Current sustainability reporting standards may prevent financial institutions from reaching long-term ESG goals, according to research from the International Trade and Forfaiting Association (ITFA).

The regulatory reporting reality of making trade sustainable, a report based on surveys and interviews with ITFA members, finds that an assortment of regulatory requirements is creating a “raft of unforeseen circumstances” that risk widening the trade finance gap and under-incentivising the social elements of transactions.

The paper says that this “regulatory paradox” stems from a “one-size-fits-all” approach to capital requirements, a backward-looking risk-based approach and an absence of scenario models to underpin assessments of climate-related credit risk.

The result is that sustainable finance does not benefit from favourable capital treatment and there is “currently no way to recognise that sustainability compliance is a reduced reputational risk, a lower consumer risk and potentially over the long term a lower credit risk”.

Rebecca Harding, independent trade expert with boutique consulting firm Rebeccanomics and author of the report, says the research demonstrates the “need to collaborate across the trade and trade finance sector and beyond to develop clear and workable guidelines for ESG reporting”.

Without these measures, Harding warns that the trade finance sector risks excluding smaller businesses and worsening the trade finance gap, especially in emerging markets, undoing “all of the good work that has been done within banks and trade associations to make trade sustainable”.

Regulators have ramped up the requirements for sustainability reporting in recent years. The wide range of ESG regulatory frameworks includes the Corporate Sustainability Reporting Directive and the EU taxonomy in Europe, and the global International Sustainability Standards Board.

After polling almost a quarter of organisations across its membership, ITFA finds that one of the main issues faced by the industry is identifying relevant metrics. Respondents claim there is little clarity on measurement standards, with 78% saying that the biggest ESG challenge facing their organisation is “confusion over what to measure”, while 71% say it is how to measure ESG factors.

There is also more work to be done to clearly define what a green or sustainable loan is, the report notes.

ITFA chair Sean Edwards says that “the wealth of standards has led to a certain degree of paralysis”, making it difficult for banks and regulators to meet green targets.

Respondents also highlight the lack of focus on the social aspect of ESG, noting that it tends to be conflated with environmental concerns as the ‘S’ for social is harder to measure by comparison.

This could mean disadvantaging countries that remain dependent on carbon-intensive commodity production for economic development, as “a blanket precautionary principle in regulation is inadequate to address real social and welfare consequences”, the report says.

“Greenhushing” is also flagged as a potential risk, a phenomenon whereby firms carry out the bare minimum in regulatory reporting to avoid accusations of greenwashing.

Most interviewees agree, however, that ESG strategies present some positives: 88% say that they offer new business opportunities and nearly 83% say they are a means of engaging with clients in a different way.

ESG considerations are a top key performance indicator for almost 60% of banks, credit insurance businesses and fintechs surveyed, while 51% say that their company has allocated more budget to ESG.

Overall, most respondents see financial services as having an important role to play in protecting the environment, with nearly 90% saying they view the provision of appropriate finance as a means of helping the planet to become more sustainable.

Johanna Wissing, ITFA ESG committee chair, adds: “We want to be an advocate for fair and impartial standards that attribute the due importance to trade finance to achieving the UN sustainable development goals, and a just and equitable transition to more positive ESG outcomes.”

To resolve the problem, ITFA is calling for the creation of a single authority to advocate for the trade finance sector, aggregate all the standards into one framework, and formulate a global audit standard in partnership with all trade associations, industry partners and stakeholders.

In a webinar to discuss the report’s findings, Harding suggested that a potential deadline by which to produce “something meaningful”, such as the creation of an audit council, could be October, when ITFA’s annual meeting will be held in Abu Dhabi.