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Emissions and Climate Risk in Commodity Trading

Climate change and greenhouse gas emissions will change the situation for commodity traders in several ways. Consumers increasingly demand transparency and traceability of the origin and the carbon footprint of goods. Many players in the commodity industry have already taken action to measure and reduce their emissions. Some of the biggest energy and commodity trading companies, such as Shell, ADM, Trafigura and Cargill have pledged to disclose the emissions reduction of their shipping activities. The companies have subscribed to the Sea Cargo Charter, which provides a baseline to evaluate if the shipping activities of the signatories are aligned with the decarbonization and climate goals. Other traders have made efforts as well to be more transparent with regards to their emissions and are working on carbon reduction or even carbon neutrality.

Climate change and greenhouse gas emissions pose both a risk and an opportunity to commodity traders, especially since demand and interconnectedness in the food supply chain are increasing. Recent research about commodity traders and climate change explores how traders and other downstream supply chain players are exposed to climate change risk. According to BloombergQuint, a global temperature increase has the potential to even benefit soft commodity traders if trade rules are implemented in a way that allows them to make adjustments in food supply. On the other hand, since emissions and climate change have a direct effect on trader’s sourcing, they will pose a chronic risk to them. In addition, traders’ climate action increasingly affects their reputation among consumers and other stakeholders in the supply chain. The Covid-19 pandemic has further highlighted the problems in global supply chains and many aim for a green and sustainable recovery. Reputation will matter enormously under these conditions.

Source: Pexels, Freestock

On the investor side, things are evolving as well. Impact investing and the use of environmental, social and corporate governance (ESG) factors by investment companies are on the rise. Both investors and other stakeholders use these factors to assess companies’ sustainability performance. The third largest investment manager worldwide, State Street Global Advisors, has announced just two months ago that it was joining Climate Action 100+. The investor-led initiative aims to ensure that the world’s largest corporate greenhouse gas emitters take action on climate change.

In this environment, a wide range of both challenges and opportunities for commodity traders can be expected. Access to finance is increasingly tied to ESG performance. There might be tighter regulatory requirements as well. Going forward, reputation with regards to end consumers and other players in the supply chain is expected to play a bigger role. At the same time, traders have to ensure they remain financially competitive and profitable. This gives an opportunity to environmentally conscious and responsible traders. Digital tools will play a big role in these circumstances and commodity traders which adopt digitalisation can be expected to have an edge over their competitors. New technology such as Blockchain and Machine Learning for transaction and logistics will have an impact on both efficiency and transparency.

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This is the second in a series of articles that explores the relation between commodity trading, greenhouse gas emissions and climate change.

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