Trade finance guarantees trillions of dollars’ worth of global trade annually. What role can it play in building a sustainable economy? And what data does it need to make a difference?
Financial services firms want climate-related financial disclosures – and not just static disclosures, but actionable data.
That’s what Mark Carney – former governor of the Bank of England, now UN Special Envoy for Climate Action and Finance – said in his speech at PIMFA’s Virtual Fest on 3 June 2020.
This is not a philanthropic drive.
Carney said that financial services now see climate change and how corporates tackle reaching net zero carbon emissions as “a new vector of value”.
However, given the amount of money on the balance sheets of the top 25 systemic banks – around US$130tn – their investment decisions could have a major positive impact on how climate change is tackled.
How will this play out in trade finance, which underpins global trade?
Between 2000 and 2019, global trade flows trebled from US$6.2tn to US$18.1tn, according to the International Chamber of Commerce. Global trade finance revenues in 2019 were US$46bn.
Those numbers have clearly taken a dent this year. The ICC estimates that the global value of trade could fall by up to 30% in 2020, thanks to Covid-19.
But even if trade finance revenues contract in line with that, it’s still a major market. Just as importantly, it helps decide the course of global trade.
What role will trade finance banks have in developing a sustainable economy?
“Digitalisation is central to having sustainable supply chains and sustainable trade finance,” says Michael Dietz, Global Head of Trade Finance Flow at Deutsche Bank.
“Even the components of a relatively simple item like a shirt – with its cotton, dyes and buttons – can’t really be traced and tracked without digitalisation. To go green, you have to be able to say ‘we know exactly where every last ball of cotton comes from’.”
The problem for trade finance banks, Dietz says, is that they are not yet able to do that tracking.
“But we can cluster data and that helps us to identify patterns,” he says. The answer, in principle would be blockchain – if it could be scaled.
“For most deals, a new blockchain would have to be constructed across multiple banks and multiple countries,” says Dietz. “And many emerging markets will take a long time to support blockchain.”
Sustainability in big firms
Also, banks are also not the only, or perhaps even the most important, actors when it comes to driving sustainability.
Dietz says that Deutsche Bank is “very, very interested” in sustainability in trade finance and proactively engages in debate around the issues. He says it has also made “clear decisions” to turn down deals that did not meet bank policies on sustainability and compliance.
However, he says that “the root” of truly sustainable supply chains is in large and scalable environmental, social and governance (ESG) projects.
“Having that comes down to sustainability at big firms,” says Dietz.
Can banks keep up?
That begs the question: if big firms were to move quickly on setting up an auditable data trail on sustainability, would banks be able to keep up? Trade finance, after all, still relies on paper documentation. Has the coronavirus crisis changed that?
It has brought a push from the International Chamber of Commerce (ICC) and major banks to change the current law on requiring paper bills of lading, as we reported in the May 2020 Trade Finance Newsletter.
But what about internal bank measures? There has been a shift in attitude, Dietz says.
“Banks have used the crisis to better understand the cost of manual processes. Post-crisis, trade finance will be much less travel and paper-document dependent.”
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