In November last year, the International Chamber of Commerce (ICC) launched the first iteration of its industry framework to assess the sustainability performance of trade transactions, selecting the textile sector as its testing ground. Eleanor Wragg speaks to the team behind the initiative to get an update on the progress so far and learn about the challenges and opportunities that lie ahead.
Launched during the 2022 United Nations Climate Change Conference in November, the ICC Sustainable Trade Framework represents the first-ever standardised industry definition of sustainable trade that takes into account both environmental and socio-economic dimensions over the entire lifecycle of a transaction. It covers both the Paris Agreement objective of limiting global warming to 1.5°C above pre-industrial levels, and the United Nations Sustainable Development Goals (SDGs).
Its aim – to tackle the longstanding challenge of defining and setting common standards for sustainable trade and its associated financing – is a lofty one, and involves measuring the sustainability of the buyer, supplier, good or service being exchanged, and the purpose or end use of the goods.
A number of banks including BNP Paribas, Commerzbank, Commonwealth Bank of Australia, DNB, HSBC, Lloyds Bank, Santander, Société Générale, Wells Fargo and Yes Bank are piloting the application of the framework with their corporate clients in the textiles sector, running assessments on at least 20 transactions or five counterparties.
Once the findings of the pilot have been collated, the ICC says it will use them to develop a definitive framework for sustainable trade. Four ICC experts: Raelene Martin, head of sustainability; Sandra Hanni, global policy lead on climate; Sophie Talarico, policy advisor for sustainability; and Tomasch Kubiak, ICC Banking Commission policy manager, speak to GTR about the progress so far.
GTR: Since the launch of wave 1 of the pilot in November, what have been your main areas of focus and accomplishments?
Kubiak: Following preparatory work with pilot members in November and December, we have been working closely with banks and corporates to operationalise the pilot, bringing in fintechs to explore automation possibilities to reduce the administrative burden of data collection and analysis. Our main responsibility is to listen to and address members’ questions and provide clarifications to ensure they can test the framework effectively.
Talarico: Currently, we are in a phase where we are actively listening to and addressing questions from participants. The majority of the feedback is from the bank side. We are learning about the issues they face with their clients in implementing the framework and gathering data. This ongoing learning process is crucial for refining our approach.
Martin: What has been really purposeful since launching the wave 1 framework is the ability to test it in real-world scenarios. We have been very pleased with the level of positive responses that we have received from the banks and corporates who are involved in piloting the framework. To understand how the framework functions in practice, we’ve scheduled regular calls with the group, comprised of banks, corporates and fintechs, to address questions, identify issues in data collection and clarify classifications.
Because all information received during this pilot phase is anonymised, we have been able to carry out one-on-one discussions without the concern of revealing client or transaction information. This has enabled us to gain valuable insights around how the framework can work in practice, and where we need to make adjustments to ensure that it is workable and implementable in the long term.
These findings will help us refine the framework for the coming year, creating a robust system for companies to chart sustainability across trade components and supply chains.
GTR: Defining robust and workable sustainability standards for trade is a mammoth task; what challenges are you coming up against so far?
Talarico: One intriguing aspect of this framework is its ability to integrate both the social and environmental dimension of sustainability. It’s interesting to see the gradual approach and learning by doing that we’re all experiencing.
Initially, we aimed to create a score for trade transactions in general. However, we realised the importance of breaking trade into different components, making it difficult to have a unique score for the transaction. At this point, we can only determine if a specific component is sustainable or not, but we can’t assign a general score or measure the extent of overall sustainability. The overall scoring and breakdown is a point we will explore in the next iteration.
We began with certain ideas, and as we tried to apply them to real-world scenarios, we recognised the need for a step-by-step approach and adjustments along the way.
Kubiak: We’re engaged in a highly operational process, and when framing the pilot, we had to make decisions with the members who would be doing the heavy lifting. Choosing the textiles sector for the initial pilot, for example, meant that some banks were comfortable with getting involved immediately, since they are active in financing that industry, while others have chosen to wait until we expand out into other industries.
From the 31 banks participating in the pilot, even incomplete results will be informative. We’re learning from the process, as are the banks and clients who are helping us build the framework. They possess the technical knowledge and real-life operations experience to test various components, which is invaluable.
GTR: Amid increasing activity by governments and regulators to align financing activity with sustainability outcomes, is there scope for the framework to be utilised as an advocacy tool for the trade finance industry?
Hanni: We know that trade and trade finance have huge potential for sustainable development and can significantly contribute to sustainability and climate action. However, trade finance hasn’t been a core discussion in the climate debate. A number of different organisations and institutions are engaged in the debate around defining sustainable trade finance and developing principles that can help assess trade finance transactions and have developed important groundwork in this regard, but the industry still lacks a common understanding. Honestly, it is very difficult to establish a framework that’s both robust and workable in the real world, but we’ve taken the task on and with the wave 1 framework have made an important step in the right direction.
We have held conversations with governments and entities like the European Commission about the framework, and the positive response received reaffirms that we’re on the right track. There might be opportunities to integrate our framework, once fully developed, into government-developed taxonomies to address the gap in trade finance and trade aspects. We are also ensuring that our efforts are aligned with international discussions at the United Nations Framework Convention on Climate Change, allowing us to contribute to the larger global climate finance conversation.
Kubiak: Banks and clients often ask about the incentives and gains from engaging in sustainable trade and trade finance. While discussions around pricing or capital relief are the purview of banks and corporate clients and not something we seek to determine with this framework, we do aim to create a common language and level playing field for sustainability. Once we have these standardised definitions, banks will be better equipped with concrete evidence on sustainable lending.
GTR: What is your overall assessment of progress and what are the next steps?
Martin: While still ongoing, the pilot has already been hugely successful at testing the wave 1 framework in a real-world setting. Working with leading trade banks, we have been able to already pressure-test how we assess the different components of trade, our calibration of approved standards, the quantum of effort required to assess transactions, and critically what it takes to get clients fully engaged.
We look forward to publishing more concrete findings over the next couple of months, before expanding to further sectors beyond textiles. This will help us understand the framework’s broader applicability within the industry.