The virtuous circle of trade digitisation and ESG
When combined, sustainability and digitisation in trade finance can power supply chain decisions and get finance to where it’s needed.
The current conversation on trade digitisation is dominated by the enormous opportunities that it offers, whilst discussions about sustainability have also been picking up pace, presenting a unique opportunity for the two largest disruptive forces in trade – digitisation and ESG – to be combined.
In recent months, a turning point has been reached in the digitisation of trade, and this has coincided with an increased focus on environmental, social and governance (ESG) issues in the wake of Covid-19. Together, the combination of innovative solutions and new technology with sustainability, equality, and a focus on the environment provide an opportunity for making global supply chain activities more sustainable.
“We are seeing growing interest in sustainability and ESG,” says Pradeep Nair, head of structured solutions, transaction banking at Standard Chartered. “Coupled with this is the need that has arisen during Covid-19 for solutions that make trade run smoothly in the face of disruption. As the regulators are now starting to push businesses and financial institutions to do more sustainable business, this is driving conversations around how banks and clients can meet those requirements.”
Trade finance digitisation – the integration of big data, artificial intelligence (AI), digital platforms, blockchain and the Internet of things (IoT) in the provision of trade finance – can lend itself easily to the integration of ESG criteria into business or lending decisions for the lasting benefit of both clients and society at large. From track and trace solutions to verify the provenance of goods, to the verification and certification of supply chains, digitisation provides the possibility of reaching global scale.
“Banks are now adopting technology and offering solutions to make life simple, and that is happening in trade in general,” says Nair. “When we speak of sustainable trade, it doesn’t change that fact. We are simply adding a layer of sustainability and verification on top of what we have so that corporates and their counterparties can see and measure the environmental and social impact of their supply chains.”
An inclusive future through ESG
Last year, at the height of the Covid-19 crisis, the International Chamber of Commerce (ICC) warned that as much as US$5tn of trade credit market capacity would be needed to return trade volumes back to their pre-pandemic trend. Failure to do so would see the trade finance gap – which disproportionately affects SMEs and women and minority-owned businesses in developing countries – become even wider.
This, in turn, threatens progress toward the Sustainable Development Goals, especially targets pertaining to women’s economic empowerment, job creation, and inclusive growth.
To ensure opportunities for development are not lost, trade finance must be as inclusive as possible, which is why, among its recommendations, the ICC called for new solutions to bring more liquidity into the market.
For a small number of banks, including Standard Chartered, curating trade finance assets for investors has been one way to do this. Today, as investors increasingly look to fund ESG-focused assets through trade finance facilities, using digital tools to identify opportunities, process or verify the transactions and tag trade activities which are sustainable provides a way to scale this even further.
Earlier this year, Standard Chartered launched a set of sustainable trade finance solutions across its network of Asia, Africa and the Middle East, Europe and the Americas. By building the Loan Market Association’s green and sustainability-linked loan principles into its offering, the bank can enable clients to meet ESG objectives as well as encourage improved disclosure and reporting.
“One of our key objectives in our sustainable trade proposition is to ensure that we align capital to where it is most needed,” says Nair. “Sustainability is a way to get that, because there are a lot more investors today who want to do sustainable business, and the more we are able to originate these kinds of transactions, the more we can attract these investors and move that capital towards the needs that exist.”
By working with customers and partners to finance underlying goods that meet agreed sustainability standards, and supporting trade for suppliers who meet acceptable thresholds against metrics such as gender equality, responsible sourcing criteria, carbon footprint and water use, banks can ensure ESG investment enters trade finance – as long as they can prove it.
“Technology provides the rails to do that, and what flows onto the rails is the data,” says Samuel Mathew, global head of documentary trade at Standard Chartered. “If you look at how global trade finance works and how complex global supply chains are with the number of countries and the number of suppliers involved, especially multiple layers of suppliers, it is difficult if not impossible to manually capture all the information in order to deem something as meeting sustainability standards. Data, therefore, is the enabler.”
Data for data’s sake
However, simply collecting data is not enough. Corporates and banks are awash with unstructured data – indeed, according to the International Data Corporation, a market research firm, by 2025 the collective sum of data in the world will reach an eye-watering 175 trillion gigabytes. As regulations evolve, the environment changes and corporate behaviours shift, actors within the trade ecosystem must work out how to compare and discern meaningful information in order to measure ESG performance and inform decision-making.
“Trade finance is very document-heavy. The data you need to demonstrate ESG performance is not simply captured in identified fields where you can just write a string and get the output,” explains Nair. “Documents are in different languages, and may not use standardised terms, so shipments of clothing, shoes, or even cotton might be tagged as ‘garments’, for example. As we implemented our sustainable trade finance offering, we found that to obtain meaningful data from our trade flows, we had to use natural language processing to identify what kind of assets we had and what the underlying goods were.”
It is not only data on the type of goods being shipped that is needed, but data on carbon emissions in a company’s value chain, climate risk, the provenance of inputs, and myriad other information.
“The data you need comes back to what you are using the data for,” says Mathew. “Standard Chartered has its own sustainability framework for trade finance, and we are working with our clients to help them on their journey, so the question then becomes how to use that data to determine to the best of our knowledge, based on the data and framework if an asset meets your standards.”
The need for standards
Aside from the sheer volume and complexity of the data required, knowing what to match it to is also an issue. There is currently no single definition of sustainability, and as many as 400 assessment techniques and ways of looking at ESG in the market today.
“Sustainability means different things to different people,” says Nair. “For the industry to really take advantage of the benefits of digitisation and ESG, there needs to be a convergence of all the different aspects and different datapoints that are measured.”
Sustainability means different things to different people. For the industry to really take advantage of the benefits of digitisation and ESG, there needs to be a convergence of all the different aspects and datapoints that are measured.
Pradeep Nair, Head of Structured Solutions
He adds that progress is being made, with initiatives such as the EU-wide classification system for sustainable economic activities, and the Monetary Authority of Singapore’s (MAS) taxonomy to identify activities that can be considered green or transitioning towards green. “Once a common language is created, then the intersection of data and ESG can really be brought to fruition,” he says.
Where two trends meet
While there remains some way to go, the convergence of the two most disruptive trends in trade is well underway, offering an unprecedented opportunity to promote, encourage and support sustainable actors across global supply chains while making progress towards closing the trade finance gap.
“The future state we will evolve towards will see trade finance and even the commercial buy and sell activity of trade itself start complementing digitally with services such as the voluntary carbon market and carbon exchange offsets that can be linked with specific transactions. As more and more trade finance is carried out on blockchain solutions such as Contour, I also see ancillary sustainability-related processes that could be plugged in,” says Mathew.
When combined, sustainability and digitisation in trade finance can take advantage of emerging technologies to analyse data, power supply chain decisions and get finance to where it’s needed, helping the world transition to an inclusive, resilient, low-carbon economy.
The article was also published on Global Trade Review.
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