New regulations on using electronic trade documents are a big step toward the digitalisation of supply chains that can help reach net zero. But when will they come into play? What impact will they have on your everyday role? And what's the connection between trade documents and net zero?
When the Covid-19 pandemic hit, trade finance was faced with a dilemma. The service relies on documents being couriered around the world. Suddenly, that was no longer possible so the banks agreed on work-arounds, sending documents by email and following up with phone calls.
To the uninitiated, it might be hard to believe that trade banks still use paper documentation at all. But under current trade laws they have no choice. In particular, bills of lading, which give title to the goods, have to be physical documents, which means paper.
Because of those legal requirements, trade banks have to deal with a lot of paper. An April 2021 UK Law Commission consultation noted that:
- one transaction can require over 100 pages and
- global container shipping needs 28.5bn paper documents each year.
When will the law on trade finance documentation change?
The good news is that the law may soon change to recognise e-docs. The UK’s law commission wants electronically transferable records to have the same legal effect as paper documents. Parliament is due to vote on the measure in May 2022.
The Law Commission expects the use of e-docs to lead to more efficient supply chains with greater security and lower costs for end customers.
The vote will impact much more than English law. Because Britain once dominated global maritime trade, many jurisdictions follow English maritime law. Allowing the use of e-docs will ripple round the world.
This is not the first attempt at digitising trade documents. The United Nations Commission on International Trade Law launched its Model Law on Electronic Transferable Records (MLETR) in 2017. However, so far only Bahrain, Belize, Kiribati, Singapore and Abu Dhabi Global Market have applied it.
However, there could soon be acceleration there too. The G7 announced in 2021 that it would start working on removing the legal and regulatory barriers that hamper the use of electronically transferable records. The International Chamber of Commerce (ICC) called the move “momentous”.
Trade docs and net zero
Though e-docs are warmly welcomed, the industry doesn’t expect the new laws to change the trade system overnight – and that could be a problem for net zero.
Michael Vrontamitis is an Adviser at Kountable Inc, and former Head of Trade, Europe and America at Standard Chartered.
Speaking at the Coriolis Technologies event – The Future of Strategy 2021: Beyond Sustainability – he said, “We’re not going to have time to wait for the world to fully digitalise [so that we have all the ESG information]. It’s just not going to happen in the next ten years.”
Vrontamitis sees the solution in using digitalisation to get more information out of the supply chains of multinational corporations.
He points out that around 80% of global supply chains go through transnational corporations. However, at the minute, Vrontamitis says, banks can’t measure whether particular projects meet ESG criteria or not.
“Everything is in paper in the trade shop. In the lending shop banks have depended on annual KYC [know your customer] to work out ESG status and a lot of banks aren’t even doing that.”
Electronic documents promise to provide far greater ability to track and measure what is going on in global supply chains. “The reality is going to come down to the credibility of the info and the due diligence of the banks to solve it until we get to a digital solution,” says Vrontamitis. “If we focus on multinationals in the G20, we’ll solve 80% of the problem.”
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