Western-driven sustainable trade finance approaches fail African SME trade, argue George Wilson, head of institutional trade finance, and Derryn Faure, institutional trade finance, at Investec Bank Limited. They propose leveraging existing AML and correspondent banking controls for a more practical solution.

 

The heralded, Western-driven industry approach to sustainable trade finance may work for OECD investment banks’ corporate trade, but it cannot work for African SME trade finance. One size simply does not fit all and the Western-led approach to processes and policies regarding sustainable trade finance needs to be rethought and adapted to take into account not only jurisdictional circumstances but also the difference between transactional banking and investment banking.

This is because, once again, there has been no African input into the Western regulation generation process, and policymakers have conflated developmental sustainability in transactional banking with Western ESG investment banking sensibilities.

It may not sound as grandiose and won’t require the indulgence of soi-disant ESG experts, but there is a tried and tested, perfectly adequate solution staring us right in the face – transactional anti-money-laundering (AML) risk screening, compliance and correspondent network banking controls. All the customer and transaction assessments and controls already in place in financial institutions to police money laundering and corruption just need to be augmented with sustainability risk screening, using the principles and framework enshrined in the UN’s own Global Compact and sustainable development goals (SDGs).

 

The current state of play

The emerging solutions for transactional banking sustainable trade finance appear to simply repurpose established Western investment banking ESG methodologies, frameworks and regulations, using their reductive interpretations of the UN SDGs.

These proposed solutions oblige all financiers in a chain of global trade transactions to:

  1. Use these common standardised methodologies to subjectively rate all legs of each trade transaction, ‘up and down’ the supply chain, and then subjectively resolve any conflicts inherent in these transactions using these precepts; and
  2. Enforce the resultant evidential compliance regime policies and processes, including third-party verification, to monitor, verify and report on each of these trade transactions.

 

This is unworkable, impracticable and flawed – and it’s not the first time Western policymakers have suffered from confirmation bias and disastrously sought to inflict global regulations forged for global investment banking on African transactional banking. We’ve seen this movie before, in the root causes of Africa’s trade finance gap.

 

The wrong products and type of financing

Investment banking and transactional banking are fundamentally different. Investment banking belongs on Wall Street with its investment products, securities filing and regulatory disclosures, while transactional banking handles Main Street’s payments and trade finance in the real economy.

Trade finance is not an investment activity: it is the essential ministration of risk management, credit and payments to the buying and selling of goods and services globally. In developing economies in Africa it provides the means to the fabric of the real economy and the key vector for sustainable economic growth.

A five-year, US$250mn green bond for a single renewables project could take months to arrange, with dozens of lawyers, consultants and bankers generating thousands of pages of documents, all orchestrating towards execution. On the other end of the scale, an African trade bank may have millions of SME clients, each with thousands of invoices for as little as 2,000 Kenyan shillings and tenors of 30 days, all randomly distributed and maturing through time, that all need discounting: the number, size, duration and timing of the parties and assets couldn’t be more different.

 

The Western perspective, interpretation of sustainability

ESG, which is often synonymously (but erroneously) used interchangeably with sustainability, is really a reductive interpretation of the SDGs from a Western perspective because, from their viewpoint, the First World imperatives of environment, social and governance (in that order) were the most pressing priorities for activists to steer corporate finance. Consequently, the resultant sustainability frameworks focus on “ESG”, where the “D” of “development”, which is the main purpose of the SDGs, is conspicuously missing because beyond SDG 13 (Climate Action), their societies, public and private capital, economies and populations require little or no development.

Through ESG, the SDGs have, in large part, been commandeered to influence investors’ flows of capital to incentivise investment in progressive schemes that can be ‘sustained’ because they won’t accelerate the future depredation of the environment by the affluent societies, they live in.

On the other hand, for bereft continental societies, the sustainable development envisioned in the SDGs should be a manifesto to end hunger, poverty, sickness and suffering of millions of Africans, today. ‘Sustainability’ has more to do with initiatives for achieving the goals not dwindling and failing because they are self-sustaining and endogenous, rather than built on temporary acts of Western charity.

 

Subjectivity and the wrong arbiters

We have written before on the hegemony of the Western interpretation of ‘sustainability’ as it relates to trade finance in Africa, and it hinges on the inescapable subjectivity at the heart of all pronouncements on the topic. Ultimately, it comes down to the behavioural economics’ biases and interpretations of the arbiters of whether financing a deal is ‘sustainable’ or not. You only have to consider that Tesla was simultaneously rated best, middle and flat worst by three top ESG ratings agencies to grasp that even with all the facts and numbers, taxonomies and algorithms, and armies of expensive consultants, ESG frameworks fundamentally hinge on subjective, personal interpretations.

ESG consultants, using Western frameworks, are just not qualified to assess the SDG impact and sustainability of trade transactions in developing African economies. They don’t have the local market context or knowledge, the requisite information or understanding of the parties and purposes, and can’t understand the developmental potential or dialectics of an African trade transaction.

Who can and should make these subjective decisions? The career professionals with all the information and local market and societal insight and colour: the transactional bankers responsible for financing the trade. They are just as capable of understanding the goals, don’t need Western-guided translations, really understand the detailed impact of the commerce and already enjoy the independent oversight of their own local regulators, management, audit and compliance.

Not only is the intercession of the Western ESG priesthood inappropriate for developing market trade finance sustainability designations, it also practically disqualifies obviously sustainable trade from any concessional incentives which should accompany sustainable finance: ESG-founded frameworks’ informational, administrative and compliance costs are impossible for African SME trade.

 

A practical, workable solution

There are large contingents of global trade through banks with OECD parents and clients which can accommodate the promulgated ESG frameworks, it’s just that a global solution must be just that.

If foisting investment ESG frameworks on African transactional banking won’t work, is there another workable solution that can work for the entire global span of transactional banking? Absolutely, yes! Every single leg of every single transaction financed by a regulated entity has to be risk assessed for AML, sanctions and financial crime against globally accepted standards – there are no exceptions.

A vast architecture of transactional product rules, standards, policies, procedures, assessment systems, controls and training has already been implemented across every single bank in the global correspondent network through trade-based money laundering policies and procedures. No third-party verification is required, and the transactional banking network that global trade depends upon only works because all banks must conform to global standards like the Wolfsberg Group principles. Authenticated Swift payment and trade series messages can only be sent between banks that have survived the enhanced due diligence and rigorous correspondent relationship management application onboarding requirements devised so that banks aren’t contaminated with financial crime perpetrated by their correspondents’ transactions. Similar provisions could protect against ‘greenwashing’ claims up and down an international supply chain.

With minimal effort and cost, truly inclusive global sustainable trade finance could be delivered by simply incorporating sustainability risk into all these existing transactional correspondent banking controls.

Compared with the contending presuppositions, it would practically address the right products, arbiters and controls for sustainable trade finance globally.