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TRADE FINANCE BRIGHTENING DARKENING SKIES

One of the few issues facing the global community today more significant than the COVID-19 pandemic, is that of climate change. A decade ago, it was high on the social agenda. Now, it is at the top, and every singular aspect of human life takes place under its darkening cloud. As these words are being written, the 26th United Nations Climate Change conference is taking place in Glasgow (Glasgow COP26). Based on the latest work of the Intergovernmental Panelon Climate Change (IPCC) - released in August - where they have declared a ‘code red for humanity’, the conference is set to be one of the most important assemblages of the world’s influencers in mankind’s history. One way or another, it is incumbent on an industry such as trade finance to help provide solutions if humans are going to stave off the disasters looming just over the horizon…


Slow Emergency As reported on by the BBC in August, the IPCC stated in no uncertain terms just how critical the issue of climate change has become. The IPCC itself carries the responsibility for furthering the world’s understanding of human-induced climate change, and it is they who collate the expertise of scientists from around the world for general consumption. The report from the IPCC is essentially a review of the science of climate change itself.


Nearly a decade has passed since the previous assessment, and it was released in lieu of the current critical COP26 conference. In a quoteby Petteri Talas, Secretary General of the World Meteorological Organization, he describes how “By using sports terms, one could say the atmosphere has been exposed to doping, which means we have begun observing extremes more often than before." The authors of the report state that global surface climate temperatures have increased more rapidly in the last 50 years than in any other parallel period in the last 2,000. Awareness of humanity’s tinkering with the climate has been a long time coming. Now that it is here, experts all agree, we are a stone’s throw away from a need to start panicking.


Thinking Sustainable


As pointed out in a previous post called Why has ESG become so Important to Trade Finance? businesses are now under scrutiny through the magnifying glass of Environment

and Social Governance. Over time, the priorities of a company have shifted from just profit, to duties to the shareholder, and now to having a social conscience. Environmentally speaking, organizations are judged on how they might allocate natural resources, the degree to which they pollute, how they dispose of their waste, their treatment of animals, and their energy use. And more recently and in keeping with the growing climate concern, their carbon footprint.


A further aspect of a business’ activities that overlaps with the social part of the ESG pyramid is with whom they are associating. An organization that conducts business with

another that accidentally or wantonly degrades the environment will at least face social ramifications if not legal ones.

In a research report produced by the K4D Helpdesk Service and commissioned by the UK Department for International Development, they cite several factors that are now pressing the trade finance sector toward sustainable alternatives. First and perhaps foremost is the fact that customers and consumers are far more mindful of the impact their purchases will have on the welfare of the planet. They exercise this concern by boycotting products, and the rise of the internet has enabled not just the ability to source alternatives, but also to spread negative merchandise- based information should they wish. Businesses have responded by making declarations of how their merchandise is sustainably derived and moving to processes that provide an audit trail (although this has also given rise to a practice called Greenwashing).


Secondly, those financiers that supply credit to trade wish to maintain their image; they do not want to entertain risk or court losses by being exposed to unsustainable or socially immoral practices of organizations within their supply chain. After all, a good reputation takes many good deeds to earn but only bad one to destroy. Thirdly, bodies of authority are imposing their legislative weight upon the sector. As the science of human-induced climate modification has evolved, so too has the awareness of governments and regulators of just how critical the situation has become. With it there has been brought a need to act, and this is fanning out to affect every aspect of human life.


The Task Force on Climate-related Financial Disclosures – established by the G20 Financial Stability Board in 2015 - requires the transparency of business’ operations and the risks they pose to worsening climate change. Equally, the European Commission’s High-Level

Figure 1: Based on a diagram taken from ADB Briefs (no. 113 September 2019) and based on the Asian Development Bank programme.

Expert Group on Sustainable Finance also sets down a framework for including sustainable decision making in an organization’s considerations. Figure 1 is a diagram based on the programme set in place by the Asian Development Bank for sustainable, responsible, and accountable trade finance. Followed wholesale, it acts as a template by which to work alongside the needs of the planet, enrich the lives of one’s employees, and foster good business practices. All in all, it is a recipe for fully sustainable business.


The Technology

At the current time, trade finance is beset with antiquation. Old processes and traditional

thinking dominate with the standout offender being the use of paper. Its use in days gone

by was totally necessary. All record keeping at one point relied on it. In modern banking

however, paper is a poor tool in a fast moving, shrinking world. For starters, paper does not generate data that can be scrutinized.


Once a transaction is over, paper becomes a matter for storage only. Modern finance requires datasets to examine for patterns of behaviour, performance issues, and flaws

within processes. Without data, all these things remain indecipherable.


With the advent of the possibility of digitalization, it becomes possible to remove paper –

and its associated cumbersome trail from the supply chain. Removing paper itself is an environmental gain since it immediately

safeguards one of our most precious natural resources: trees. A not completely insignificant

gain too, would be the elimination of the use of couriers for paperwork. No couriers means less travel means less carbon emissions.


Where digitalization really becomes interesting though, is when considering the emergence of blockchain technology. Networks based on encryption and decentralization can give rise to information transfer between suppliers, traders, consumers, and financiers, that carry with

them authentication and security.


As this technology gathers momentum and each party in the supply chain joins the network, bad actors or malcontents will find it harder to operate.


Once technology such as blockchain moves into the mainstream and becomes the norm,

entities with negative intentions will be forced to use the technology or go out of business.

What this all means from a climate change-related perspective specifically, is materials and

processes can be tracked and audited for their impact on the environment for example.


Every aspect of every transaction – as well as all parties involved, and every path of transportation– can be tracked and recorded without fear of outside manipulation. Not just financiers, but any interested parties will be able to assess every facet of the supply chain transaction for weaknesses, liability, risk, crime, or environmental breach. In effect, a supply chain can be supervised at each point and by any interested entity. Attempts to damage the environment by cutting corners or overt criminality will no longer go unchecked, a mouth-watering prospect for cleansing and developing a sustainable, accountable, responsible, and conscientious industry.

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