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Turbocharging the sustainability shift in trade finance

Global trade accounts for roughly a quarter of world GDP and up to 30% of greenhouse gas emissions. Between 80 and 90% of trade flows rely on some form of trade finance. In this context, sustainable trade finance (i.e., aligning trade financing with ESG goals) will be vital to reconcile the needs of the trade ecosystem with the needs of the planet. 

At the Commodity Trading Week Europe conference in London, Trade Treasury Payments (TTP) Editor Deepesh Patel spoke with Jonathan Sims, Senior Research Analyst at Triland Metals and Vashti Maharaj, Adviser, Digital Trade Policy at The Commonwealth, for a panel session titled, Turbocharging the Sustainability Shift in Trade Finance.

Defining and measuring sustainability in trade finance

Before you can discuss sustainable trade finance, however, you need to agree on a definition of what exactly it is.

Sims said, “Sustainable trade finance is still a moving target…. The problem that has arisen is that there is still no clear definition of what low-carbon or green metal means. There’s a considerable degree of inconsistency in how those terms are applied.” 

There are currently no globally agreed-upon regulatory standards on what counts as sustainable finance, and regulators have signalled closer scrutiny of banks’ green claims amid concerns about greenwashing. 

In November, responding to industry demand for clear criteria on what sustainable trade finance is, the International Chamber of Commerce (ICC) did release a set of Principles for Sustainable Trade Finance. However, the lack of a universal definition still leads to confusion since what one bank calls a “green trade” deal might not meet another’s criteria. 

Today, companies’ ESG disclosures are often voluntary and use inconsistent methodologies. Standardised reporting frameworks, whether through exchanges like the London Metal Exchange (LME) or broader regimes like those in the EU, are crucial to ensure that hard data backs green trade claims. 

There are positive signs. The LME had found that 84% of its listed aluminium brands were already publishing sustainability reports with emissions data. More broadly, about 42% of global greenhouse gas emissions are now subject to a pricing mechanism. 

Without consistent ESG metrics and transparent reporting requirements enforced across markets, however, sustainable trade finance will struggle to scale. 

Using carbon pricing to drive sustainability

Carbon pricing is where a tangible price is put on carbon emissions, which, in theory, creates a financial incentive for companies to reduce their emissions or invest in cleaner technologies.

Sims said, “In terms of general climate policy, carbon pricing has been hugely successful in driving decarbonisation in other sectors. We’ve seen how quickly the European power sector has been decarbonised. … The EU is a particularly strong advocate for carbon pricing, and it seems to be the way that we will see decarbonisation progress over the coming years.” 

Today, however, carbon pricing is a patchwork. Only 27% of global emissions are covered by explicit carbon prices like taxes or cap-and-trade, and coverage has stalled at around 42% of emissions when including indirect fuel taxes. 

A uniform or at least linked carbon pricing framework across major economies would amplify the impact, as heavy emitters everywhere would face similar incentives to clean up. Unfortunately, achieving this is a political challenge, and not all governments are on board. 

Sustainability comes at a cost, especially for developing economies

For many developing nations, sustainable trade might seem like a luxury that they cannot yet afford, particularly if it means paying more for cleaner inputs or risking their exports via new rules like the EU Carbon Border Adjustment Mechanism (CBAM).

Maharaj said, “Governments, particularly smaller developing countries, now need to make decisions as to what their priorities are. It is very clear that it’s a tough battle. We all love the planet and want to be more green and sustainable because it helps the planet generally, but how do you prioritise that in your national policy, in your national legislation, and in your regulations?” 

Poorer countries have legitimate concerns. Investing in greener technologies or stricter standards can be expensive, and budget-constrained governments may prioritise basic economic growth, poverty reduction, or healthcare over environmental upgrades. 

An International Trade and Forfaiting Association (ITFA) white paper on African trade finance, published in November 2022, pointed out that global sustainability standards might be unworkable or unfair for African traders because they were designed with developed market multinationals in mind. 

African economies contribute only about 3% of global GHG emissions (vs 25% for G7 countries), yet they are being asked to meet standards that could impose significant costs on their key industries. Many African and low-income countries rely on carbon-intensive exports (like commodities or agriculture) and lack the financial and technical capacity to immediately switch to cleaner processes. 

If sustainability standards are too stringent or rolled out without support, there is a risk of excluding poorer countries from global trade. We must make sustainability accessible and beneficial for all, not a new barrier or cost burden for those with the least resources.

Including MSMEs in the green transition

In a similar vein, micro, small and medium-sized enterprises (MSMEs) could be left behind in the sustainability shift. 

Without better access to finance, capacity-building, and regulatory support, many MSMEs will simply be unable to comply with sustainable trade standards. Large multinational companies might have the means to hire ESG consultants, retrofit factories, or absorb the costs of certification and reporting, but a small supplier or family-owned exporter often does not. 

Many MSMEs struggle to even obtain basic trade finance, let alone extra funds for green improvements. According to a report from the ICC, 73% of financial institutions now offer green or sustainable finance options for SMEs, yet only about 2.8% of SMEs have actually applied for such financing in the past three years. 

This huge gap suggests that smaller firms either aren’t aware of these products, find them too costly or hard to access, or don’t have the bandwidth to pursue them. Indeed, sustainability-linked loans or green grants often come with reporting requirements or upfront costs (for energy audits, new equipment, etc.) that MSMEs cannot manage without help. 

If a significant chunk of the supply base (MSMEs account for a huge proportion of suppliers worldwide) cannot participate in sustainable trade, then global ESG goals will continue to evade our grasp. 

Financial tools and partnerships for sustainable trade

On a more optimistic note, there are several practical financial tools and innovations that are starting to make sustainable trade and its financing more feasible. 

Sustainable commodity indices are emerging, and we are seeing signs of early traction with instruments like carbon contracts and power purchase agreements that de-risk green industrial projects and link them to market mechanisms.

Carbon contracts refer to things like carbon credit trading and futures, or contracts-for-difference (CCfDs) that guarantee a price on carbon. For instance, companies can use carbon credit futures or forwards to lock in the cost of emissions, which creates more certainty for investing in low-carbon technologies. There are also proposals for CCfDs where governments pay the difference if carbon credit prices are too low, thereby incentivising companies to undertake green projects. 

Power purchase agreements (PPAs) are another approach. PPAs are contracts typically used in energy markets, where an offtaker (like a corporation) agrees to buy electricity from a renewable energy project at a fixed price over a long term. Similar mechanisms are being used to support green industrial projects. For example, a mining company might sign a renewable PPA to ensure its operations are powered by green energy.

Blended finance, which uses public or philanthropic funds to absorb some risk or improve returns for private investors in sustainable projects, is another effective model. In a trade context, that could be a development bank guaranteeing a portion of a loan facility for sustainable suppliers, or a government-funded junior tranche in a financing vehicle that catalyses private capital. The idea is to use public money to unlock private investment by making the deal more attractive. 

For example, the IFC and other development finance institutions frequently partner with commercial banks to co-fund trade finance programs in emerging markets, increasingly with climate or sustainability criteria attached. 

Maharaj said, “Do you think, as a small business, you’re going to make it into the ICC registry of accessible and safe companies to do business with? Chances are not, and that is where public-private partnerships come in really handy as they can create the enabling infrastructure for sustainable trade finance inclusion.”

While none of these tools alone will transform the market overnight, together, as they scale up, they can reduce the risk and cost associated with sustainable trade, making it more bankable. 

Harmonised standards and global collaboration

Making all of this come to life, however, will require harmonised standards and global collaboration. Sustainable trade finance, by its very nature, spans borders, and if each party involved has a different sense of what qualifies as sustainable, deals will stall. 

One key area is standard-setting. Aligning the numerous sustainability frameworks and filling the gaps will require forums where regulators, banks, corporates, and international bodies work together. Yet, it is important to remember that one size does not fit all, and standards must recognise different development levels. That said, having baseline global standards will help. 

Bodies like the UNEP Finance Initiative and ICC are already collaborating on harmonising standards and benchmarks for sustainable finance. Likewise, the WTO has started to discuss sustainable trade facilitation, and multilateral development banks are coordinating on climate finance definitions. 

Collaboration is also needed to ensure emerging markets and MSMEs have a voice in these standards. ITFA’s African trade finance white paper warned that if African perspectives aren’t included, new ESG rules might be unrealistic for them. This could mean phasing in requirements (e.g. grace periods for least-developed countries on carbon tariffs), providing technical assistance to help meet standards, and creating financing pools targeted at upgrades in poorer countries. 

Global collaboration can also take the form of knowledge-sharing. Successful models (like Singapore’s Green Trade Finance framework, which piloted sustainable trade finance in Asia) can be shared and adapted elsewhere. 

Sustainability in trade finance is a collective action problem. No single bank or country can solve it alone. If only a few players uphold strict standards while others do not, dirty trade will simply shift to less scrupulous channels. 

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Sustainability in trade is not a niche concern or a corporate social responsibility checkbox for wealthy nations, but rather an imperative for all countries in the face of climate change. If regulators, financiers, and traders coalesce around common standards, invest in credible data and metrics, deploy innovative financing tools, and include all participants, big and small, then sustainable trade finance can truly scale. 

The road ahead is challenging, but with the kind of global collaboration and determination exhibited in this panel, the industry just might turbocharge the sustainability shift in trade finance for good.