Trade for prosperity

Dr. Rebecca Harding, CEO Coriolis Technologies

Whatever happened to the ambition of COP26? In December 2021 analysts and commentators alike were talking about 2022 as though it was likely to be the most important year for sustainability since the Paris Climate Accord. Policy makers set ambitious net zero goals, there were further bans on deforestation and targets to reduce the amount of methane produced by cattle. 

Alongside this, regulators in the EU in particular introduced stringent mandatory reporting requirements in the form of the Sustainability Financial Disclosures Regulation1 and the EU taxonomy,2 as well as in the form of the imminent Supply Chain Act. All of these measures will be introduced during the course of 2022 and by 2023 there will be requirements to report on both the “E” (environment) and “S” aspects of ESG (Environment, Social and Governance) criteria. The Security and Exchange Commission has similarly announced its intention to make mandatory sustainability reporting.3 

The crisis in Ukraine initially diverted attention away from this focus on sustainability. However, the EU’s reliance on Russia for oil and gas in particular has put a spotlight on the need to source energy from alternative suppliers as well as from alternative means. 

Yet the “how” of all of this remains vague. The International Chamber of Commerce’s joint position paper on measuring sustainable trade4 puts forward a proposal to use the Sustainable Development Goals (SDGs) as a framework for the approach to financial reporting. This is a useful framework, yet there is little guidance on exactly what needs to be measured and how it aligns with the SDGs. 

THE CORIOLIS TECHNOLOGIES APPROACH 

The Coriolis approach is based on one simple premise: that if it is possible to match the product or service in a country’s trade profile to these SDGs, then a picture of the sustainability of international trade can be drawn. Based on refined United Nations Comtrade data5 at a six digit HS code level6 a country’s imports and exports are matched to the 17 SDGs using the UNESCAP method paper as a basis.7 We match imported and exported trade products that contribute negatively and positively, and weight them for the value of trade in each SDG from the trade profile of the country concerned. 

Because some products count against several SDGs, the total annual values are higher than the value of trade in a country. For this reason, the score is normalised on a ranking of -1 (where everything is negative) to +1 where everything is positive. A score of 0 means that trade is neither negative nor positive. 

SO HOW SUSTAINABLE IS WORLD TRADE?

On this basis, world trade is not sustainable. Overall, the score for trade across the world is -0.58. In other words, nearly 80% of world trade contributes negatively to SDGs. In other words, for each SDG, there was the equivalent in value terms of some $122.7 trillion US dollars in 2020 that undermined the achievement of SDGs. The equivalent value of positive contributions was just $19.3 trillion, or 17%. A breakdown for the top five negative contributions to SDGs in value terms is illustrated in Figure 1.

If this were not worrying enough in its own right, the trade profiles of developed economies with heavy manufacturing bases are generally less sustainable than emerging economies. For example, intra-EU trade scored -0.68 in 2020, while imports into the EU as a whole scored -0.67 and exports, -0.71. 

Two aspects of this scoring system are really interesting however, and both are positive. The first is that for many countries 2020 was better in terms of sustainability than an average for the past five years. This is unsurprising since 2020 was the year when pandemic induced reductions in global trade meant that for a few months the amount of fossil fuels, manufactured items and consumer goods was considerably lower (Figure 2).

The largest and most manufacturing-heavy economies fare the worst of the G20 in terms of the sustainability of their trade: The EU’s trade, whether within the region itself or between the region and the rest of the world, has the worst score, but China, South Korea (Republic) Japan and Mexico also tip above the -0.6 mark. Interestingly, the UK has one of the better scores for the developed economies, but this reflects a smaller manufacturing base and a higher contribution of sectors such as “Works of Art” – its 10th largest sector for exports – which are not measured against SDGs. 

The other positive aspect of this scoring system is that it does not bias the sustainability risk against emerging economies. Within the G20 it is the emerging economies, with the exception of China and Mexico, that have the best scores, albeit still negative. And for the poorest nations in the world, the scores are materially lower – between -0.39 and -0.52 (Figure 3) 

Figure 3 highlights the fact that trade in the poorest economies has a completely different structure to trade in developed world economies. For example, Madagascar’s cereal imports were some $206m in 2020, while automotive imports were similar at just $214m and on a steady downward path since 2017. In other words, imports are often for substistence purposes rather than aimed at meeting luxury or consumption-based markets. 

Under these circumstances a “better” ranking, insofar as it reflects lower economic development, is not a good thing. But what it does mean is that the SDG-related risks of trade are lower and that such countries should not be excluded from trade deals or trade finance on the grounds of sustainability since, comparing like with like, their trade is less environmentally damaging.

CONCLUDING REMARKS 

This scoring system is a wakeup call for world trade and policy makers all around the world. Some of the most advanced economies have the least sustainable trade and if we are to meet the ambitious targets laid out at COP 26, we cannot afford to ignore the messages here – that the majority of world trade is unsustainable, and where it is not, it is a symptom of under-development. 

Since we know the sustainable development goals where the largest negative contributions are likely to be across world trade, we know the levers we should pull. Too much of world trade contributes negatively either to zero hunger (in other words it potentially makes access to food worse), or to negative climate conditions such as affordable and clean energy, clean water and sustainable cities. While these are age-old challenges, if we know how to measure them, we can also measure progress towards addressing them. This is progress.

References

1. https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/sustainability-related-disclosure-financial-services-sector_en 

2. European Commission: EU taxonomy for sustainable activities: https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/eu-taxonomy-sustainable-activities_en . The EU Framework for Sustainable Investment was agreed in June 2020: https://eur-lex.europa.eu/legal-content/EN/ TXT/?uri=CELEX:32020R0852 

3. https://www.sec.gov/news/statement/peirce-climate-disclosure-20220321 

4. International Chamber of Commerce and Boston Consulting Group (November 2021): ICC Standards for Sustainable Trade and Sustainable Trade Finance – ICC – International Chamber of Commerce (iccwbo.org)

5. This refinement is a bilateral mirroring by product and country trade flow (imports and exports) to plug gaps in the trade data for under-reporting nations or sectors. The average of two flows is taken and weighted in favour of the most “trustworthy” dataset. Trustwortiness is derived from reporting regularity and consistency over time. 

6. The Harmonised Standard code is the code assigned to a product for customs and excise purposes (www.un.org/comtrade) 

7. https://www.unescap.org/sites/default/d8files/knowledge-products/SDG-HS-NTM-Concordance.pdf

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