Sustainability, trade finance and compliance

06 May, 2021Ouida Taaffe

Ship in sunsetSustainable trade could help the world move towards carbon net-zero. But what is the relationship between trade, sustainability and regulation?

In the year of the COP26 Global Climate Summit in Glasgow, sustainability is on everyone’s minds. That is going to mean major changes to compliance.

New Zealand will be the first country to make banks, insurers and investment managers report the impacts of climate change on their business.

That legislation was introduced to the New Zealand parliament in mid-April, but other countries are close behind.

In 2020, the Bank of England invited large banks and building societies to take part in its Climate Biennial Exploratory Scenario. That is, a stress test of climate-related exposures, which runs this June.

More broadly, the UK government wants to be the first G20 country to make climate-related financial disclosures mandatory across the economy.

Trade banks and data on net-zero

Trade banks are already working on methodologies to reduce carbon emissions in the activities they finance and in their own business. They’re also looking to fintechs to help provide the data.

Michael Harte is Executive Director, Trade Product, Product Management Europe at Standard Chartered.

He says fintechs that incorporate artificial intelligence (AI) and ‘internet of things’ technology across the physical supply chain can relay data that can be used to reduce carbon emissions.

These fintechs, he adds, may also in future be able to reduce carbon emissions and enhance sustainable finance solutions.

However, Harte says that the “industry is still in the early stages of applying that technology and using that data”.

Data gathering and standardisation for trade finance

One of the first market-wide approaches to data gathering is from Swift – the global provider of secure financial messaging.

Swift has added the International Chamber of Commerce’s Sustainable Trade Finance Guidelines to its 'know your customer' (KYC) registry, which is used by more than 6,000 firms.

This will help trade banks and large corporates to identify ESG risks by standardising some of the necessary information on a single hub.

Data standardisation will be central to giving decarbonisation bite.

“One of the problems is having nearly 600 ratings scales for ESG,” says Alexander Malaket, President of Opus Advisory Services and founding partner at ESG Validation.

“There has to be some consolidation so that there is less picking and choosing among ratings systems."

There are global moves to bring transparency to green finance. In October 2020, for example, the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD) reported that “support for the TCFD framework has exceeded initial expectations”.

The UK’s Financial Conduct Authority (FCA), which sets standards in one of the world’s largest financial centres, wants some listed companies to report whether their disclosures are in line with TCFD recommendations. Those disclosures go right down the supply chain – far beyond ‘scope one’ emissions.

Transitioning to green financing

If the TCFD’s work goes to plan, there should soon be plenty of data for trade banks and clients to use.

That might sound like a problem for trade finance.

After all, when it comes to digitalisation, it has long lagged behind other aspects of commercial banking.

It is notorious for still having many paper-based processes. But that delayed digitalisation may turn out to be a strength in the transition to green financing. For example, trade banks – certainly in some regions – should be able to leapfrog to the latest technology.

Digitalisation could also have an unexpected benefit. Malaket says that the expertise and market knowledge in trade finance operations could finally start to be appreciated.

“This transformative phase may present an opportunity for banks to better mine and leverage operational/transactional expertise – together with customer knowledge in those units – to improve solution development and service delivery.”

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