Making trade work better for everyone
From multi-country supply chains urgently ramping up production of essential goods during the pandemic, to job creation and lifting of millions out of poverty, trade has demonstrated that it can be a powerful force for good – but more needs to be done for it to reach its full potential.
According to the Future of Trade 2030 report by Standard Chartered, global trade is set to almost double by 2030, shaped by five trends: a wider adoption of sustainable and fair-trade practices; a push for more inclusive trade, with more people participating; greater risk diversification; more digitisation; and an accelerated shift towards high-growth emerging markets.
This growth, if harnessed correctly, will see the trade corridors of the future act as conduits to tackle the problems faced in the economy, societies, and the natural environment, achieving the “better trade” called for by Ngozi Okonjo-Iweala, director general of the World Trade Organization.
“A better answer to the real problems we see lies in a fairer and more equitable globalisation, one that brings marginalised people and countries into the economic mainstream, while helping us decouple human wellbeing from environmental impact,” she said in a keynote speech in February.
As part of its research, Standard Chartered interviewed more than 500 C-suite and senior leaders of global companies to get their views on the trends shaping the future of trade. Their response was almost unanimous: trade needs to become fairer, better for the planet and more inclusive – but putting this into practice is a challenge.
“The future of trade has to be sustainable by definition,” says Roshel Mahabeer, head of clean tech and sustainable trade finance at Standard Chartered. “Commitments to combat climate change, a rising wave of conscious consumerism and the development of global governance standards for sustainability are all driving companies to rethink their supply chains.”
However, she adds, there is a clear gap between intention and action. “Trade makes up over half of global GDP, but a lot more work needs to be done to really unlock the true impact of ESG improvements. Companies want to do better, but they need support around collecting the right data, validating it, and looking at the right measures to make improvements.”
Solving for the lack of sustainability definitions in trade
Respondents to Standard Chartered’s research overwhelmingly want to implement sustainable and fair trade practices across their supply chains to make trade more equitable and responsible. However, many face barriers to achieving this – not least because it isn’t always immediately obvious what practices they need to focus on.
“There are different aspects of sustainability; it isn’t just one dimensional,” says Pradeep Nair, global head of trade structured solutions at Standard Chartered. “A company may subscribe to one part of ESG, for example the environmental side, but that doesn’t necessarily bridge them into the social aspect. There is no common standard of what sustainability means, and that needs to be solved. The intent is there, but the action is lacking due to a lack of clarity. Co-creation between suppliers, buyers, and their banks is needed to work out the most important aspects to focus on.”
In March last year, to help cut through some of the noise, Standard Chartered developed a sustainable trade finance framework, which embeds the Loan Market Association’s (LMA) green and sustainability-linked loan principles into its offering. The solutions can be used to finance underlying goods to meet agreed sustainability standards, to support trade for suppliers who meet ESG metrics, or to finance trade in sustainable industries, such as renewable energy, and transition activities, such as emissions reduction.
“The framework really simplifies the approach to sustainable trade finance, which itself is such a complex topic,” says Nair. “There are two parts to it: first, we identify with clients the business processes that they want to focus on from a sustainability perspective, and then this enables us to find solutions around what can be done to improve, what needs to be done to mitigate, and what solutions we can offer as a bank. Because the framework simplifies the process, we often find that clients can then set off the next wave of items to be solved for.”
Cascading ESG improvements down the tiers
Sustainability considerations are set to shape corporate activities in the coming years, and nowhere will this be more apparent than in global supply chains.
“Our research shows a significant difference among client segments in terms of how far along they are in the sustainability journey,” says Kai Fehr, global head of trade and working capital at Standard Chartered. “Unsurprisingly, amid the global drive to move towards a net zero future, multinational companies have a very high rate of adoption of sustainable business practices but mid-sized companies aren’t too far behind them. Among SMEs, however, that rate is much lower.”
SMEs account for the vast majority of suppliers in global supply chains, which are responsible for as much as 80 per cent of total carbon emissions. However, small suppliers often don’t have the know-how or the resources to implement net-zero strategies. By pushing finance linked to measurable objectives down the tiers to these small firms, large companies can partner with their banks to bring together the entire value chain to curb emissions and drive progress towards a greener future – as well as a more inclusive one.
“Thanks to technology-enabled trade and supply chain finance solutions, multinational companies can pass on better ESG practices into the first, second and third tiers of their supply chains and beyond,” says Fehr.
Digital solutions to enable globalisation to work for all
But technology doesn’t just facilitate the propagation of sustainability improvements; it can also make finance efficiently accessible to those who need it most. This is a key consideration for the overwhelming majority (91 per cent) of companies surveyed by Standard Chartered, who say that globalisation needs to be reset to become more equitable, but there’s clearly some way to go before this aspiration can become a reality. According to the Asian Development Bank, the trade finance gap is now at a record high of USD1.7 tn, and it is SMEs who bear the brunt of a lack of access to the finance they need to participate in global supply chains.
Four-fifths of companies say the answer to this issue is to be found by partnering with banks to promote access to finance for robust and inclusive supply chains, but with traditional supply chain finance programmes only reaching the first tiers of suppliers, innovative solutions need to be found to get liquidity to where it’s needed.
Through a partnership with supply chain technology solution provider Linklogis (LLS), Standard Chartered is taking the lead in providing a flexible, sustainable and scalable supply chain financing proposition. The LLS solution uses a digital financial token based on an irrevocable payment undertaking by an anchor buyer, enabling finance to pass along the chain to several levels of suppliers.
Thanks to technology-enabled trade and supply chain finance solutions, multinational companies can pass on better ESG practices into the first, second and third tiers of their supply chains and beyond.
Kai Fehr, Global Head of Trade and Working Capital
Bringing the ecosystem together
The projected growth of trade over the coming decade can enable it to become a real vector of prosperity – as long as everyone has an equal opportunity to benefit.
However, in order to reach scale, sustainability needs to be embedded into trade finance at the industry level. “The reason we set out our framework in the way we did is that it’s simple to adopt for clients, but it’s also easy for other financial institutions to understand. Scalable impact will only be delivered with a consistent market movement to support sustainable development, and we want to create market momentum, because there’s no way one bank can do this alone,” says Mahabeer.
If experiences from the global bond market are anything to go by, an industry-wide sustainable trade finance framework would have wide-ranging transformative power. Since the World Bank issued the first green bond in November 2008, the instruments have become an important tool to address the impacts of climate change and related challenges. Following the establishment of the ICMA Green Bond Principles in 2014, the market has grown exponentially, from just USD104 bn to USD1.5 tn today.
“Trade finance touches all parts of the value chain, from production to procurement, processing and logistics,” says Fehr. “If we can bring scale into this and achieve the same level of adoption as has been seen in the bond market, the positive impact will be phenomenal and will create permanence in sustainable business practices across the value chain.”
The original article was first published on Global Trade Review.
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