Global trade needs ESG risk scoring to hit its targets

As concerns around sustainability have grown exponentially in the last few years, the focus on how to measure environmental, social and governance (ESG) risks has swiftly sharpened for the global trade community, writes Nigel Hook, TradeSun CEO, for Financial IT.

Only recently, UK regulators warned that companies may face action if they gloss over their climate-related risks, in a signal of how authorities may choose to steer the sustainability agenda for business in coming years.

In 2021, Britain’s Financial Conduct Authority (FCA) made it mandatory for the London Stock Exchange’s premium market to make climate-related disclosures to investors in line with the global Taskforce on Climate-related Financial Disclosures (TCFD), or to explain why they have not.

The Taskforce comprises more than 30 members from across the G20, with the UK the first economy in the group to make TCFD disclosures a requirement.

In a review of last year’s regulatory intervention, the FCA and the Financial Reporting Council said they found a significant increase in the quantity and quality of disclosures – positive progress for transparency regarding climate risks to the business.

However, they added that in “some instances where companies indicated that they had made disclosures consistent with the recommended disclosures … the disclosures themselves appeared to be very limited in content”, stating that these are being considered in more detail and “appropriate” action may be taken. 

 

Quantifying the gap

Perhaps unsurprisingly, the regulators said that the most common reporting gaps in the review were found in the more “quantitative” elements of the TCFD’s recommendations, giving examples of scenario analysis, metrics, and targets. 

The only way to ensure the transparency of climate – and, more generally, ESG – risks facing businesses involved in trade and beyond is through thoughtful interpretation of data that enables factual, fastidious, and fair reporting.

For global trade, supply chains reaching around the world make it an inherently complex business. Multiple stakeholders, from a chain of tiered suppliers to logistics operators and financiers, in different jurisdictions make it difficult to accurately assess the ESG risks of a certain good, service, and, subsequently, a trade transaction.

At present, technology is starting to be embraced to better quantify ESG risks in trade transactions and across supply chains. Artificial intelligence and leading algorithms are being deployed by banks to analyze transaction data against sustainability frameworks, as well as predict patterns of forced labour in supply chains, while the internet of things (IoT) technology is tracking the journey of commodity products from soil to shelf.

The private sector is providing practical solutions to bridge the gap between high-level frameworks and reporting on the ground for companies of all sizes. For example, Coriolis Technologies’ ESG Tracker, developed by the leading trade data and analytics provider in partnership with more than 50 financial institutions, is measuring the ESG impact of companies against the United Nations’ Sustainable Development Goals (SDGs).

Technology is the way forward for robust and accurate ESG risk reporting for companies, which is critical in increasing transparency across end-to-end supply chains, as well as avoiding accusations of “greenwashing”.

Greenwashing, when a company appears to be more sustainable than it is, often a result of deceptive marketing tactics, is an increased risk for business. Not to mention, it makes it more difficult to identify the real contributions to more sustainable and transparent trade. 

 

Evolving frameworks

Part of the issue with determining progress around sustainability and identifying “greenwashing” in an industry like trade is that participants may be using different frameworks to measure their ESG impact, as there is no universal standard, making it difficult to draw comparisons from transaction to transaction. 

That said, the International Chamber of Commerce (ICC) last year published a roadmap specifically for sustainable trade finance that includes scoring the different elements of a transaction against certain criteria. For example, the buyer in a transaction would be rated against environmental, economic, and social factors. 

Meanwhile, the SDGs, devised by the United Nations in 2015, are a collection of 17 interlinked global goals designed as a “blueprint to achieve a better and more sustainable future for all”. Though, in its 2022 review of the goals, António Guterres, UN Secretary-General, said that creating a global economy that works for all requires “bold” action. 

What will increase transparency is clear reporting against such high-level frameworks – the quantitative metrics that track and define progress and impact. 

Global trade is far from where it needs to be in measuring its effect on our planet. When it comes to measuring, verifying, and tracking the ESG impact of trade activities and end-to-end supply chains, technology will be the enabler of factual, fastidious, and fair reporting.

 

The piece was first published in Financial IT.

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