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.