The paper – developed in partnership with the Boston Consulting Group through a global consultation exercise involving over 200 banks and corporates – outlines the first-ever standardised framework and assessment methodology to qualify the sustainability profile of trade transactions.
Unlike other asset classes, such as bonds, no standards currently exist to allow financial institutions to grade the sustainability performance of trade finance transactions – the global market for which is currently valued at US$5 trillion annually.
The new report highlights that existing frameworks governing sustainable finance – which tend to solely focus on the intent of financial instruments – are not well-suited to deal with the hidden complexities of international trade. For example, a single trade transaction can involve as many as 20 different parties – involving different types of goods, services and raw materials crossing multiple jurisdictions and requiring different forms of transport.
In addition, while specific goods may not in themselves be sustainable, they can often be used for purposes such as sustainable infrastructure. The same also applies in reverse when it comes to the trade of sustainable goods for non-sustainable purposes.
The proposed ICC framework seeks to break through this complexity – recognising not only positive activity, but also guiding banks and corporates towards the use of best-practice standards.
Speaking on the launch of the paper, ICC Secretary-General John W.H. Denton AO said:
“We recognise the imperative to ensure that international trade is a trusted vector of economic, societal and environmental progress. But the difficulty of defining workable sustainability standards for cross-border commerce should not be underestimated. The proposed framework we are setting out today is intended to cut through the inherent complexity of global value chains – establishing a standard methodology for banks and corporates to reliably grade the economic, environmental and social performance of individual transactions.”
The report proposes a comprehensive assessment framework that provides transparency on the sustainability credentials of different components of a trade transaction – including the buyer and seller, the nature of the goods being sold, the intent of a transaction and the mode of transportation. This is backed by a standard definition of “sustainable trade” to ensure integrity in the application of the framework.
Rather than defining a new set of standards for financial institutions and businesses to follow, the framework takes an innovative approach in drawing on existing standards wherever possible, with the intention of avoiding any added complexity for trading parties – particularly small businesses for whom trade is often a vital lifeline, and for whose activities are often least measurable in terms of sustainability.
Mr Denton added:
“We see a remarkable opportunity to put the US$5 trillion trade finance market squarely behind global sustainability goals. But to achieve this, we need to ensure we land an approach that sets a high-bar on sustainability while still being capable of being implemented in the real world by banks and corporates – regardless of their size, sector or geography.
That’s why we are launching the biggest-ever consultation exercise in the history of the International Chamber of Commerce on the draft framework published today. We’re looking to crowd in expertise not only from our business network but also civil society, academia and international organisations to help us establish a framework truly capable of making trade work for people and our planet.”
Later this week, ICC will launch a structured review process open to all interested stakeholders, before commencing more detailed work next year to refine the methodology, map existing standards to the framework, and – crucially – determine how to most effectively implement them in practice.