John WH Denton: Global trade is at a critical juncture on sustainability

The International Chamber of Commerce (ICC) was founded just over a century ago with the mission of making international trade a driver of peace and prosperity across the world. Global trade is a vital engine of economic development, supporting the work and livelihoods of billions of people. It also has an ever-increasing role in advancing sustainability and climate action.

The recent COP27 in Sharm el-Sheikh was a timely reminder that no actors are beyond responsibility, or indeed scrutiny, when it comes to sustainability. Despite disappointment surrounding the scale of commitments coming out of the UN meeting, countries reconfirmed their important commitment – made under the Paris Agreement in 2015 and the Glasgow Climate Pact agreed last year – to limit global temperature rise to 1.5 degrees Celsius above pre-industrial levels.

COP27 also ushered a new era in the international climate process: that of implementation. Countries are now tasked with translating agreed rules into concrete action on the ground, and we are just at the beginning of understanding what all this means for global trade and its financing.

Seizing an opportunity

Boston Consulting Group estimates that more than $20tn-worth of goods flow across the world every year, a figure expected to reach almost $35tn by the end of the decade. There is growing consensus that there remains significant potential for trade to play an even greater role in achieving the Paris Agreement targets and become a key driver to help reach the UN Sustainable Development Goals.

But just as complex supply chains often have literal global reach, so too do their associated problems. An estimated 80% of global corporates’ emissions arise from their supply chains, a figure that rises to as much as 90% in some industries. At the ICC, we believe that tackling the issue of sustainability is impossible without due focus on solutions spanning the entire length of corporate supply chains and the entire geography of global trade.

We are in good company. The World Trade Organization launched a flagship report to coincide with COP27, which highlights the role that trade can play in accelerating the decarbonisation of the global economy. Trade acts as a catalyst for countries’ mitigation and adaptation efforts in the face of alarming climate change impacts and other sustainability challenges, it argues, reducing the cost of technologies and critical goods and services.

Just as importantly, financial institutions and companies from the largest corporates to the smallest small and medium-sized enterprises (SMEs) are demonstrating that they believe this too. To give just one example, earlier this year, Coca-Cola Europacific partnered with Rabobank to arrange a €600m sustainability-linked supply chain finance programme to facilitate early payments to suppliers based on sustainable key performance indicators (KPIs). This follows similar moves from other big-name companies such as Walmart and Gucci.

With many banks and corporates no longer content to limit their sustainability efforts to their Scope 1 and 2 emissions, we now find ourselves with a unique opportunity to push sustainable trade to the top of the global agenda.

The role of trade

Trade has a crucial role to play in advancing sustainability efforts, and in particular supporting effective climate action. International co-operation on trade-related aspects of climate policy can boost investor confidence and help avoid trade frictions and remove barriers relating to green products. Through sustainable trade finance, it can also mitigate some of the biggest blockers to individual companies’ sustainability journeys.

It has long been the norm for the world’s largest corporations to set sustainability targets, and banks have begun to offer tools from sustainability-linked loans to carbon calculators to help achieve them.

Many SMEs – more than 90% of companies – still lack clarity on their best path to sustainability. Banks also lack the capacity to tailor advice and solutions to the needs of all their SME clients, leaving those companies struggling for knowledge, resources and incentives to drive their sustainability agendas. At the same time, we see growing pressure from large companies on SMEs within their supply chains to reduce their emissions.

The ICC, together with global sustainability analytics firm GIST Impact, has developed a digital tool (SME360X) to make it easier for SMEs to track and improve sustainability performance. SME360X has been designed to require very little time and knowledge from SMEs seeking to understand and improve their sustainability performance. Because of this, it is being deployed globally and at scale by organisations such as UPS which are looking to support green trade by SMEs.

There is a need to take a major step forward in sustainable trade and supply chain finance. We believe that the answer to this challenge lies in enabling this $10tn market to better recognise, facilitate and even reward sustainable practices in global value chains. In typical examples of sustainable trade finance, large corporates and financial institutions can collaborate to offer SME players in the corporate supply chains accelerated access to receivables based on adherence to a number of sustainability-linked KPIs.

The benefits for all actors are manifold. SMEs receive the incentives and funding support needed to pursue their sustainability goals. Larger corporates manage to reduce Scope 3 emissions through their supply chains and often receive technical advisory support from banks on compiling their supplier categorisation. For the banks themselves, trade finance programmes allow them to strengthen relationships with existing and new clients, as well as contributing to their own sustainability goals.

Building a coordinated framework

Despite their potential, sustainable trade finance programmes face significant challenges. First among them is the sheer complexity of international trade. The ICC has broken down trade into five component parts, each of which is a target for sustainability initiatives: the buyer; the seller; the goods and services themselves; the transport of the goods and services; and the ‘purpose’ underlying the economic activities facilitated by the transaction. One transaction can be complex enough, but these can be iterated thousands of times along the length of an entire supply chain.

This complexity is only exacerbated by the current lack of a comprehensive framework to assess trade finance. Existing standards and definitions of sustainable finance, such as those developed by the International Capital Market Association and Loan Market Association, already exist, but they only go some of the way to helping to scale trade initiatives. Their focus is largely on the use of proceeds of an individual trade, the goods and services themselves, and does not explicitly encompass the sustainability of the buyer, supplier or mode of transportation.

The ICC has been on a multi-year journey to try and fill this gap, and recently launched a new framework for sustainable finance after consultations with more than 500 companies from various sectors and geographies.

The framework assesses the environmental and socio-economic sustainability of a trade transaction across all five of its key components. This is then visualised in a 2x5 matrix, with transactions graded according to a comprehensive list of ICC-approved standards. Banks and corporates will be able to use our framework to chart their sustainability across component parts of trade and throughout their supply chain for the first time.

We believe that this framework represents a major leap forward to surmounting obstacles for large corporates and SMEs alike, embedding sustainability at the heart of global commerce in a practical and robust way.

When it comes to global sustainable finance, we stand at a critical juncture. In the immediate contexts of the ICC framework, we have partnered with more than a dozen leading banks, global technology companies and major players in the textile sector (including HSBC, Santander, BNP Paribas, Puma and Esquel Group) for a pilot with real-world clients and transactions. More broadly, buy-in from globally significant firms presents a real opportunity for sustainable trade.

It is just as well, because the stakes are too high for there not to be. But together we have a unique opportunity and responsibility to set trade on a path towards maximising its contribution to global sustainability goals.

John WH Denton AO is the secretary general of the International Chamber of Commerce.