Dr Rebecca Harding
There are three, clear, issues at stake for banks as they attempt to navigate the minefield of sustainability.
The first is simply the imperative to avoid greenwash. Sustainability is about saving the planet from itself, not just about climate change. Effectively it is the business and financial equivalent of the Hypocratic Oath: do no harm. This includes effective governance and transparency, creating high quality jobs with decent pay and conditions as well as delivering “social responsibility programmes that encourage learning and help communities around the business to grow. Climate change is to ESG what Pandas are to the conservation movement – the “charismatic megafauna” that gets all the attention but that only represents a fraction of what needs to be done.
Second, a comprehensive view of ESG like this potentially means collecting, analysing and actioning so much data that the attempt to standardise fees to many like boiling the ocean. The ocean is, unfortunately, doing a good job of boiling itself so the challenge for trade finance providers is to step back and identify the means by which this complexity can be simplified. Unless we can agree on standard processes, we won’t avoid greenwash.
Without wanting to sound overly reductionist, there are ways of doing this by focusing on the product that underpins a transaction, rather than focusing on the transaction itself. This would be a welcome move to increase transparency anyway, but we can all agree that it is the product and the production process that pollutes, so a move towards “Know Your Goods” and how they are associated with Sustainable Development Goals and the EU Taxonomy enables the level of granularity that a trade finance provider needs.
Finally, because we can take everything down to the product level, this means that we can effectively price for sustainability. It would be possible to integrate preferential terms for transactions or contracts that are sustainable by virtue of the products or services intrinsic to them. Many banks want to move towards a process of more favourable terms for sustainable supply chains – the product or service level approach enables the real time data to do this.
Many years ago I was involved with productivity research that looked at the management of “intangibles” in business. “Intangibles” are, broadly speaking, the things that drive ESG management: effective governance, decent work practices, training, Corporate Responsibility programmes, environmental impact management and innovation. The startling finding of that research was that companies that managed their intangibles well were statistically signficantly more productive than those who did not, by a margin of around 10%. More recent research[2] has corroborated these findings.
The question, then, is why has this got caught within the compliance function? Why is it seen as a regulatory push that is driving the momentum for change, when identifying and measuring a business’s ESG status might lead to better credit terms for better businesses? The imperative of sustainability is a commercial imperative – not just a planetary one. This may well be the moment in time where everyone can genuinely “do well by doing good”.
[1] https://www.spglobal.com/esg/insights/more-than-3t-of-companies-outside-the-eu-could-be-on-the-hook-for-europe-s-sustainable-finance-disclosure-regulation
[2] https://workofthefuture.mit.edu/wp-content/uploads/2020/11/2020-Research-Brief-Brynjolfsson-Benzell-Rock.pdf
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According to the latest UK Exporter Monitor by Coriolis Technologies and The Institute of Export & International Trade, Northern Ireland exporter numbers increased more than any UK nation in the past month
Is now the moment to call time on measuring ESG? The shortest and most polite answer to this question is a resolute ‘no’. We have no option but to transition away from where we are now to include the ESG that the investment community seems to reject.
Now is undoubtedly the moment where a strategic, and integrated approach to sustainability, economic development and growth, and, sadly, military conflict, needs to be developed by businesses, governments and financial institutions. Trade has a central role to play in this strategy.
