Contour discuss ESG in trade finance
Tackling environmental, social and governance (ESG) issues has always been a challenging task in the complex world of trade finance. But, the emergence of innovative, digital technologies, combined with a growing focus on sustainability by investors, banks and governments, has created a perfect storm which finally promises to turn the tide for ESG in our industry.
Against this backdrop of growing ESG awareness has been more urgent demand for solutions to make trade finance run more smoothly. The pandemic has accelerated this, shining a light on many of the industry’s shortcomings and the frailty of supply chains.
At the same time, regulators are increasingly pushing financial institutions to do business in a more sustainable way, driving ESG-focused conversations in the boardrooms of banks and corporates around the world.
Whereas in the past an ESG agenda may have been a ‘nice-to-have’ for these institutions, it now holds a central role in planning investment processes – and forward-thinking technology is steering the trade finance industry in a more sustainable direction.
The digitisation of trade finance offers some obvious benefits for the environment. The UN’s recent climate change report, described as ‘code red’ for humanity, served as a stark reminder for the need to conduct business in a more environmentally friendly way.
Trade finance is notorious for its reliance on many paper-based processes, with invoices, packing lists and insurance documents all being produced on paper. Paper is a serious hindrance to environmental sustainability – it is estimated that it accounts for 26% of total waste at landfills around the world. Replacing the abundance of paper documents in trade finance with electronic copies is an essential step to pave the way for a greener approach to business.
Beyond the immediate impact of eliminating the use of paper, the digitisation of trade finance also holds a number of secondary advantages that benefit the environment. Removing the need to produce paper, for instance, also removes the large amounts of carbon dioxide released in this process. Likewise, digitisation also takes away the need for couriers and the transportation of trade documents, further reducing carbon emissions.
Making trade more inclusive
The digitisation of trade finance also holds the key to making trade finance – and by extension, global trade as a whole – more inclusive.
Covid-19 exacerbated the financial exclusion that small-medium businesses (SMEs) have long suffered from. The current “trade finance gap” – the difference between how much trade finance is requested by businesses around the world and the actual amount of funding that banks are willing or able to provide – serves as a stark reminder of this exclusion. A latest survey conducted by the Asian Development Bank (ADB) showed the trade finance gap widened 15% to an all-time high of $1.7 trillion in 2020, as the pandemic sent shock waves through trade and supply chains.
SMEs in emerging countries have been the hardest hit – the ADB report stated that 40% of trade finance applications made by SMEs face rejection. The situation in the least developed countries is particularly dire – in Africa, the rejection rate for requests of trade finance exceeds 50%, according to a World Economic Forum report. Despite the fact that SMEs in emerging economies are the largest employers and economic contributors, a lack of access to trade finance is a top three export obstacle for half of the world’s countries.
Many of the paper-heavy processes involved in trade finance create time-consuming and costly administrative barriers that restrict access to funds. Digitisation, however, allows businesses to bypass many of these obstacles by eliminating the need to manually transfer information.
Covid-19 has magnified the inefficiencies of existing legacy processes – such as paper-based trade documents and reliance on human transportation – and has exposed the need for a system that can cope during times of uncertainty. By creating frictionless connections between businesses and financial institutions, the adoption of digital technology can make trade simpler and more efficient whilst at the same time heightening accessibility to trade finance for SMEs.
Beneficial to business
In addition to the benefits to the industry and society as a whole, ESG also increasingly informs decisions over investment strategy – so banks and corporates should look to all the possible ways in which they can tangibly fulfil their commitment to the criteria. Elements of trade finance such as Letters of Credit are ripe for digitisation and have been for years, making them an obvious place to start.
By eliminating paper, the entire trade ecosystem can bring this critically important industry into the twenty first century and work together towards a more inclusive, accessible and low-carbon future.