How banks can lead the way to sustainable trade

30/11/2017

People being lead up a mountain

People being lead up a mountain

It is increasingly clear that we need a sustainable approach to trade – one that can safeguard the long-term interests of all of the “three Ps”: People, Planet, and Profit.

The first P means guaranteeing fair labour conditions and human rights for workers within corporate supply chains.

The second requires that companies do their part to protect the environment in the face of climate change – by conserving resources, for example.

The third demands that globalisation and trade be allowed to flourish, in order to sustain employment, economic growth, and prosperity well into a low-carbon future.

Protecting all three Ps is certainly no mean feat.

The solution lies in educating the market on the need to go green, outlining guidelines for sustainable trade, and developing robust standards on which to measure it.

Banking on sustainability

Sitting at the heart of world trade, banks are in a prime position to help. They hold the purse strings of the global real economy, allowing them to help finance sustainable endeavours. Banks can direct funds to the growth of renewable energy projects, for instance – and, at the same time, critically assess the exposure of their balance sheets to carbon-intensive industries, such as coal mining.

Banks engaged in the world of commerce have yet another tool at their disposal: the ability to foster sustainable trade practices across diverse networks of counterparties and supply chains. This includes checking individual transactions, loans or relationships against environmental, social and governance (ESG) risks.

The reputational risk department at Commerzbank, for instance – cooperating closely with other relevant divisions – checks on average more than 5,000 transactions a year against strict ESG criteria. Not only does this help to ensure that crucial commodities like palm oil or coffee are responsibly financed, but it also, ultimately, protects a company’s most important asset: their reputation.

3 ways banks must educate the market

We can’t make progress alone. Continued success relies on raising awareness among all key stakeholders, and educating them on how to bring about positive, responsible change.

First, banks must work with wider society, including corporations, universities, governments and NGOs, if they are to contribute to positive development. Encouragingly, initiatives such as the United Nations Global Compact – a group of private-sector organisations and companies dedicated to achieving the UN’s Sustainable Development Goals – have gained considerable traction in recent years.

Second, banks themselves need to collaborate to foster best practice. Progress on this front is promising. For example, in May this year, 40 different institutionssigned up to the Frankfurt Declaration, which acknowledges the financial sector’s particular responsibility in reaching the UN’s Goals.

The Cambridge-based Banking Environment Initiative (BEI), which brings together 12 financial institutions with over $12 trillion of assets, is looking at ways of overhauling soft commodity supply chains in order to achieve zero net deforestation by 2020. They are also exploring how major import markets such as China can increase demand for sustainably produced commodities.

And the International Chamber of Commerce (ICC) Banking Commission hosts a “Working Group on Sustainable Trade Finance” which brings together industry players to boost advocacy efforts and raise awareness of sustainability in the trade finance market.

Third, banks should work closely with their corporate customers. Not only can they raise awareness of how to build future-proof supply chains, but they can also – crucially – make clear the economic incentives for doing so.

After all, real and urgent challenges facing trading companies are on the horizon: from world population growth putting pressures on dwindling food, energy, and water resources, to the heightened chance of natural disasters as a result of climate change.

What is sustainable trade?

Of course, having a grasp of what exactly constitutes “green” finance or “sustainable” trade is vital. Just ask ten bankers to define sustainability: you can expect about twelve answers!

Until we have clear consensus on what is green, a lack of guidelines threatens to hold back progress.

This is why the ICC Banking Commission’s Working Group is exploring how to devise a system of “sustainable trade principles” that could offer some much-needed transparency to support companies making improvements to their supply chains, as well as help smaller financial institutions active in trade to “go green”.

The Equator Principles already guide best practice in the project finance market, and the International Capital Market Association’s (ICMA) Green Bond Principles underpin growth in the green bond market – so it’s high time trade benefitted from some guidelines too.

Raising and defining standards

Certification is another key area which could gain from improved transparency. Across the commodities trade, for instance, numerous standards and labels promise fair incomes for farmers or sustainable forestry – but how are consumers and trading companies to distinguish reliable certificates from those that are effectively “greenwashing”?

In close cooperation with major bodies, those active in the trade finance industry, from banks such to organisations are looking at determining what a trustworthy certificate should contain, and how it should be constructed.

The end result, it is hoped, is that trading counterparties can rely on the certificates they use to guarantee a fair deal for producers at the start of a supply chain, promise safe and secure labour conditions for those working across it, as well as offer protection for the environment.

Taking a sustainable approach to trade may be an increasingly high priority for some businesses in the short term – but in the long term, it will be a necessity for all. With education, guidelines and standards, we may be one step closer to making sustainable trade mainstream.

Disclaimer: The opinions expressed in this article are those of the contributing author, and do not necessarily reflect those of the Forum for International Trade Training.

About the author

Ruediger Geis

Author: Ruediger Geis

Ruediger Geis is Head Product Management Trade in the Trade Finance & Cash Management department of Commerzbank, and a member of the Executive Board of the ICC Banking Commission. With more than 20 years of experience in finance, having held posts at Commerzbank in Frankfurt, Bahrain and New York, Ruediger is an active member in various trade initiatives and currently chairs the sustainable trade working group of the ICC Banking Commission.

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