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Asian countries have “broadly regressed” on trade sustainability, with economic progress being offset by declines in social and environmental standards, researchers find.

Rising inequality and political instability, combined with persistent air pollution and inadequate labour standards are mitigating strong economic indicators, such as GDP growth and improved trade infrastructure.

According to the Sustainable Trade Index 2018, compiled by the Hinrich Foundation, a trade policy research organisation, the negative externalities restrict the sustainability of the region’s trade growth.

Researchers find that while trade is “an indispensable ingredient in economic development”, it can’t be sustainably pursued without responsible environmental stewardship and commitment to social capital.

While the report finds that Asian countries remain committed to trade-based growth, failure to tackle these environmental and social issues can act as barriers to this. With multinational companies becoming more aligned with sustainability, poor performance in these indicators can act as a barrier to foreign direct investment (FDI) to the region.

Of 20 countries studied (19 in Asia plus the US), only China, Laos and Pakistan recorded improved environmental scores on the index over the past year. China’s air pollution score improved dramatically, while Indonesia, Myanmar and Laos reduced their dependence on natural resources exports.

Meanwhile, in Malaysia, Singapore and Thailand, three of Southeast Asia’s most prominent trading nations, air pollution, deforestation and transfer emissions have worsened.

In social terms, half of the countries experienced a rise in political instability, including the US and Brunei. Sharp drops in inequality in Cambodia combined with worsening tertiary education enrolment in Indonesia contribute to a largely poor regional picture.

Given the focus afforded to sustainability in trade in recent years, the regression is disappointing. The report states that the decline is coming amid rising awareness of environmental issues. However, this is perhaps being superseded by the impact of growing populations and economic output.

According to Stephen Groff, vice-president for East Asia, Southeast Asia and the Pacific at the Asian Development Bank (ADB), this should not be used as an excuse.

“Some countries are better than others at dismissing this fallacy in terms of a trade-off between economic growth and environmental preservation. We’ve seen in a number of countries, including Bhutan, Costa Rica, the Nordic countries, Sri Lanka, Switzerland and Zambia, that you can have economic growth without massive environmental degradation,” Groff says.

Sri Lanka is singled out in the report for “punching above its weight”. The island nation has had a strong focus on sustainable development since the end of its civil war in 2009.

It has been working towards market economy status, reducing trade barriers and boosting trade facilitation, while also trying to broaden workplace participation. It is praised for a “slew of interventions” that have given it the best air pollution score, including vehicle emissions inspection programmes and a national clean air initiative.

China, meanwhile, is termed “a poster boy for change”. Aggressive interventions in industrial sectors, in an effort to clean up the notoriously noxious air and reduce capacity in manufacturing sectors, have helped reduce “the smog apocalypse”.

However, it’s worth noting that China continues to export project work that is hugely damaging to the environment. Chinese companies are set to build a 6,000MW coal-fired plant in Egypt, which would be the “biggest CO2 emitting power plant outside Asia if completed”.

The report comes at a time when banks and investors are eyeing the sustainable finance market in Asia, as reported in GTR last week.

New frameworks designed to provide standards for green loans, combined with a growing green bond sector, has seen banks scouring the continent for bankable deals. However, a lack of such projects is holding back the sector’s growth, according to ING’s head of sustainable finance for Asia Pacific, Herry Cho.