Standard Chartered’s global head of structured solutions for transaction banking, Pradeep Nair, discusses why data-driven financing models are a crucial component of making global trade truly sustainable
Companies around the world are almost unanimous in their desire to make their supply chains more responsible, resilient and future-proof, no matter the sector or the region they operate in. But to better support them in their journey and for this to scale, the trade finance sector needs a universal framework for environmental, social and governance (ESG) data.
Standard Chartered recently surveyed more than 500 C-suite and senior leaders as part of its Future of Trade 2030 report. Its findings were encouraging: global trade is moving rapidly towards a new, more sustainable and inclusive paradigm. However, although nine in 10 respondents acknowledged the need to incorporate ESG standards and practices across their supply chains, many do not have a clear view of what they need to do to achieve their goals.
The main reason for this is a lack of definitions around what ESG in trade actually is. This is a data problem: there is no uniformity in either the inputs – that is, the metrics used or the data that needs to be collected – or the outputs. As a result, there’s no real way for companies to identify which areas they need to improve upon, or benchmark themselves against others.
For banks looking to support their clients on the journey towards creating a more equitable, climate-sensitive global trading system via sustainability-linked financing, this poses a serious challenge. If a bank wishes to ascertain the credit risk of a client, it can rely on ratings. While the output of each credit assessment may not be uniform, depending on the model used – for example, BBB+, Baa1 or P2 – the inputs are governed by accounting standards, which means every company must provide the same set of information.
Across the ESG landscape however, there is a patchwork of different standards covering numerous sustainability metrics, while some areas have no standards at all. For carbon emissions, companies can use the GHG Protocol Corporate Standard, for example, but while this covers the accounting and reporting of emissions, it does not provide granularity on how the verification process should be conducted. For other environmental and social issues in the supply chain, there are myriad areas to focus on, and each company at present has the freedom to effectively self-select the details that they believe to be material – leaving them open to claims of ‘greenwashing’.
Companies want to be able to understand their ESG risks and have conversations with their banking partners as to what solutions can be offered to mitigate them. But with hundreds of different assessment techniques and scales and ways of looking at ESG in trade, each capturing certain metrics and omitting others to give a red, amber or green ESG score, or a rating of A or 1, every sustainability-linked trade and supply chain finance facility becomes a bespoke deal.
This is fast becoming a major problem for SME suppliers, who should be the largest beneficiaries of sustainability-linked supply chain finance. Often, a supplier may be catering to multiple buyers, each with different ESG criteria. Without clear standards and an agreed-upon format, the amount of work that must go in to getting the information required is significant, and this can create a barrier to accessing the financing that is needed.
Through its sustainable trade proposition, Standard Chartered is aiming to address this confusing landscape. Launched at the beginning of 2021, it embed measurable metrics that are aligned to external benchmarks across four pillars: sustainable goods, sustainable suppliers, sustainable end-use, and transition industries.
However, Standard Chartered cannot do this alone. For sustainable trade finance to scale, the industry needs a uniform model that can be used by everybody.
This is why we welcome the work by the International Chamber of Commerce (ICC) to create the first-ever standardised assessment methodology to qualify the sustainability profile of trade transactions, industry-wide.
The opportunity is enormous: the rise of digitalisation in trade and growing adoption of tools that can be leveraged for the attribution of ESG data at the transaction level are laying the ground for all participants in trade to collect and share information on their sustainability performance, allowing for meaningful change across supply chains globally. But the data they share needs a framework. This needs a home.
According to Standard Chartered’s research, global exports will rise from USD17.4 tn to USD29.7 tn over the next decade, with this upward trajectory bringing with it new prospects for more inclusive, equitable growth. An industry-wide model for ESG data will unlock the true power of trade as a force for good – as long as everyone adopts it.