Why COP26 is not sustainable unless it understands trade

“Values of this magnitude make the government level commitments to support deforestation of $12billion quite literally look like they have lost the wood for the trees.”

Values of this magnitude make the government level commitments to support deforestation of $12billion quite literally look like they have lost the wood for the trees. But they also put a huge sustainability burden on the trade finance sector that really needs to be addressed if the world’s economic model is going to adapt in a way that promotes environmental, social and governance goals.

The banking sector is well aware of this challenge. It goes beyond the funding of fossil fuels and into the day-to-day practice of providing trade finance to businesses across the world, 95% of whom are small, providing jobs in their communities and who are part of the fabric of our daily lives. It means a complete transformation of the way in which banks and alternative finance providers work with their clients to encourage sustainability in every sense of the word – decent work, decent conditions, economic development and environmental responsibility as well as good governance.

Banks have already worked on the governance side of all this through anti-money laundering (AML) and know your client (KYC) screening which is a long and arduous process a well as a costly one. Even so, these measures are not enough by themselves. For example despite the systems that are now in place to scrutinise everything about a propsective client, and despite the fact that there are already regulations to prohibit banks from supporting trade in sectors linked to illegal logging  in 2020 the value of “hidden” (or non-reported) trade in those sectors according to our analysis of trade flows was more than double its value in 2006 at nearly $11bn.

This simple example shows why regulators will inevitably get tougher, not just on the type of sustainability fraud that the illegal logging statistic suggests, but on the whole process of sustainable trade finance. Expect the EU taxonomy for sustainable activities and the UK’s own Green Taxonomy to combine with letters from regulators that will enable them not just impose fines in the future but also to question a financial organsiation’s license to operate if they do not take sustainability into account.

Banks know this. Already sustainability compliance functions are among the fastest growing departments in financial services because there is an inevitable regulatory push that will become heavier as the decisions at COP26 start to work through. But there is also a profound passion within banks and financial services organisations to start the process of change anyway – not because they have to at a corporate level, but because it is the right thing to do as well at a human level.

Our Future of Strategy week takes all this on board and looks at the challenges that the regulatory and the practical implementation of sustainable finance involves. It is not a talking shop. It is a week dedicated to understanding what banks are doing, the regulatory and geopolitical context in which they operate, and how they will form strategies and plans to make their own practices sustainable as well as those of their clients. This is the start of a journey, but it is imperative to move quickly – maybe next year this blog will be able to say that two trade dollars in every five contribute positively to sustainable development goals.