Whether environmental, social or economic, the sustainability challenges at the heart of trade often seem insurmountable in this global, sprawling industry. Recent research suggests 92% of CEOs believe the integration of sustainability will be important to the future success of businesses – but only 48% say they are actually implementing sustainability into operations. Against this backdrop, what role can technology play in bridging the gap between belief and action when it comes to making trade more sustainable?
Driven by pressure from investors, governments and consumers, in the past few years, Environmental, Social and Governance (ESG) criteria have become a key priority for all participants involved in trade, including goods manufacturers, financial services institutions and logistics providers.
Sustainability issues are increasingly important to investors when deploying capital, increasingly built into policy planning by governments and increasingly front of mind for consumers that demand greater transparency across the supply chain for the goods and services they purchase.
This trend shows no sign of slowing, and a succession of global crises have prompted a closer look at ESG’s presence in everything we do, from the ethical nature of supply chains to increasingly urgent calls for action on climate change.
Global trade, with its diversity of participants and generations-long lack of technology investment, is an industry riddled with a complex mix of environmental, social and governance challenges. Trade and trade finance are intrinsically linked, and by overhauling and modernising the latter, there is huge potential to improve ESG in the former.
Mind the gap
Trade finance is an industry ripe for digitisation, but which remains beholden to legacy processes. Many of these are characterised by an abundance of paper, making them slow, expensive and inefficient.
The World Trade Organisation estimates that some 80-90% of global trade relies on trade finance. Despite this, the global shortfall in the finance needed by businesses to fund their operations – known as the “trade finance gap” – stands at a mammoth $3.4 trillion. The COVID-19 pandemic has widened this gap and reminded us that trade finance is – for the most part – an incredibly antiquated sector that can prevent businesses and even entire countries from growing trade.
Of the global trade finance shortfall, Asian countries experience the largest unmet demand. The WEF estimates that the trade finance gap affecting developing countries in Asia and Africa could reach $2.5 trillion by 2025 as supply chains move away from China to poorer developing countries.
In many developing markets, trade financing relies heavily on correspondent banking and, with global banks shedding correspondent relationships in recent years, these markets have been the ones that have suffered the most, according to the International Monetary Fund.
Those companies that do manage to make progress with banks for international trade can often be held back through their country’s high-risk profile – represented by low credit ratings. This is often identified by banks as a reason to provide less trade credit for transactions in developing countries and, with businesses that are initially rejected from seeking alternative financing, the ADB has found that almost half are typically unable to find anything appropriate to meet their needs.
The irony of this is that trade transactions represent a relatively low risk. For example, ADB’s trade finance business, which since 2009 has completed over 21,000 transactions valued at $36 billion –most conducted in Bangladesh, Pakistan, Sri Lanka and Vietnam – has never had a default or loss on any transaction. Instead, the real challenge developing and emerging markets need to overcome is the lack of a common, standardised network for trade financing.
Open, inclusive global network
Digitising trade finance can help make it more accessible to all, closing the gap and creating truly ‘sustainable’ finance. With the right technology in place, greater access can be provided for businesses in developing and emerging markets, and the need for physical locations or documents will be reduced.
Business continuity can also be greatly improved by digitisation. The impact of Covid-19 has exacerbated the inherent limitations in international trade networks dependent on human couriers and employees working from offices. Keeping trade flowing during turbulent times is particularly critical to small businesses in developing markets. This requires more than just keeping goods moving, it also requires a level of network accessibility and connectivity that traditional physical documents are unable to sustain.
By eliminating data trapped within silos and connecting businesses seamlessly to financial institutions and the physical supply chain, digital technologies such as blockchain can provide an open and inclusive network for global trade participants.
Making trade greener
Alongside the benefits digitisation can bring to opening up access to trade finance for all, it can also extend to the environment. One tangible way to fulfil ESG commitments is through eliminating the paper-based processes that are prevalent in trade finance. It goes without saying that less paper equals a more environmentally friendly approach to business.
Beyond the immediate environmental benefits that cutting paper brings to trade, there are secondary benefits to be seen, across the workforce. Digitisation eliminates the need for couriers, in turn reducing carbon emissions. Looking further ahead, technology-based guidance over trade routes and asset provenance can ensure that the physical journeys made in the supply chain are not wasted.
As ESG continues to inform decisions over investment strategy, banks and corporates should look to all the possible ways in which they can tangibly fulfil their commitment to the criteria. Elements of trade finance such as Letters of Credit are ripe for digitisation and have been for years, making them an obvious place to start.
By eliminating paper, the entire trade ecosystem can bring critically important industry into the twenty first century and work together towards a more sustainable future.
This article was also published on Finextra.