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Commodities Bulletin, November 2023

21 November 2023

The November edition of our Commodities bulletin focuses on themes and issues likely to take centre stage at this month’s COP28, which will see the first global stocktake of the planet’s progress towards net zero.

Killing coal: easier said than done

Given that it accounts for over 40% of global greenhouse gas emissions from fossil fuel usage, reducing coal consumption is essential to reaching climate change targets, including those established within the Paris Agreement.1 Notwithstanding this, global coal demand rose above 8.3 billion tonnes in 2022, making it a record-breaking year. Demand continued to grow steadily in the first half of 2023 and coal remains the main energy source for power generation (over 60%) and industrial use (over 30%) globally.

In this article, we consider why coal is breaking global consumption records despite all efforts at a multilateral policy-level to phase it out.

Regional differences

One main reason is regional difference in coal dependency. Emerging markets and developing economies were responsible for 50% of global coal consumption in the early 2000s; today, they are responsible for over 80%. In part, this is because coal consumption has (until recently at least) been on a steady decline in Europe and North America, with greener alternatives on the rise. The recent and rapid industrialisation of emerging markets (the BRICS economies in particular) is also partly responsible. China accounts for over half of global coal demand and in 2022, Indonesia’s coal demand soared by around 36%, making it the fifth largest coal consumer globally, largely as a result of its rapidly-developing steel and metallurgy sector.

It is difficult not to see the challenges of phasing out a commodity that is such a fundamental driver for fast-growing emerging markets. Dislodging such a deeply embedded energy source, within even new infrastructure, will require mobilisation of significant levels of climate finance (e.g. via the deployment of renewables) to catch up with existing and future energy demand.

The impact of geopolitics

The global energy crisis of 2022, triggered by the Russian-Ukraine conflict, boosted coal consumption for a number of reasons:

  • Having lost access to Russian natural gas, Europe entered into competition with the rest of the world for LNG and was better placed to outbid and divert this cleaner energy source from less wealthy competitors, particularly in South Asia. As a result, a number of Asian countries faced significant energy security challenges and responded by scrapping or pushing back their energy transition commitments and boosting their coal-fired power capacities. Indonesia and Pakistan are notable examples.2
  • Energy security concerns reignited coal consumption in Europe too, with Germany in particular bringing several coal-fired units back online.3
  • In Australia, the Albanese government has been approving both the expansion of existing coal mines, and entirely new mines, despite the protests of activists4.

Innovation, investment and infrastructure challenges

There are some deeply entrenched barriers to phasing out coal, relating to innovation, investment and infrastructure. Often, these are more of a challenge for developing economies.

  • It is estimated that more than USD $1 trillion of capital is yet to be recovered from the approximately 9,000 existing coal plants globally. Three quarters of these are located in developing economies, most of which are recently built (many in South Asia as part of China’s Belt and Road project) and have not yet achieved a return on their initial investment. The geographical differences are stark here: the average coal-fired power plant in developing countries in Asia is less than 15 years old, compared with over 40 years old in North America. Over half of coal-intensive industry sector assets such as blast furnaces and cement kilns are less than 20 years old and are unlikely to undergo any major refurbishment or repurposing where the switch to cleaner power generation or industrial processes (to co-fired biomass or ammonia for example) could be made. The scale of existing investments and interests are a powerful incentive for a status-quo, at least until the end of these investment-cycles.
  • In some heavy-industry sectors, clean and affordable alternatives to coal are not yet readily available. For example, steel and cement are made mostly from burning coking coal, which has a very high carbon content. This process cannot yet be easily and cheaply replaced with cleaner energy sources, despite the efforts of major market participants5. To give an order of magnitude, carbon emissions from steelmaking and cement production in China alone are estimated to be higher than the European Union’s total carbon dioxide emissions. In these industries, replacing coal requires rethinking entire industrial processes and will depend on technological innovations to offer realistic and affordable clean alternatives.
  • Switching to alternative energy sources which generate lower emissions also requires heavy investment: for example, LNG receiving terminals are costly to construct, bespoke pieces of infrastructure.
  • The same is true for possible future energy sources: LNG terminals are not constructed to be compatible with receiving ammonia (without significant modification), or liquid hydrogen, should it ever become a seaborne energy source.
  • In many states, gas-to-power infrastructure to feed into national grids is sorely lacking, whereas the existing infrastructure for converting coal or oil to energy is in place.
  • Reducing coal consumption will require immense international capital investment. It is estimated6 that emerging markets and developing economies (excluding China) will require between USD 500 bn and USD 1 trillion in investment to put them on a path to transition securely away from coal.

Availability of mitigation

In the meantime, mitigating efforts such as carbon capture, utilisation and storage technologies are required. In this space, projects under development are approximately five times in number to those already in place and mitigating technologies are clearly gathering momentum. However, many of these laudable initiatives remain at the mercy of more immediate threats, in particular of energy security, in an increasingly testing and fraught geopolitical climate.

Challenges to coal

Coal is not without its challengers. These come largely from the legal, financial and insurance sectors in wealthier economies.

  • In states which permit such actions, there is a concerted legal effort on foot to ‘kill coal before it kills us’. This has manifested in a range of high-profile court actions, seeking to hold those who are perceived as being responsible for climate change – governments, corporations and some individuals – accountable for its negative consequences, challenging the expansion of coal mines and other greenhouse gas-emitting activities, and seeking to enforce human rights enshrined at national level or under international conventions. Given the rather unwelcome mass resurrection of coal as an energy source, it is anticipated that this trend is one which will continue. According to the UN Global Climate Litigation Report 2023, the number of all climate change cases has more than doubled since 2017.7
  • In part because of the risk of legal challenges and shareholder pressure, other sectors have taken action:
    • Last year, the lobby group Reclaim Finance reported that 96 banks had policies to restrict financial services to the coal sector and mining companies report that obtaining financing for new projects is becoming harder. This challenge to coal should be kept in perspective, however. Also last year, the International Energy Agency reported that global investment in coal supply would rise by around 10%, with China at the forefront.8
    • A growing number of insurance companies have restricted cover available to the coal industry, increasing the pressure on producers, which in some cases are now self-insuring. This has had knock-on effects: lack of insurance cover can tie up capital and make financing more expensive and where cover remains available, premiums have increased sharply.9

The potential for success of these challenges to coal’s dominance is uncertain because it depends in part on public policy and public opinion. More certain, however, is the fact that this issue will face us until clean, economically viable energy can be produced and deployed globally, as an alternative to the ubiquitous coal.

Dan PereraJustine Barthe-Dejean


Sustainability linked loans in the commodities sector: an increased focus on greenwashing and the potential for ‘greenhushing’?

What are SLLs and why have they been successful?

Sustainability linked loans (SLLs) are designed to incentivise the achievement of sustainability targets, most of which are voluntary commitments taken on by corporations. Typically, if the borrower hits the required sustainability target, it benefits from a reduced interest rate on its debt – and vice versa if it misses them. Whilst green loans and other types of sustainable debt are tied to funding for eligible ‘green’ projects, SLLs offer more flexibility to borrowers because loan proceeds are not tied to particular ‘green’ projects. This has made SLLs attractive for banks wanting to improve their ESG ratings and for borrowers wanting access to finance. It has helped the SLL market to grow dramatically.1

Sustainability targets in the commodities sector vary widely across the SLL market and can include targets relating to carbon emissions, traceability of supply chains, sustainability of farming methods, human rights and worker safety, amongst others.

The Loan Market Association has described SLLs as a “transition tool, supporting the borrower as it seeks to improve its overall sustainability performance”2 and many of the largest commodities traders are accessing the SLL market. On 23 October 2023, Trafigura, one of the largest commodity traders in the world, announced the successful closing of sustainability-linked facilities worth USD 2.7 billion. Trafigura is not alone: many of the largest traders, including Gunvor, COFCO, Bunge and Louis Dreyfus, have closed large SLL financings in recent years.

This sounds great; what is the problem?

Even as the SLL market continues to grow, there are potential clouds gathering as regulators have identified and begun to focus on greenwashing risks in the finance sector.

In June 2023, the Financial Conduct Authority (FCA), the UK’s financial regulator, published an open letter to the heads of ESG of financial firms, signalling that it was preparing to take a tougher stance on greenwashing in the SLL market.

In its letter, the FCA highlighted “potential market integrity concerns” in the SLL market and pointed to “weak incentives, potential conflicts of interest, and suggestions of low ambition and poor design” in relation to sustainability targets.

Other jurisdictions are following suit:

The Swiss financial regulator, FINMA, has expressed an intention to clamp down on greenwashing (“ecoblanchiment”) with a focus on the Swiss asset management sector. On 25 October 2023, the Swiss Federal Department of Finance announced proposals for new federal regulations to tackle greenwashing by August 20243.

In June 2023, the European Securities and Markets Authority published a report on the rise of greenwashing in the banking, insurance and investment sectors. The European Commission has called on industry watchdogs to address this.

A package of EU regulations and directives relating to sustainable finance, including the EU taxonomy4, the recently enacted Corporate Sustainability Reporting Directive (CSRD)5, and the proposed Green Claims Directive6, already provide tools for holding companies to account for their sustainability and green claims.

What is greenhushing?

In its report7 published in late October 2023, the International Trade and Forfaiting Association (ITFA), a trade body representing banks and companies involved in global trade and receivables financing, warns of a raft of unforeseen potential consequences from attempts to regulate greenwashing, which it describes as a “regulatory paradox”. It warns that greenwashing is being replaced with ‘greenhushing,’ where companies seek to avoid possible liability for greenwashing by setting sustainability targets which are “flexible and undemanding” and by complying with only minimum regulatory reporting requirements. These unforeseen consequences, the report argues, are “existential for trade and supply chains across the world” and the current regulatory approach may be holding back longer-term sustainable business models.

Is there guidance on good practice available?

Some guidance is available from the Loan Market Association (LMA). It publishes guidelines with principles for selecting and calibrating targets in SLLs8.

In May 2023, the LMA published a set of draft SLL clauses and this was followed, in October 2023, by a model term sheet including SLL terms. This is the first time the SLL market has seen an attempt to create standardised wording. A key aim is to help protect the legitimacy of the SLL market by reducing the risk that loans are susceptible to greenwashing claims.

The LMA clauses include the concept of ‘declassification,’ allowing a lender to declassify a facility as “sustainability linked” on the occurrence of certain events, for example the consecutive non-achievement of sustainability targets. A lender may have a right to prevent the borrower from continuing to refer to the sustainability linkage in its public statements. The LMA stops short of suggesting that borrowers who breach sustainability terms should be at risk of triggering an event of default or acceleration of the loan. However, that is not to say the draft clauses are without teeth: the threat of a ‘declassification’ event may be serious for some borrowers.

These developments may help to address some of the FCA’s market integrity concerns over the SLL market.

What should trade finance professionals do?

In the short term, aside from setting robust and meaningful sustainability targets and complying with any specific regulations and industry guidance, traders should beware of making broader sustainability assertions in relation to their trade finance products. It is crucial to ensure that any claims made can be backed up.

Discussions and cooperation with banks in the sector are an integral part of the process. However trade finance professionals should take care not to rely on a financier’s own sustainability frameworks when making sustainability or green assertions about a trade finance product or underlying goods.

Until there are common regulatory standards, there will continue to be a risk of greenwashing accusations for users of financial products, including SLLs and other sustainability-linked instruments used in trade finance9. Market participants should exercise caution. In short, sustainability targets embedded in these products should be selected extremely carefully to ensure that they are material, robust and meaningful.

Jason Marett


CBAM transition phase: a move towards decarbonisation in hard to abate sectors?

Importers into the EU of products in the cement, iron, steel, aluminium, fertiliser, hydrogen and power sectors are currently grappling with the new reporting requirements introduced by the Carbon Border Adjustment Mechanism (CBAM). These came into force on 1 October 2023 – see our previous articles for more information.1 Although no levy will be due for imports before 1 January 2026, the stakes are already high: unreported emissions attract fines of between EUR10 and EUR50 per tonne.

Importers may feel that an onerous reporting regime has been sprung upon them, in spite of the CBAM’s lengthy evolution. After years of discussion, the last twelve months have seen agreement reached between the Commission, Council of Ministers and Parliament, adoption of regulations and the beginning of the transition period.

In this article, we consider some of the challenges to the success of the CBAM and why the reporting regime is so important.

What is being reported?

Cement, iron, steel, aluminium, fertiliser and hydrogen have benefited from free allocation of allowances under the EU Emissions Trading Scheme (EU ETS), in recognition of their vulnerability to competition from imports for which no carbon price has been paid. However, free allocations are to be progressively removed to encourage decarbonisation in these heavy-emitting industries. The aim of the CBAM is to avoid “carbon leakage” (production moving out of the EU to avoid EU allowance (EUA) payments), by imposing a levy on embedded emissions in imports. These CBAM payments will be set at the EUA price at the time the product enters the EU.

However, measuring embedded GHG emissions in imports is more challenging than measuring emissions from facilities, on which the EU ETS is based. Hence the need for an information gathering transition period from 1 October 2023 to 31 December 2025. During this period, quarterly reports are required to be made to the EU on the quantities, location, production route and specific direct emissions of imports, with the option to use estimates in some circumstances. Indirect emissions, by way of consumption of electricity in the production process, must also be reported.

Details of carbon prices paid locally, in the country of production, prior to import must also be reported and those sums will eventually be set off against CBAM payments.

This data will assist the EU in structuring the scheme to apply from 1 January 2026 and also in gauging its success in encouraging other countries to put in place similar measures.

Industry concerns

European producers of cement, iron, steel, aluminium and fertiliser have been concerned about the phasing out of free allocations, coming at a time when their industries are under pressure from high energy prices, increasing indirect costs and inflation. Their industry bodies issued a joint statement at the end of 2022, requesting a test period during which CBAM payments were made on imports before free allocations were phased out. They also wanted rebates on EU ETS payments for exports, to protect them from competition from products with higher carbon footprints, as well as more limited exceptions and default arrangements. Further concerns related to data transparency, verification and review.

These issues have not been addressed by the EU regulators, no doubt reflecting pressures on the EU from World Trade Organisation (WTO) rules, which limit the unfavourable treatment of imports, as well as from importing countries, whose industries will struggle with the CBAM regime. Some less developed countries lack the infrastructure for accurate reporting and are ill-adapted to bear the cost of over-reporting and CBAM fails to recognise the Paris Agreement principle of common but differentiated responsibilities and respective capabilities, in the light of different national circumstances (CBDR) which is enshrined in Article 4 of the Paris Agreement. This principle allows for certain countries (broadly considered the Global South countries) to take on Paris Agreement commitments at a different pace to those of the developed countries. In that respect, the CBAM fails to acknowledge that Global South countries should not be expected to adopt the same carbon price as those of developed countries under the CBRD principle. This issue was reflected in the European Parliament’s June 2022 proposal, which included a commitment by the EU to finance Least Developed Countries’ efforts towards the decarbonisation of their manufacturing industries in an amount at least equal to the revenue generated for the EU by the CBAM. The Commission proposal also committed to report annually on the contribution of the CBAM revenues to such decarbonisation efforts. However, although the architects of CBAM have been concerned about a challenge to its legitimacy under WTO rules, the EU’s obligations under Article 4 of the Paris Agreement were not addressed in the final agreement between the EU Parliament and the Council on the CBAM.3

We consider specific industry issues below:


As a high user of electricity already bearing decarbonisation costs, the cement industry has supported CBAM and the inclusion of indirect emissions within its scope, although it is concerned about exports.

Iron and steel

Iron ore production has relatively low emissions and the EU is heavily dependent on imports, so the effect of CBAM on iron is expected to be less significant than on steel.

For some importers, price increases of up to US$275 per tonne of imported finished steel are anticipated. The cost of Chinese steel is projected to rise by 49% and Indian steel by 56% by 2034. No wonder then that both countries are considering WTO claims. There are also reports that India is contemplating its own carbon border adjustment mechanism– to apply to exports to the EU only.

The other largest producers2, South Korea, Turkey, Taiwan and Japan, are consulting with the EU and considering counter-measures.

Nevertheless, producers are also stepping up their decarbonisation efforts, albeit hampered by scrap shortages in more recently industrialised countries and export bans elsewhere, which limit the replacement of traditional blast furnaces with electric arc furnaces.

Meantime, the EU has been criticised by Carbon Market Watch for being unduly lenient in its approach to phasing out free EUAs for steel, which CMW say is as a result of lobbying by the European steel industry.


Indian and Chinese aluminium products are also expected to increase in price, by over 40% and 17% respectively, according to research from ING. China is considering a strategy of relocating production from coal-powered plant in the north to hydro-powered plant in the south. However, this will not help under current CBAM rules.

The EU industry warns that imports may move up the value chain in favour of finished products (such as cars and drinks cans) which fall outside CBAM’s scope and lead to an increased focus on scrap generation, as scrap has a zero carbon designation under CBAM, no matter if the original aluminium was produced in a coal or fossil fuel fired furnace. They also caution that resource shuffling may occur, where producers direct low carbon aluminium to the EU, with higher carbon products sent to destinations with more relaxed climate laws.


Gas is a common feedstock for EU fertiliser production, much of it imported, so producers already have an incentive to be efficient, benefiting their carbon footprint.

Participation in the EU ETS may kick-start investment in electrification of plant with an average industry age of 45 years, but pressure on profit margins from the removal of free allowances could hinder this.


Most EU hydrogen has its origins in fossil fuels and hydrogen was therefore included in the CBAM to avoid imports from low cost, high carbon producers.

However, the potential for green hydrogen to replace fossil fuels in large scale transportation and the increasing financial viability of green hydrogen as carbon prices rise is a great advantage for the industry, so there is a positive side to the EU’s green agenda for the hydrogen industry.


Carbon leakage is a risk for electricity, with interconnectors crossing EU borders from countries where generation has a high carbon footprint. Electricity has therefore also been included in the CBAM, although there are no free allowances as there are in other sectors.