Dave Meynell, ICC UK Digital Rules Advisor
“Looking ahead, the future of sustainable trade finance lies in continued innovation and collaboration”
In an era where global trade accounts for approximately 29% of the world’s GDP[1], the environmental impact of these economic activities has come under increasing scrutiny. With international trade responsible for 20% to 30% of global greenhouse gas emissions[2] and 80% to 90% of these activities reliant on trade finance[3], the role of sustainable trade finance has become pivotal in bridging the gap between economic prosperity and environmental management.
Sustainable trade finance represents a paradigm shift in how financial institutions approach trade-related transactions. It incorporates environmental, social, and governance (ESG) considerations into traditional trade finance products and services, aiming to support and incentivise trade activities that contribute positively to sustainable development goals while mitigating negative environmental and social impacts.
The emergence of sustainable trade finance is driven by a confluence of factors, including increasing regulatory pressure, growing investor demand for sustainable investments, and a broader recognition of the risks posed by climate change and social inequalities. Financial institutions are recognising that integrating sustainability into their trade finance offerings is not just a matter of corporate social responsibility but a strategic imperative for long-term business resilience.
Technology plays a crucial role in advancing sustainable trade finance, developing and implementing digital tools to better assess the sustainability impact of trade transactions. This includes using data analytics, AI, IoT, and blockchain to enhance transparency and traceability in supply chains.
Various global initiatives have emerged, including the United Nations Environment Programme (UNEP) Finance Initiative[4] and the International Chamber of Commerce (ICC), both working to harmonise global standards and develop guidelines for evaluating sustainable trade finance practices. The ICC’s Principles for Sustainable Trade[5], for instance, provide a framework to assess both the environmental and socio-economic sustainability of trade transactions across four components: the use of proceeds, the seller, the buyer, and the distribution.
Collaboration is key in advancing sustainable trade finance. Many commercial banks partner with multilateral development banks (MDBs) like the European Bank for Reconstruction and Development (EBRD)[6] or the Asian Development Bank (ADB)[7] to support sustainable trade in developing markets. These partnerships often involve risk-sharing arrangements that enable financing for green technologies and sustainable projects. At the COP28 summit, MDBs committed to increasing their support for climate action, which is likely to include expanded backing for sustainable trade finance initiatives[8].
Financial institutions are also focusing on supporting the transition to low-carbon economies by financing trade in renewable energy technologies, energy-efficient equipment, and other products that contribute to climate change mitigation and adaptation. Many banks provide capacity building and education, offering training and resources to help their clients understand and implement sustainable practices in their trade operations. Some institutions have established dedicated teams to advise clients on structuring sustainable trade transactions and accessing appropriate financing solutions.
The business case for sustainable trade finance is becoming increasingly clear. A study[9] conducted with 902 publicly listed companies in the US from 2002-2017 found that firms with high ESG performance had a significantly lower probability of corporate credit default. This reduction in commercial risk makes ESG-centric assets increasingly attractive from a risk management perspective, potentially creating a cycle of increased investment in sustainable trade activities.
Looking ahead, the future of sustainable trade finance lies in continued innovation and collaboration. Key areas for development include further digitalisation to enhance data collection and analysis, standardisation of sustainability criteria across the industry, and capacity building to enhance knowledge and skills among finance professionals. Policy advocacy will also play a crucial role in creating advantageous environments for sustainable trade practices. As highlighted by the ICC UK, the transition to a sustainable, green economy is a priority for all businesses and consumers[10].
As the sustainable finance market continues to grow and mature, trade and supply chain finance are uniquely positioned to drive positive change. By leveraging their central role in global trade flows, these financial instruments can channel capital towards more sustainable economic activities, supporting the transition to a low-carbon economy and contributing to the achievement of the United Nations Sustainable Development Goals[11].
Looking ahead, sustainable trade finance is poised for significant growth and innovation. As digital technologies continue to evolve, we can expect to see more sophisticated tools for assessing and monitoring sustainability in supply chains. Furthermore, as regulatory pressures increase and investor demand for sustainable investments grows, we may see the emergence of new financial instruments specifically designed to support sustainable trade.
Collaboration between financial institutions, corporates, and policymakers will be crucial in developing standardised frameworks for sustainable trade finance. As these standards become more established, we can anticipate increased market confidence and a potential acceleration in the adoption of sustainable trade finance practices across global supply chains.
[1] https://www.wto.org/english/blogs_e/data_blog_e/blog_dta_24apr24_e.htm
[2] https://www.lse.ac.uk/granthaminstitute/explainers/how-does-trade-contribute-to-climate-change-and-how-can-it-advance-climate-action/#:~:text=Around%2020–30%25%20of%20global,efforts%20to%20mitigate%20climate%20change.
[3] https://www.tradefinanceglobal.com/wp-content/uploads/2024/06/Trade-Finance-Guide-for-SMEs-Small-and-Medium-Enterprises.pdf
[4] https://www.unepfi.org
[5] https://iccwbo.org/news-publications/policies-reports/icc-principles-for-sustainable-trade/
[6] https://www.ebrd.com/who-we-are/our-values/environmental-and-social-sustainability.html
[7] https://www.adb.org/what-we-do/topics/sdg
[8] https://www.cop28.com/en/news/2023/12/Multilateral-Development-Banks-announce-over-180-billion-in-new-climate-finance
[9] https://www.proquest.com/openview/5482a9d673b7ad67ce9edfe0afc4925b/1?pq-origsite=gscholar&cbl=2032327
[10] https://iccwbo.uk/wp-content/uploads/2024/04/20231106_ICC_United_Kingdom_Toolkit_Value_Chain_v6-1.pdf
[11] https://sdgs.un.org/goals
1 https://www.wto.org/english/blogs_e/data_blog_e/blog_dta_24apr24_e.htm
2 https://www.lse.ac.uk/granthaminstitute/explainers/how-does-trade-contribute-to-climate-change-and-how-can-it-advance-climate-action/#:~:text=Around%2020–30%25%20of%20global,efforts%20to%20mitigate%20climate%20change.
3 https://www.tradefinanceglobal.com/wp-content/uploads/2024/06/Trade-Finance-Guide-for-SMEs-Small-and-Medium-Enterprises.pdf
4 https://www.unepfi.org
5 https://iccwbo.org/news-publications/policies-reports/icc-principles-for-sustainable-trade/
6 https://www.ebrd.com/who-we-are/our-values/environmental-and-social-sustainability.html
7 https://www.adb.org/what-we-do/topics/sdg
8 https://www.cop28.com/en/news/2023/12/Multilateral-Development-Banks-announce-over-180-billion-in-new-climate-finance
9 https://www.proquest.com/openview/5482a9d673b7ad67ce9edfe0afc4925b/1?pq-origsite=gscholar&cbl=2032327
10 https://iccwbo.uk/wp-content/uploads/2024/04/20231106_ICC_United_Kingdom_Toolkit_Value_Chain_v6-1.pdf
[11] https://sdgs.un.org/goals