The key role of ESG in global trade credit management
An interview with Dirk Hagener and Jesse van Cleef of Atradius
Atradius provides trade credit insurance, surety and collections services through a presence in more than 50 countries around the world. With a reputation built on excellent customer service, Atradius continuously invests in the latest market intelligence and tools to support businesses.
Climate Change Review caught up with Dirk Hagener, Director Atradius Group Marketing & Communications and Jesse van Cleef Regional Director of Special Products, to learn how action and cooperation play an integral role in the current ESG phase.
How will the credit risk industry respond to climate change?
We expect the credit risk industry to respond to climate change in two ways: firstly, based on how the credit risk insurers accept the challenge of becoming carbon neutral themselves, and secondly, based on how they adjust their portfolios to respond to politically driven climate change discussions. Banks seem to be front-runners in responding to climate change, but credit insurers will follow their example to remain attractive. One specific characteristic in the credit insurance industry is that part of the export risk in global trade, mainly in emerging markets, is insured by public entities through export credit agencies (ECAs). Therefore, governments and their ECAs will push trade risk mitigation in the direction of the politically driven framework regarding climate change.
As the private credit insurance market is mainly driven by three global insurers, it is likely that they will follow the local political direction of climate change. For their own carbon footprint, it is likely that all credit insurance providers will commit to zero emissions following the current market benchmark (the year 2050 at the latest).
Atradius has built its ESG ambitions on three key pillars:
- Enabling sustainable trade in supporting our customers on their climate change paths.
- Building an ESG DNA in our organisation, so that the ESG principles are embedded in everything we do internally and externally.
- Contributing to ESG principles in our ecosystem with commitments to the main international ESG standards such as the United Nations Sustainable Development Goals and Principles for Sustainable Insurance as well as many other commitments concerning financial investments, reducing carbon footprints and supporting local ESG initiatives.
How can risk planning in this sector benefit the client?
Proper risk management means looking at all potential risks. ESG contains an unlimited amount of potential risks and hence should be evaluated from all angles. Each topic, Environment, Social and Governance contains different risks with some of them being interconnected, making risk management and stress testing of these risks even more complicated. Credit insurance is however both a science and an art, so you can think of many examples. For instance, here are a few random examples:
Environment –What impact will climate change and extreme weather have on countries, sectors, and buyers? What are you as a corporation vulnerable to, and what can you do to prevent these risks from happening? What risks can be mitigated or avoided and which are perhaps unavoidable and even uninsurable? What actions still need to be taken to manage these? These questions need to be raised for the supply chain: What are your suppliers doing?
And most importantly for managing your trade credit risks: What are your obligors doing to manage these risks?
Social –Let’s take another very topical example: the future of work. How can we manage our workforce to remain just as productive in a hybrid working environment, or even working 100% from home due to lockdowns, etc., while staying mentally healthy and keeping the same levels of service? With the war on talent, companies with insufficient human resources strategies might ultimately struggle to survive as this could lead to a vicious downward circle.
Governance – Fraud is a key threat in credit risk. How good is a company’s corporate governance? What is their reputation in the market? What kind of management and strategy do they have? Simple things like inventory management can sometimes already reveal the good, the bad, and the ugly in an industry.
What these three ESG topics as a risk have in common is the reputational risks, which come along with them. Not managing these risks appropriately could lead to severe reputational damage, which in turn will lead to a greater emphasis on the management of other risks too. So, forgetting to manage one of these risks could create a domino effect, as doubt in a company’s risk management could lead to many side effects. Atradius aims to manage our own ESG risks as much as possible and with all the experience we are gaining, we would also like to help our business partners, like our customers and brokers.
Is there an opportunity to integrate ESG within an overall sustainability strategy?
In our view, integrating ESG is a must, not an opportunity. However, that said, there should be a clear distinction between short- mid- and long-term risks. With regards to credit risks, we notice that most ESG, and especially environmental risks are expected to take place in the mid- and long-term. This means that we still have time to adjust and tailor strategies to the expected circumstances. The word sustainability already says it: to be sustainable as a company it is also important to have a long-term strategy, including a focus on long-term profitability. In recent years, a lot of research has been done on this topic and they all seem to confirm the same thing: companies that are integrating Sustainability/ESG in their strategy are more successful.
Please describe how you have worked with clients to achieve this goal?
Next to helping our customers manage their credit portfolios including all ESG risks involved, we have an open dialogue with them around ESG. We are interested in what this means to them and what they think it means for credit insurers and more specifically for us as Atradius. We do this on a bilateral basis but also by conducting surveys. Together with our customers and other stakeholders, like companies specialising in strategy and innovation, we are trying to get a good overview of what is important to our customers, and if we can support them with specific value propositions around ESG.
How do you see the sector developing?
The credit insurance sector has always been focussed on sustainable trade. With an increased focus on ESG and improved transparency and guidelines, we expect credit insurers to become more prominent ESG players in the global economy. In the foreseeable future we expect governments to lead the developments and to require banks and multiline insurers, especially, to invest based on ESG principles. Adjustments to risk portfolio taxonomy regulation will play a strong role, which will be applied to banks and multiline insurers first. In credit insurance, the ECAs will drive change due to their relationships with local governments.
What message do you have for those considering their options in this field?
Businesses should not be discouraged by the unlimited amount of information, players, risks and the regularly moving goal posts in the area of sustainability. Just get started and you will learn and improve along the way. Another piece of advice is to ask for and accept help along your ESG journey. Many companies, just like Atradius, are keen to help you, and by providing help, these companies will also learn. Action and cooperation are key in the current phase of ESG – we have only one world, so we are all in this together.
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