Case study: ESG-linked derivative for commodity trader, Trafigura

Find out how Standard Chartered executed an ESG-linked derivative that brings together conventional risk management with sustainable linked KPIs across the supply chain.

Case study: ESG-linked derivative for commodity trader, Trafigura

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Background

A major challenge for the commodities sector is managing a range of risks, from fluctuations in the cost of the commodities themselves, to exchange rate volatility and transportation costs. As one of the world’s leading diversified commodity traders, Trafigura is responsible for sourcing, storing and distributing commodities across 48 countries. The company has adopted Environmental, Social and Governance (ESG) targets linked to the sustainable sourcing of materials and a reduction in greenhouse gas emissions.  Trafigura needed a risk management solution that could enable it to manage its financial exposure while delivering on its ESG objectives.

 

A derivative that incentivises sustainability

Standard Chartered executed an ESG-linked derivative that brings together conventional risk management with key performance indicators (KPIs) linked to reducing greenhouse gas emissions throughout the supply chain. The KPIs also extend to the sustainable sourcing of base metals to minimise the impact of mining and extraction on the natural environment.

 Both of these KPIs are key elements to Trafigura’s Responsibility framework (https://www.trafigura.com/responsibility/responsibility-framework/).

 

ESG-linked derivative structure

The transaction is uniquely structured so that Trafigura benefits from a discounted hedge rate if it meets the agreed KPIs, which are independently monitored and reported on regular basis by a leading third-party provider ERM Certification and Verification Services. If the targets are not met, Trafigura will pay a sustainability penalty.

 

Standard Chartered’s role

Standard Chartered worked closely with the commodities company to solve this challenge.  Given our extensive suite of commodity capabilities, we were able to customise a OTC solution that covers Trafigura’s commodity exposures and address its hedging and funding requirements.

The ESG-linked derivative with Trafigura furthers Standard Chartered’s commitment to funding our client partners on their journey to a low-carbon future, with a range of products to meet their needs. ESG derivatives help fund capital towards sustainable investments, manage risks including ESG risks, improve market transparency, price discovery and market efficiency, for contributing towards long term sustainability.

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