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Talking about trade and sustainability can be a double-edged sword: international trade is denounced by climate and anti-globalisation activists for polluting the planet, but many see great potential in trade to power a green transition. Like it or not, trade makes up almost 30% of global GDP; it has also lifted over a billion people out of poverty in the last decades, and is going to become an increasingly central part of the fight against climate change as more parts of the world become integrated in the global market.

That’s not to say there aren’t environmental concerns. International trade makes up as much as 30% of global CO2 emissions, and as trade grows, so does pollution: freight emissions alone, currently responsible for 7% of the CO2 total, are projected to increase fourfold by 2050. 

As trade grows, so does the economy, and with it the impact on the environment: trade’s unique role in powering growth globally makes finding a way to reconcile it with the environment all the more urgent. 

Even now, trade plays a central role in fighting climate change and its effects: the global energy transition couldn’t happen without wind turbines being shipped to windy cliffs the world over; electric cars in Europe are powered by lithium mined in Africa; and Asian countries are surviving the effects of global warming through drought-resistant crops exported from America. 

Simply put, the climate effort needs trade – trade which can’t happen without trade finance. Trade finance is uniquely placed to bridge the gap between environmental and economic concerns and power the green transition: the UN estimates meeting the Sustainable Development Goals by 2030 will require $5 trillion, much of which can come from or through the trade finance industry. The countries that need trade finance the most are the developing economies that are just joining the global marketplace – those same ones that could benefit the most from a green transition. 

Trade finance’s responsibility

There are two ways the trade finance industry fits into the fight against climate change. First, the product being traded matters: financing a shipment of coal or a carbon-intensive crop has a much worse environmental impact than financing the export of electric cars or building insulation. The way the goods financed are then being transported has a more direct impact on trade finance’s carbon footprint, with air freight being the most damaging to the environment and maritime transport the least. 

Trade finance institutions can massively impact the fight against climate change by strategically divesting from certain industries, or investing in and extending more favourable terms to climate-friendly companies. To do that, however, the industry needs transparency over the supply chain and clear guidelines to judge the environmental impact of a prospective investment—two things that are currently sorely lacking.

Sustainability efforts around the industry

As far back as 2020, Citi lamented the lack of market standards in trade finance, especially compared to the abundance of regulation for ESG loans and green bonds in other areas of finance. The Sustainable Trade Finance Working Group had been set up by the ICC only a year earlier, in 2019, to create a framework to help banks and exporters better understand the environmental impact of their investments; five years later, sustainability has been widely discussed in the industry, but there is still no unified framework in sight.

The need for a framework is all the more urgent in the face of greenwashing, for which two major German investment banks earned major fines earlier this year. Because of the lack of environmental standards, it’s easy to claim that investments are greener than they really are, so even companies which genuinely support eco-friendly industries fail to get the recognition they deserve. 

Some trade finance companies have started to act at the extreme ends of the environmental scale: members of the OECD Arrangement, for example, are no longer providing trade finance to a particularly polluting type of power plant, and recently announced plans to expand financing to environmentally focused firms.

On a larger scale, the Asian Development Bank has worked for years to promote sustainable trade finance through its Trade and Supply Chain Finance Program (TSCFP). The TSCFP aims to make global supply chains green, resilient, and socially responsible by providing trade finance instruments to environmentally responsible SMEs in Asia and the Pacific region. The WTO has hailed the program as a model example of what a sustainable trade finance project should look like, and these efforts have gone a long way to promoting sustainability and supply chain resilience in the region.

However, what is missing is a way to set up these projects on a global scale and focus on the bulk of companies trade finance usually deals with. The vast majority of exporters asking for financing are not on either side of the spectrum but somewhere in between, and institutions need a way to observe and measure their environmental impact. 

In June of this year, the ADB published a reference note in conjunction with the IFC on sustainable trade finance, discussing what type of goods must be financed for a firm to claim it is taking on a sustainable investment. The category was expanded to include climate-efficient appliances and building materials, but there is still a long way to go, and measurements still need to take socioeconomic and transport aspects into account. 

The principles for sustainable trade

For the movement to expand beyond isolated efforts, however, a set of criteria that the trade finance industry agrees on to judge how sustainable a trade finance investment is needed —only then can anyone have a meaningful conversation on how to regulate trade that is harmful to the environment or promote sustainable industries. 

The framework should be objective, quantifiable, and lead to a clear outcome on the environmental impact of an investment; it should be easy to apply, so that institutions do not need to devote even more time and effort to compliance tasks; and it should be widely and internationally accepted as a standard.

The International Chamber of Commerce (ICC), in collaboration with BCG and the trade finance divisions of 4 major banks, recently published the findings of a pilot project that proposed an objective set of standards to judge companies by and create a semi-binary classification for trade finance investments. 

The “sustainability principles” proposed in the project take into account the UN Sustainable Development Goals, and judge four elements of a trade transaction – the product itself, its seller, buyer, and distribution – across both environmental and socioeconomic standards. An investment is classified as fully, partly, or not at all sustainable depending on which criteria it has fulfilled. This enables lenders to immediately know the sustainability of a company and makes it much easier to enact uniform rules across institutions.

However, there are some logistical and conceptual issues with this, which the ICC itself acknowledges in the paper. If the next step was, for example, to reduce trade finance supply to companies classified as not sustainable or unclassified, this might hurt firms in developing countries that have not had the chance to become entirely green yet – thus widening the trade finance gap. Standards can also be complicated to negotiate, and even starting with a unified set of goals – in this case, the SDGs and the Paris Agreement – it can be hard to agree on what specific measures should be used to measure compliance with them. 

The road ahead

Beyond building the framework itself, trade finance firms are going to need tools to systematically apply that framework and incorporate it into their compliance checks without massive time expenditures. Multilaterals like the Asian Development Bank’s Trade and Supply Chain Finance Program (ADB TSCFP) are well placed to encourage institutions to work bilaterally.

ADB TSCFP’s knowledge-sharing initiative that now helps companies monitor their supply chains could help bring the technology to the companies themselves, ensuring they know what changes they need to make in order to be eligible for a green trade finance instrument. 

Decarboniszing trade is essential to stopping a climate disaster – and the trade finance industry is uniquely placed to make this happen. To make a real impact, however, institutions and companies must come together and agree on a unified set of environmental standards and a unified way to apply them. Isolated efforts can only go so far – but a commonly accepted sustainability framework to measure trade finance investments and a committed application of them by firms could put the industry at the forefront of finance’s fight against climate change.