystem to scale while simultaneously reducing the burden of reporting and disclosures.  

The second area of focus is derisking supply chains. In a post-Covid world supply chains have morphed from “just-in-time” to “just-in-case”, and this has seen renewed investment in manufacturing and infrastructure. While this will provide a welcome boost for many African countries to grow their manufacturing capacity as a result of “on-shoring”, poor infrastructure is adding a significant layer of costs to operations.

Research out of McKinsey and shared with Global Trade Review highlights the reality that inadequate transport links are adding as much as 40% to the cost base for corporates, which is eating into the working capital of businesses that need trade finance to mitigate these inefficiencies.  

One has only to consider the situation in SA, where the African Rail Industry Association has estimated that inefficient rail and ports costs the economy as much as R385bn a year. This is material leakage, which could be going to support socioeconomic initiatives.    

Should we be able to narrow this gap, we could facilitate more efficient trade, which would have positive spin-offs across the ESG spectrum. As trade becomes more efficient and cost-effective, we can bring more small businesses into the fold, including youth and women-owned businesses that simply do not have the working capital to participate in the value chain.  

A third consideration is that many African countries — and multinational corporates operating on the continent — have made commitments to reach “net zero” as part of their broader strategies. This means they need to make significant investments in technology and processes that meet global best practice as it relates to sustainability.  

Importantly, these are issues across all the big sectors at the moment, and we have worked on some exciting projects with mining groups such as Harmony, retailers such as Shoprite and big property operators such as Growthpoint. ESG is front of mind for everybody at the moment.  

Under-capitalised small and medium enterprises will not be able to make this leap on their own, and this is where innovative funding models could come to the fore. Africa is becoming an increasingly important trade partner across the globe. Whether it is the export of mining and agriculture products to developed markets or trade being stimulated by the African Continental Free Trade Area (AfCFTA) there is a demand for more efficient trade activities, and this presents a world of opportunity for financing partners that can close this gap.

With an annual trade finance funding gap of as much as $100bn and a big focus on ESG, we believe Africa is well positioned to unlock innovative solutions over the next few years, and we look forward to working with our partners to make this happen.  

• Khoza is head of ESG at Absa CIB.