The pandemic has shone a spotlight on the role and responsibility of industry players to tackle environmental, social and governance (ESG) issues, and encouraged a new wave of innovation in trade finance. GTR and Barclays gathered industry experts for a virtual roundtable to discuss the measures that need to be taken to ensure that progress continues to be made.
- James Binns, global head of trade and working capital, Barclays
- Rebecca Harding, CEO, Coriolis Technologies
- Alexander Malaket, president, Opus Advisory and founding partner, ESG Validation
- Annabel Ross, Banking Environment Initiative lead at the Cambridge Institute for Sustainability Leadership (CISL)
- Shannon Manders, editorial director, GTR (moderator)
GTR: There has been a lot of momentum building around ESG in trade and trade finance, and parties across the trade ecosystem are increasingly buying in to the notion that sustainability is good business. How does the industry maintain this momentum and uphold the ethos of ESG and sustainability in a world where demand is outpacing supply and business costs are steadily rising?
Ross: Firstly, what we need to maintain momentum are clear definitions on what we’re all talking about. Some people think ESG refers only to reporting and disclosure, whereas others are increasingly seeing it as a framework to transform the way that business is done, which is to embed sustainability in an holistic way.
The pandemic has opened our eyes to the importance of transparency, and having access to reliable information upon which decisions can be made is also something that will help momentum.
At the moment we’re seeing quite a lot of ESG-related statistics being published and I’m hoping we’ll see more of that. Without transparency of data we don’t know what we’re working with.
Another core topic for momentum is communication. We need consistent messaging from leadership across all parts of the economy, including governments, business and finance. We need to be aligned internally, within our organisations, but also externally, with our clients, our buyers and suppliers, and ask challenging questions about what everyone is doing from an ESG perspective.
Also, we need to ensure we’re approaching this holistically, so not just tackling net zero-related issues, but bringing in broader sustainability. One of the ways we’re doing that at CISL is by updating our Let’s discuss climate guide, which was about how banks can interact with large corporates on climate, to also include nature. I’d love to see the social inclusion element come into that as well because there’s a little bit of friction at the moment between pure greenhouse gas emission decisions versus the impact on society.
Lastly, what’s essential to maintaining momentum is being practical. We can be idealistic, but we’re going to lose the trust of people who are being sold a story that it’s win-win, and everyone’s going to benefit. There will be trade-offs. I’m an economist by background, and I think we have to be realistic about the challenge we have ahead and realise that it’s going to be a journey. But taking a practical and proactive stance will keep momentum going.
Malaket: One of the reflexes around ESG is to look at it as a cost and risk mitigation thought process. But what we might do to maintain momentum is to actually look at the opportunities of ESG. The UN’s Sustainable Development Goals (SDGs) have been referred to as the greatest commercial opportunity map that’s ever been created for business. That’s one way to shift the discussion from a defensive posture to a more opportunity-oriented conversation.
Another important factor is learning from the lessons of the past. We’ve already been through a lot of what we’re experiencing today with the environmental movement and with corporate social responsibility (CSR). We’ve seen how those efforts have evolved, and in fact devolved. One of the things we need to be careful of is to not allow ESG to go the way of CSR, to devolve into a philanthropy or PR exercise. There’s a lot of attention being paid to greenwashing and virtue signalling. When you hear about top companies leading the charge on ESG, but doing not much else substantively about their business, those are the kinds of things that we need to watch for.
Binns: During Covid-19, consumers became more aware of the importance of environmentally responsible, as well as socially responsible, practices. It was a real eye opener, and it is important now not to lose that momentum.
Large organisations have a duty to continue to educate consumers, clients and employees as to why this is such an important journey because, ultimately, it’s going to be consumer behaviour and preference that drive success over the coming decades.
If we can do that, then ESG starts to become business as usual and a natural part of supply chain resilience – another topic that the pandemic helped to highlight. I would like to see us get to a point where supply chain risks from an ESG perspective are also part of day-to-day resilience planning across supply chains.
Harding: For me, there are three stages to ensure we maintain momentum. The first is identifying what is being measured, and how. What does net zero actually mean for a company’s day-to-day operations? Secondly, it’s important to make sure those measurements aren’t punitive. In that respect, we need to learn the lessons of KYC/AML, which was a punitive process and inadvertently cut out large numbers of small businesses from supply chains. Clearly, we need to ensure that all companies are involved in the process – but by incentivising, not punishing, them. Thirdly, we need to keep banging the drum that this is a necessity, rather than a nice-to-have, which is going to become increasingly clear as we start facing all the new regulations we’re expecting to see.
We also have to keep in mind that for many businesses on the ground, ESG is going to be inflationary. Meeting targets and changing operations is adding an extra layer of cost and inflationary pressure into the whole process.
GTR: The industry is facing a verification and scoring challenge. We’re seeing a number of industry bodies issuing guidelines on what constitutes ‘green’ and/or ‘sustainable’ – many of which are not yet being followed. There also appear to be some grey areas when it comes to ESG ratings. For example, a company involved in a heavy-polluting industry can secure a relatively strong rating, given that these systems often don’t assess a company’s fundamental environmental impact. Has the accountability of where all of this goes been proven out in the markets yet? Is this perhaps the next hurdle for the industry?
Malaket: It is a complete mess from a definitional, metrics and alignment perspective.
A 2020 OECD report, ESG Investing: Practices, Progress and Challenges, which evaluates the current state of ESG investing, takes a look at data and measurement challenges and approaches, noting that efforts are still highly fragmented and that ESG portfolios remain open to interpretation.
This fragmentation is problematic in terms of ratings. For example, you could have a household brand that is ranked at the very low end of one rating, but at the very highest end of another. If you’re at arm’s length from that process, there’s just no way of objectively knowing how to assess that company.
Bloomberg published a piece recently on the fundamental problem with scoring systems, suggesting that they are directionally incorrect and in fact scoring the wrong thing: less the ESG alignment of businesses and more the impact of ESG commitments on the businesses themselves. It raises some fundamental questions about what those ratings mean, and the practices behind them.
One of the reasons behind launching ESG Validation a couple of years ago was the absence of an objective and trusted voice around this work, combined with a growing number of firms claiming that they can boost a company’s ESG score.
The good news in the world of trade is that the profile of sustainable finance is being raised. The G20, under Italy’s 2021 presidency, re-established and elevated the G20 Sustainable Finance Working Group with the aim of scaling up sustainable finance that supports the objectives of the 2030 Agenda and goals of the Paris Agreement. Indonesia’s G20 presidency will seek to deliver similar outcomes.
Ross: We’re on a journey, and there’s an element of us all clamouring for standards, frameworks, data and insights in an organised way. But we’ve got to appreciate where we are on this journey – not everything is clear cut yet.
My observation of where large companies, including banks, are at the moment is ESG is becoming a mainstream consideration in such a way that all areas of the business are getting involved, which creates chaos and confusion, but will eventually lead to more organised and systemic changes. If we think of any innovation cycle, there is chaos at the beginning. We probably need that chaos because if we were to try to force things into clarity today, none of us have the maturity yet to be able to define what that might look like. Another element of the verification and accountability argument is actually putting in dollar signs so we have a clear signal from our leaders, our bosses, on what kind of behaviour they want to see. An alignment in terms of pricing may help people make better decisions that align with global sustainability objectives.
Binns: I agree we have to accept that we’re in a period of chaos. I think that’s a natural part of moving to the next step, which will hopefully be a little bit more ordered. The point that others have made about measurement and improving on that measurement step-by-step is absolutely critical. That is the basis upon which we can start to reduce the confusion and increase the accountability, because then you begin to get the necessary clarity, visibility and direction.
Like many of the other banks, we are on a journey to net zero by 2050. We’ve introduced a system called BlueTrackTM, which is a methodology to track the emissions of the activities that we finance. We’ve started to roll that out across various elements of our portfolio, and will continue doing so. Over the coming years, this will give us a lot more clarity as to what we’re financing in terms of emissions generated, and what we need to do to hit our net-zero target.
The chaos and confusion the industry faces now is creating a lot of energy and momentum, but at the same time we need to maintain a degree of prudence to make sure we are taking the right steps now to guarantee we make real progress in the future.
To Alexander’s point on people potentially showing the wrong behaviours in certain instances, it’s not just about measurement and standards, but also about auditing and checking that some of those standards are genuinely being adhered to. This will become part of regulation and auditing processes going forward, and something that we’ll be able to monitor across supply chains.
But we have to accept this is not going to happen overnight.
GTR: What is the role of data and technology in creating benchmarks and standards? What have been some of the recent efforts to drive the adoption of standardised ESG scoring criteria, tools and methodologies for trade?
Harding: The way to create standards is through what we already know, not what we don’t know. There’s a risk with all the different types of self-reporting structures, which the industry amalgamates into even more self-reporting structures, that we’re just perpetuating the problem and realising that we don’t know very much. This data is qualitative, and until you’ve got a huge amount of qualitative information that all starts to point in the same direction, you can’t really do anything with it.
What we’re doing at the Kosmos consortium is developing an ESG monitoring and passporting tool for global trade flows. We’re approaching the problem on a transactional level. Every trade transaction involves the sale of either a good or a service, which we can track and map against the SDGs and the EU taxonomy, and measure its sustainability. We’re then correlating HS codes with the SDGs and the taxonomy to create a company-level score for sustainable development.
We’re also approaching it at a country level, where we’re scoring countries’ sustainable international trade, and already we can gauge that about 80% of world trade is not sustainable.
The next step will be to build this all into some kind of regulatory reporting so that we can become less reliant over time on self-reporting. The technology is out there to enable this, and we’re working hard to harness it.
GTR: What is ESG going to look like in the trade finance space in five years’ time? Which players are going to be driving the improvement of ESG performance?
Binns: Many banks have developed good suites of solutions that are environmentally linked, and are in the process now of broadening out the criteria to include the ‘S’, the social element of ESG. This will continue.
For us at Barclays, the ongoing engagement with clients and employees on the matter is absolutely critical if we’re going to meet all the various targets we’ve set ourselves across the organisation. This includes our commitment to facilitate £100bn of green financing by 2030, as well as our journey to net zero.
We’ve talked a lot about measurability, and we will continue to roll out our BlueTrackTM methodology so that we can track and understand the emissions impact of our financing portfolio, which in turn will allow us to start balancing that portfolio to a more emissions neutral basis.
What you’ll start to see over the coming years as a result of that is a more detailed level of ESG reporting, not just for us but for other financial institutions and large organisations. This will ultimately lead to greater collaboration and a much clearer strategy so that we’re all able to achieve our targets.
Malaket: I want to end on an upbeat note. I’ll start by picking up the comments about the chaos phase. I agree that this is normal, and part of meaningful evolution. In the next five years, I hope we’ll see less chaos and more alignment. I would like to see some consolidation in the data and the ratings schemes, and some alignment in the policy approaches. I think we’ll start to see that happen as people sort out what the priorities ought to be around ESG.
Another important piece is to make ESG relevant to a broader range of stakeholders, including SMEs. One of the ways of doing so is to put it in the context of a supply chain discussion, and have the buyers drive that relevance down into their supply chains, but also have them absorb some of the costs of implementing ESG expectations for SME and micro SME suppliers.
Ross: Five years will come around very quickly. I really hope we see change and won’t still be talking about the same things we’re talking about now. If we don’t learn from past mistakes, we won’t have made progress.
My vision would be to have more strategic partnerships so that we see a lot more collaboration on tackling these big challenges, as well as an element of value add, which may come in the form of competitive sustainability. By that I mean that companies will really drive value through sustainability, making it part of their core offering, which is something we’re already seeing today. I just hope people don’t step away from the collaboration side of leadership as they do so.
In terms of which players are going to drive the improvement, incumbents have a huge role to play, but I also think innovative companies – and smaller ones that can be more nimble – are going to be the challengers and the ones that come up with interesting solutions and access capital in a way that hasn’t been seen for a long time. It could be a really exciting transformation and I hope that people embrace that, rather than resent it.
Harding: The key thing that’s going to drive a change in behaviour is regulation and we’ve already seen some significant shifts, such as government-mandated export credit agencies ending support for fossil fuels.
In terms of future opportunities, I think the circular economy offers up some exciting prospects. Although it’s still an area that is very difficult to measure objectively, there’s a very real desire from some trade financiers to start funding the recycling stage – so not just raw materials, intermediate goods and the final stages of distribution. To me, that presents a huge opportunity and I’d love to see more of it.
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