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Why the need for sustainable trade finance?

Do you know that a single pair of jeans needs 10,000 liters of water to make?? 

Do you know that cultivation of palm oil, which is a common ingredient in food, cosmetics, fuel etc. has caused destruction of millions and millions of hectares of forest land? 

Source: Mongabay.com

Here in comes the concept of sustainable trade finance. The main aim of sustainable trade finance is to encourage and inculcate a practice to finance trade which is environmentally friendly and socio-economically inclusive.

Salient Points about Sustainable Trade Finance

Let’s understand some salient points about sustainable trade finance which you should know -

✨The Paris Agreement forms the precursor and foundation of this push towards sustainable trade finance. It is an international treaty on climate change signed by 195 member countries. One of its major goals is to limit the global warming and temperature increase to 1.5°C above pre-industrial levels.

✨It is estimated that to achieve this goal, world trade can act as a big influencer. But why world trade? Because more than $22 trillion worth of goods flow across the world every year, a figure expected to reach almost $35 trillion by the end of the decade. So, if a conscious choice of encouraging the finance of goods that are sustainable is made, then it can act as a key differentiator to achieve the goal of the Paris agreement. 

✨To implement that, ICC has come up with ‘ICC Standards for Sustainable Trade and Sustainable Trade Finance’ which aims to provide a framework on how sustainability can be defined and measured in a trade. The framework aims to be in such a way that it can be applied easily by banks and corporates by providing an ESG (Environmental, Social, Governance) score. The framework will be iterative and currently the Wave 1 version deal with the textile industry. It will consider two aspects to determine sustainability of a project, or the goods manufactured - environmental aspect i.e. impact on the local environment and terrestrial or marine ecosystems. Socio-economic impact i.e. supporting of human rights, supporting peaceful and inclusive societies 

✨Not only the goods that are manufactured are taken into consideration, but all the five components of a trade which are the buyer, the seller as well as the purpose of the goods and trade, are considered. For complexity in determining ‘green transport’, this wave 1 version has kept the transport used for the goods outside the purview of the framework.

More and more banks are onboarding this push of financing sustainable trade and ESG rating and scores are increasingly becoming an important factor while financing trade.

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