The International Chamber of Commerce (ICC) has today published a report setting out proposals to tackle the longstanding challenge of defining and setting common standards for sustainable trade and associated financing.
The paper, developed in partnership with the Boston Consulting Group through a global consultation exercise involving over 200 banks and corporates, outlines what the ICC says is the first-ever standardised framework and assessment methodology to qualify the sustainability profile of trade transactions.
Unlike other asset classes, such as bonds, there are currently no standards that allow financial institutions to properly assess the entirety of the sustainability performance of trade finance transactions, leaving the industry open to accusations of greenwashing.
Financiers have also found themselves caught between competing objectives when deciding what is or isn’t sustainable. One example is that of coal financing. Although objectively bad for the environment, coal remains a vital energy source across the Asia Pacific, with recent Asian Development Bank research finding that the fuel accounts for 43% of final industrial energy in the region. Meanwhile, several developing nations, such as Indonesia, rely on coal energy exports for balance of payments needs. As a result, some industry voices have raised concerns that moves such as last month’s ban on export credit support for unabated coal-fired plants by the Organisation for Economic Co-operation and Development countries are focusing solely on the ‘E’ in ESG, and ignoring the societal repercussions.
What’s more, while specific goods may not in themselves be sustainable, they can often be used for purposes such as sustainable infrastructure. The same also applies in reverse when it comes to the trade of sustainable goods for non-sustainable purposes.
While some frameworks that govern sustainable finance already exist, they tend to solely focus on the intent of financial instruments and are not well-suited to deal with the hidden complexities of international trade, the ICC says. For example, a single trade transaction can involve as many as 20 different parties, including different types of goods, services and raw materials crossing multiple jurisdictions and requiring various forms of transport.
In today’s position paper, developed by a task force led by Andrew Wilson, the ICC’s global policy director, the ICC is proposing a new framework that will seek to break through this complexity, recognising not only positive activity, but also guiding banks and corporates towards the use of best practice standards.
Rather than defining a new set of standards for financial institutions and businesses to follow, the framework draws on existing standards wherever possible, and proposes a standardised infographic to provide a consistent means of conveying the sustainability credentials of a given transaction across each sustainability dimension – environmental, human and social, and economic.
The ICC will now open up what John Denton, its secretary general, calls the “biggest-ever consultation exercise in its history”, before commencing more detailed work next year to refine the methodology, map existing standards to the framework, and determine how they can be implemented effectively.
In an exclusive interview, GTR speaks to Wilson to understand more about the position paper and the process ahead, as well as the challenges inherent in establishing a workable sustainability framework for real-world transactions.
GTR: What is the impetus for this initiative?
Wilson: First of all, some of the discussions within the market have reached a level of maturity where we can now go out and try to establish at least a degree of standardisation. Second, although the discussions have reached that maturity, we have detected a lot of confusion in the market, so we thought we should have a proper discussion about what a future framework could look like, and what will be needed to implement that.
The reason we were keen to do this now at Cop26 is that – and this is not a criticism of the market – it is increasingly clear that trade finance is lagging behind other asset classes when it comes to incorporating sustainability. And our concern is if we don’t rectify that, ultimately, trade and trade assets will be subject to criticism by civil society and potentially subject to action by government or by regulators. We think it’s important to put a stake in the ground to demonstrate that actually the industry is serious about addressing this.
However, this is a very complex exercise. When we went through the early scoping exercise which led to the development of the report, people said, ‘well, you’ve already got all these standards, just use the green loan principles, for example’. But the reality is, that won’t work, because it does not look at the different dimensions of a trade transaction, the buyer, the seller, the intention of the transaction, the goods themselves, the mode of transportation. So we really want to send a clear message that we’re committed to doing this, but it’s difficult, and this needs to be a carefully considered process as we move forward.
GTR: What is the roadmap from this position paper to the creation of actual standards?
Wilson: Alongside the report, we are launching a structured consultation with a number of questions, partly to understand whether we’ve set the bar sufficiently high in terms of sustainability criteria, but also to understand whether it’s workable and whether there are gaps in the framework.
In parallel with that, we’ll start talking with a number of different industries and sectors to understand what best practice standards they already have that could be integrated into any future framework. The last thing we want to do is add complexity to an already complex market, and so we will look to incorporate pre-existing standards.
Based on the feedback we receive, and based on our discussions with different sectors, associations and companies, will then look at producing in Q2 or Q3 next year what we hope will be more or less a fully-fledged version of the standards. The idea then is to look at whether we can work with banks to pilot the application of the standards and hopefully get some degree of scale in the market. And then, probably at least every two years, we will then come back to the standards to do a review.
GTR: What challenges do you expect to come up against?
Wilson: One challenge we will encounter is in industries that don’t have sustainability standards or best practices. When we started this, I was slightly naïve in that I thought it would be relatively easy and that we would come to Cop26 with a fully-fledged framework and standards. It’s a far more contested space than I expected. We’ve heard different points of feedback about where the bar should be set and how you deal with the different dimensions of ESG. But it’s also a fantastically complex when you actually start to think through how this could be applied to any individual transaction. This is going to be an iterative process. We are not looking to rush in, but we just want to put a stake in the ground to say, this is the direction we’re headed in, and hopefully we can start to bring some consistency to the market.
GTR: Are there linkages between this work and the ICC’s trade digitalisation workstreams?
Wilson: If you want to enable sustainability at scale and do it in a robust way, there is an absolute need for digitalisation. We are in discussions with the Digital Standards Initiative around how we can bring these two initiatives together, because if there was effective digitalisation of the trade space, that would significantly enhance the capacity of corporates to demonstrate their sustainability profile or performance as well as make it much easier for the banks to get the data that they need.
GTR: With the consultation now open, from whom are you hoping to get responses?
Wilson: This needs to be a joint initiative with buy-in from banks and corporates. So principally, we’re very keen to get feedback from industry and the trade finance market. However, we’re also going to turn the consultation towards other stakeholders. We will be inviting comments from multilateral institutions, the UN, the WTO, sustainable finance experts, academia, and civil society groups. This will help us to identify if there are any gaps, and also test our framework in the court of public opinion. We are also very conscious that we need to test the framework with SMEs, to really make sure that in an everyday transaction, the requirements that may come from banks as a result of these standards are things that they can deal with and that they can provide this data, which again goes back to the challenge around digitalisation.
GTR: How will you ensure that the eventual standards are taken up by the market?
Wilson: Without any shadow of a doubt, the reason we’re keen to consult so very, very carefully on this is we want to make sure that this is workable and capable of being adopted by corporates and particularly by banks. Banks right now are at risk of claims, rightly or wrongly, of greenwashing, because they’re all applying different standards, which are frankly highly subjective. The market definitely sees the need for standardisation, and we really want to make sure this standard is something the industry can buy into.
Once we have the final standards next year, one idea we have at the moment is to look at getting together a group of banks to pilot the application of the standard. We think that would first of all build some momentum and really send a signal to the market that this is the direction of travel. The second thing it will do is allow us to take a deeper dive and look at some of the practical challenges of implementing any future framework in a much more granular way to understand how the standard or the framework might need to be tweaked.
The other exciting thing we think we could do is to start to look at data collection. If banks can tag transactions as sustainable using our standards, can we then link this into the ICC Trade Register and find if there is a correlation between sustainability performance and credit performance?
Essentially, we’re not just going to issue standards and leave them on the ICC website in the hope that people might use them. We’ll be actively working with the market to take this forward.