The International Trade and Forfaiting Association (ITFA) has announced plans to set up an independent cross-industry body that will create a set of common audit standards for ESG reporting.

The Sustainable Transition Foundation (STF) will define standards targeted at the trade finance sector, where ESG-related financial risks are currently measured in a range of different ways among corporates and banks.

Because regulators do not apply capital ratios to sustainable trade finance, pricing is a challenge and means that sustainable lending can lack proper incentives, ITFA says.

The foundation will also establish “the world’s first data repository for climate-related risk modelling”, including the development of capital requirements frameworks for risk mitigation and transition pricing, and combine expertise to create a common approach to audit standards.

“Sustainability is a very, very big topic. But in most organisations, it’s done at a high level, and it doesn’t have the granular dive into trade finance, which is exactly why we’re doing all this work here,” Johanna Wissing, ITFA’s ESG committee chair, tells GTR.

ITFA chairman Sean Edwards said in a webinar announcing the news yesterday that it is seeking up to £500,000 to fund the venture, with £150,000 sought for the first year from trade finance banks and ITFA members.

Funding will be tiered, with the top level giving banks a seat on the founding board, a role in defining the audit standards and the ability to give recommendations to the advisory board. Shares proportionate to investment will be issued after a year.

The STF will be set up as a community interest company, which takes into account the public interest component of climate change but also allows it to make a profit.

After the first year, it will be funded by its advisory, data, training and research services.

The audit standards will need to be common across the world, as well as being comparable, benchmarkable and repeatable, Rebecca Harding, independent trade economist with boutique consulting firm Rebeccanomics, tells GTR.

The STF will set the audit standards based on what banks say they need, Harding says, and then pool the data and run models “that will tell us the financial risk associated with the climate risk”.

“The combination of those two things is completely unique in the marketplace, and it gives us a real framework to move ahead on a collaborative basis with everyone else in the industry,” Harding says. “It’s potentially game changing as a prospect.”

Sharing data is essential, Harding adds. “This won’t work unless we do share – and all of this is pre-competitive and anonymised from the start, so we can’t stress enough that it is in the interests of the whole industry to do.”

ITFA says it will also use AI to identify the common features of existing standards and provide automated updates in an online portal.

The creation of the foundation comes in response to research carried out by Harding for ITFA that revealed how the plethora of sustainability reporting standards and lack of data was failing to properly incentivise the green transition.

These regulations “take a backward-looking ‘one size fits all’ perspective” that “restricts finance for projects which may in the longer term be more sustainable by providing weak incentives to corporates and their financial providers”, ITFA says.

Edwards pointed out in the webinar that supply chains “are both a promise of how we can do better, and potentially our Achilles’ heel”.

He said the foundation has to avoid the “nightmare” associated with anti-money laundering compliance, which involves “too much box ticking and is not driven by data”.

Current regulatory systems also risk disadvantaging or excluding smaller banks, African banks and credit insurance providers, Harding says. “The whole trade finance ecosystem is at risk because of the amount of data that’s out there and the amount of reporting that potentially will need to be done.”

Harding explains that the foundation’s tiered funding structure is intended to “make sure that the costs are not prohibitive” for smaller and niche providers.

“The problem is too big for us to fail,” she adds.

ITFA aims to reveal the first board-level investors at its annual conference in Abu Dhabi next month, with first-year seed funding slated to be achieved by December.

An investment round will be launched in Q2 2024.