We Need to Talk. Sustainable Trade Calls for Collaboration.

2022 has been a year full of unprecedented economic threats. We are yet to recover from the impact of a global pandemic and a supply chain crisis, and the Russia-Ukraine conflict has laid bare the threats if we do not transition to alternative energies quickly. Above this the planet faces a real-world global catastrophe, climate targets are slipping, and the rate of decline is accelerating, not getting better. Yet despite this, financial institutions, international businesses, and policymakers seem to be slow agreeing a viable solution. It is impossible to understate the contribution sustainable trade could make towards ameliorating the human suffering that these threats have created.

The time for action is now and collaboration is key.

Measuring Sustainability Through Trade, a report published by Coriolis Technologies and the Greens/EFA in the European Parliament in June, demonstrated that fossil fuels are over 10% of the value of world trade. As a result, it is unsurprising that world trade scores -0.58 on our scale from -1, which means that everything is negative, to +1, which means that everything is positive. In other words, the score means that nearly 80% of world trade contributes negatively toward SDGs (Sustainable Development Goals).

The conclusion was drawn by matching all products in world trade to the United Nations 17 Sustainable Development Goals (SDGs). The sustainability of trade is the balance between positive and negative contributions to SDGs of the products imported or exported by a country.

What is interesting about this process is that it is not the emerging markets that score worst on this index. Even though many emerging economies depend on fossil fuels for export revenues, these countries do not consume at the levels that more developed economies do and therefore do not contribute negatively to the SDGs.

Of course, this is potentially a self-evident explanation that is part of the problem of under-development – emerging markets consume fewer end products and therefore score better. Yet it avoids the usual type of criticism of these types of indicators for two reasons – first, it is not militating against the emerging economy’s access to preferential credit terms or green bonds because the score is better. Second, the action plan for economic development is clear: use regulation and investment to support sustainable growth against SDGs by promoting the sectors that contribute positively rather than negatively.

There is an equally stark message for developed economies too. Policy needs to focus on driving intra-regional trade in things like electric energy, biofuels, food, and electric cars if it is going, quite literally, to shift the dial.

However, since these findings were released, the debate around sustainability and Environment, Social and Governance (ESG) has come under criticism. Regulatory raids on Deutsche Bank’s investment arm, DWS, for greenwashing, a contrarian speech by Stuart Kirk questioning ESG as a valuable investment tool, and critical press on the subject matter all aim undermine the efforts of innovative approaches to achieving sustainability. Indeed, the Coriolis Technologies report was itself called into question following consternation amongst banks and corporates in the market. Understandably so when such evidence presents findings so disagreeable with the current maxim.

Clearly there is a breakdown in communication with specific parts of the industry.

Is international trade responsible for negative contributions? The simplest answer to that question is no.

A more nuanced answer however, says, again correctly, that human activity is responsible for the destruction of the planet; that is universally accepted. Much of that activity is economic activity, and that means trade – or the buying and selling of goods and services between businesses. Since the ancient Phoenicians, that trade has been cross-border as well as domestic to satisfy the basic problem of economics – scarcity and choice. As David Ricardo pointed out, economies have a comparative advantage in the production of one good and trade with other economies to widen choice or address the issues of scarcity.

In short, we cannot apportion blame for the past, but we can accept responsibility for the future. This is a collective responsibility and one that should be addressed in a collaborative way. The regulators are now offering an opportunity to use trade finance as a mechanism for catalysing a transition towards a more sustainable trading system. The sector does itself no favours by saying that it does not have a problem. The world has a problem, and it is irresponsible of the sector to shy away from its scale.

The risk for banks and businesses is that EU’s regulatory landscape is shifting, and by January 2023, businesses will be compelled to report on their progress towards meeting the sustainability strictures of the EU (European Union) taxonomy and Sustainability Financial Disclosures Regulations (SFDR). That is, businesses and their finance providers will come up against a high regulatory hurdle if they do not start to report on their sustainability status.

Yet if this process is to be anything other than greenwash, understanding how to change will be important too. By measuring the trade profile of a business by matching its products to SDGs, we provide a benchmark as a starting point and can suggest a route towards improvements as well. There is a long way to go to make trade sustainable or even neutral in terms of SDGs. But let us hope that the current geopolitical crises have made not just a timely, but also a compelling case, for a rapid transition.