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Sustainable Trade Sets Down Roots

by internationalbanker

By Ruediger Geis, Head of Trade Affairs, Commerzbank and a member of the Executive Board of the ICC Banking Commission





Trade encompasses a global community. As such, the trade-finance sector has a responsibility to safeguard social and environmental health, alongside economic growth. Sustainable trade can help ensure we are doing just that.

So what can companies do to ensure they are trading sustainably? First, all parties must strive to secure fair labour conditions and social wellbeing for workers across corporate supply chains. Second, companies should work to mitigate environmental damage, in part by choosing energy-efficient alternatives and conserving natural resources. Then, robust and responsible business models—which provide employment security and economic growth—will follow.

As key suppliers of trade finance, banks are primed to lead sustainability efforts. Arguably, banks’ most important role is to educate the market that prioritising social and climate concerns does not preclude corporate success—and that seizing “green” opportunities will be necessary for growth.

Getting green right

But to champion sustainable trade, we first need to understand what it actually means. Obfuscating its meaning, the green label has previously fallen victim to so-called “greenwashing”—through which companies mask not-so-sustainable activities under the guise of environmental or social stewardship. Therefore, making clear to banks what defines genuine sustainability, via thorough guidelines, is crucial to progress.

The green-bond market, for example, is supported by the International Capital Market Association’s (ICMA’s) Green Bond Principles, and the project-finance market looks to the Equator Principles for guidance. Most recently, the Blue Finance Principles were unveiled to support investment for the health of ocean ecosystems. Although these frameworks have a number of factors in common, one stands out: transparency. This element underpins the ICC (International Chamber of Commerce) Banking Commission’s Working Group on Sustainable Trade Finance—and the principles it is working on creating for the trade-finance sector.

The Working Group’s objectives are threefold. The first is to develop an integrated tool that standardises the identification of environmental and social risks attached to any particular commodity or its country of origin. The result will be increased awareness of these issues by banks, as well as enhanced transparency. The second is dedicated to formulating guidelines for analysing environmental and social risks in relation to trade finance. With these, banks will be able to better assess the sustainability of their corporates’ trade business.

An understanding market

But why is assessing sustainability or having green guidelines important at all? The short answer is that it makes sense—not only for the environment but also for business. Educating all stakeholders to this end is the Working Group’s third aim. Environmental risks associated with climate change and worsening weather conditions are very real across the supply chain, for example. Mitigating and adapting to these will influence corporate longevity, providing clear economic incentives for going green.

The long answer is that as the heart of the global economy, banks must lead by example. This is already underway. Aside from the Working Group—a bellwether for collaboration between banks for sustainable economic growth—there are other initiatives at play. For example, in May 2017, Commerzbank was among a number of institutions calling for change. Intent on accelerating sustainable finance, and highlighting the financial sector’s responsibility to do so, 40 banks, corporations, universities and non-governmental organisations (NGOs) signed the Frankfurt Declaration. The signatories intend to align their work to that of wider environmental, social and governance (ESG) initiatives, including the United Nations’ Sustainable Development Goals and Principles of Responsible Investment.

More recently, in December 2018, Commerzbank became one of the first financial institutions involved in the Alliance for Development and Climate Change—an initiative founded by Germany’s Federal Ministry for Economic Cooperation and Development. The Alliance aims to make it easier for companies to raise capital to finance CO2-offset projects across the developing world. It is hoped that this effort will help to tackle climate change globally, while simultaneously promoting economic and social development locally. This represents part of the growing intent to highlight the financial sector’s responsibility in the acceleration of sustainable finance.

Indeed, collaboration is crucial—but not only between financial institutions. Establishing open lines of communication between corporations, academic institutions, governments, NGOs and regulators—all part of the global community—will prove instrumental. In this way, all parties can serve to inform, educate and learn in equal measure.

With their corporate clients, banks should look to engage in discussions around environmental and social concerns. By encouraging sustainable trade—and providing a more attractive financing for those transactions that suit their appetites for ESG risk—banks can pave the way for trading companies to address those risks and allow them to prosper as a result.

On the frontline

On the ground, too, banks are able to help in more ways than one. Banks have already bolstered green bonds in the past few years—with their share of issuance rising from 3 percent in 2014 to 22 percent in 2017. And that doesn’t include green loans or other forms of green financing, which have also increased.

This growth in available financing is having a positive effect on all areas of corporate activity. For example, financing can help to develop renewable-energy projects—such as wind and solar—and be divested from carbon-intensive fuel industries. The result could well be a renewables-powered supply chain in which manufacturing plants (at its beginning) and sales warehouses (at its end) provide environmental and economic security. It doesn’t end there, either: banks may also finance greener transportation projects that create a more sustainable logistics chain along trade corridors.

But it isn’t only capital that makes banks influential in this sphere; they are encouraging sustainable trade practices across a diverse network of counterparties—tracking not only environmental but also social and governance risks across an array of transactions or trade relationships. At Commerzbank, for instance, more than 5,000 transactions a year are examined against ESG criteria. This helps to ensure that commodities are sourced responsibly, workers are treated well and companies’ reputations remain secure.

Keeping up the good work

At the core of sustainable trade is, of course, longevity. As such, new trade-financing instruments, sustainability-assessment tools and information sources should be encouraged—and, most importantly, they should not hinder current processes. To be successful, sustainability has to become an integral part of a sleek and efficient trade-finance network. While market support is important, efficient technologies will also help.

For example, “track and trace” solutions could reliably identify the origins, positions and conditions of goods across supply chains—which could then be cross-checked against ESG-risk databases. Blockchain could provide a solution here, too. By facilitating the transfer and approval of certificates between producers and suppliers with complete transparency, blockchain could incentivise sustainable practices in agricultural-commodity trade, as counterparties secure themselves against reputational risk.

Alternatively, another strong solution would be a system overseen by an independent authority that helps to identify the sustainability risks of a given commodity in a given country. Potential risk mitigants, such as existing certifications, could also be flagged. The onus would then be on the parties involved in the trade chain to assess this risk and decide to either employ the suggested mitigants or ask for additional information about the transaction.

Sustainable trade finance is firmly on the map. How effectively it thrives now depends on the integrity of the system. Sustainable practices should be positively implemented, with a view to add real value. Patience is key: it will likely take time, and more than a couple of test-runs, to get it right. But ultimately, with the development of proper standards, coherent guidelines and stakeholder support, banks can drive forward economic growth motivated by environmental and social action.


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