The International Trade and Forfaiting Association (ITFA) has launched a model for measuring the social value created by trade finance transactions.
The social return on investment (SROI) methodology aims to assess the off-balance sheet impact of an investment, so that banks can either benchmark the past impact of a deal or forecast potential social outcomes.
The model was unveiled at the ITFA annual conference in Singapore last week.
Rebecca Harding, chief executive of the Centre for Economic Security and member of ITFA’s ESG committee, explains that the model takes an input – such as the value of a trade finance transaction – and net outputs – such as the economic values of jobs created or contracts with local suppliers – to create a ratio of inputs to outputs.
“This ratio gives the social, societal or security return to a particular transaction over and above the value of the deal. Every transaction will be different and the approach allows this diversity to be reflected in the measurement,” she says.
“The ratio can be used to create a benchmark or baseline value allowing it to capture transition over time.”
While the concept of SROI has existed for some time, it has not previously been applied to trade finance, Harding says.
The aim is to make it easier for banks to understand their impact on aspects such as food and energy security, as well as potentially tap into regulatory capital relief.
Though large organisations may be “sceptical” about adding another model to their existing ESG processes, Harding suggests that the potential for gaining competitive advantages will be appealing.
“If it leads to something that directly allows preferential liquidity treatment on compliant lending or new products because of the work that ITFA does with regulators, then the largest banks will want to use the tool,” Harding says.
Sean Edwards, chairman of ITFA, tells GTR that Mauritius Commercial Bank is currently the “most advanced” in its adoption of the model, with three to four other banks also exploring it “very closely”.
“We don’t think it is likely that any regulator will mandate compulsory adoption of the model, so what we are looking for is a confirmation that the model can be used to model and score ESG risk and, where used appropriately with accurate data, can satisfy regulatory expectations,” he says.
The aim is to begin discussions with the OECD, with the hope that the organisation can provide direction for the project, Edwards says. After that, the timeline for discussions with regulators is six to nine months.
“I think the main obstacle will be convincing banks that a simple model can be effective in an environment filled with a multitude of standards and approaches, making complexity the norm,” says Edwards.
The key to the model’s success will be sustaining conversations with regulators and making sure the concept is useful in regions like Africa and Latin America, Harding adds.
ITFA’s ESG committee has previously tried to tackle the complexity of sustainability regulation via initiatives such as a set of common audit standards for ESG reporting.
A 2023 report from the trade body found that the range of regulatory requirements was creating a “raft of unforeseen circumstances” that risked widening the trade finance gap and under-incentivising the social elements of transactions.
