Principles For Sustainable Trade

A set of global principles are being drafted to support sustainable trade and trade finance, including supply chains. The International Chamber of Commerce (ICC) is spearheading this work with its ICC Principles for Sustainable Trade: Wave 2¹, which will be released at COP28.

According to ICC the focus of the principles is twofold: ‘The methodology of the principles assess both the environmental sustainability of a transaction, and how it supports socio-economically sustainable development. They are designed to advance two objectives: support business in meeting both the Paris Agreement objective of limiting global warming to 1.5°C above pre-industrial levels, and the UN Sustainable Development Goals.’

HSBC, along with five other banks, has been involved in the development of the principles, in collaboration with Boston Consulting Group and the ICC. These contributed to the results that were released in the Wave One at COP27 in Egypt a year ago.

Wave One looked at ways of establishing the sustainability and socio-economic credentials of the buyer, the seller, and the goods being traded. Several pilot trades were carried out in the trade and apparel sector. Wave Two has expanded the scope of this work both in terms of other sectors and by adding analysis of the way the goods are transported between seller and buyer – as well as overall increasing the robustness and adding a mechanism to provide transactions with a graded ‘score’.

Sector Specifics

The key finding from Wave One was that standards need to be sector specific. The findings from analysis of the textile and apparel industry showed the importance of being able to verify that material such as cotton or synthetic fibre was sourced from provably sustainable sources. This is likely to be replicated in other sectors as well but with completely different sets of data.

"There are different standards because what is relevant for the textile and apparel sector is not necessarily relevant for the auto sector. There have to be different standards," says Sadarangani. "And because these standards differ from sector to sector, the standards are not consistent, and there are a multitude of them. As part of Wave Two, ICC is looking to put in place a database of various standards that are relevant to different sectors, which could be a very useful repository."

Data and Automation

The two key elements of the application of these new standards to supply chains are the external validation of sustainability and socio-economic claims, and also being able to automate this data. Companies are looking at the best ways to embed both in their operations, firstly by identifying the external accreditation and validation providers that are most relevant to the sector in which they operate, and secondly by including that data into their technology stack. This will be necessary for accessing the increasingly digitised trade finance ecosystems that banks are deploying.

"It is very early days to take a call as to whether or not this is scalable, but the ambition is certainly there," says Sadarangani. "To make this really, truly scalable, it's got to be completely automated to allow straight through processing."

Tying sustainability and social standards to the provision of finance is not new. They exist in many corners of the market, such as the Equator Principles for project finance or the Green Bond Principles for the capital markets. Bringing them to bear in the global trade finance market is ambitious, given the greater volume and complexity of participants and transactions.

But arguably, they can have a greater impact given how important trade is to the global economy and a major role in global emissions. Trade finance is also more than just the provision of finance. The use of contingent solutions, such as guarantees and letters of credit, are integral to trade finance. These contingent products are now included in the Green Loan Principles² as managed by a working group comprising the Loan Market Association, the Loan Syndications and Trading Association, and the Asia Pacific Loan Market Association. The inclusion of contingent products will further expand the reach of the new sustainable trade standards.

It is the first time that the industry is developing principles for sustainable trade. HSBC is working closely with the industry to help shape these standards.