Sustainability in trade has become a topic of crucial importance for all stakeholders, from financiers and multinational corporations to SME suppliers in emerging markets. New developments are enabling a greater understanding of the environmental, social and governance risks in the world’s supply chains. But translating this into action means harnessing data in new and better ways.
Global trade encompasses an annual $28.5 trillion of transactions across a complex web of suppliers and buyers. From agricultural exports to textiles, metals and minerals to manufactured goods, the supply chains that span the planet are an enormously important driver of economic growth and development, lifting more than one billion people out of poverty since 1990.
However, important environmental, social and governance (ESG) challenges remain in ensuring trade meets its full potential as a force for good, such as tropical deforestation linked to exports of key commodities, the generation of greenhouse gas emissions through the transportation of traded goods, and human rights violations in supply chains.
Getting trade right
It is in everyone’s interest to get trade right, but because of its complex, global and interconnected nature, it’s often difficult to identify how. Many corporates only have a connection to their direct suppliers, meaning they don’t know much about their suppliers’ suppliers. These limitations make it impossible to fully understand just how sustainable their activities truly are. Meanwhile, financiers, who are increasingly attempting to support their clients along their sustainability journey with ESG-linked trade finance, often find themselves relying on patchy, self-reported data with only narrow metrics to measure against.
Stakeholders across the trade ecosystem want to do better on ESG, and everyone wants to have the ability to provide transparency about their activities. The problem is, you might be doing well, but you really can’t prove it, which leaves you open to low ESG scores though in reality your score might be very high.
Fixing this and generating real, measurable sustainability improvements in trade isn’t just a nice-to-have. For society at large, it means securing prosperity and decent jobs while delivering on the United Nations’ Sustainable Development Goals (SDGs) and meeting the objectives of the Paris Agreement.
ESG factors have been found to be positively correlated with business performance, and with supply chains accounting for about 41% of a company’s ESG impact, according to research by ratings firm Scope Group, it’s becoming increasingly important for business leaders to demonstrate how their suppliers are performing too.
Meanwhile, financiers from banks to export credit agencies are looking to mobilise increased levels of finance for the low and net zero emissions economy and need credible insights into where their funding can make the most impact.
Harnessing the data
All of this information is already available, in the shape of the vast oceans of data created by trade activities every second of every day. The Internet of Things, with its networks of cameras and sensors on millions of devices, feeds a constant stream of data on shipping routes, storage methods, and their attendant carbon emissions. Satellite data provides visibility of deforestation and water resource use. Blockchain technology is utilised to ensure the transparency and traceability of minerals. In terms of reporting, the main recognised ambition today is based on Science-based targets (SBTi), an organisation leading the way in providing companies with a clearly defined pathway to reduce their greenhouse gas (GHG) emissions. They set ‘science-based’ targets based on what the latest climate science deems necessary to meet the goals of the Paris Agreement.
But trade data doesn’t have to involve cutting-edge technology. It’s also the information entered into invoices, contracts, and bills of lading at ports, factories and production facilities each day, and the codes used by customs officials to classify goods.
Across the length and breadth of supply chains there’s a lot of data that needs to be brought together. However, data is just data unless it’s analysed and acted upon. The first thing is to identify how to consume that data so that something worthwhile can be done with it, and since it may not be formatted consistently, you need to find a way to ensure everyone is communicating in the same way.
This can be achieved via API standards, which will help to ensure that any information being shared is in a uniform format that can be easily used and validated by others. Surecomp’s new RIVO platform, a digital hub that provides open API access to importers, exporters, banks, insurers, shipping companies and solution providers, is one example of this concept in action. RIVO is essentially about bringing all that data in and processing it to be something usable.
Creating a framework for change
Simply collecting and structuring data is only half of the story. Turning data into useful insights means measuring it against globally accepted ESG metrics, and herein lies the challenge. There are currently hundreds of different assessment techniques for different types of goods and different aspects of ESG, and each framework has its own scoring methodology. Not only does this make it extremely challenging to benchmark corporate ESG performance in trade, it also places a disproportionate burden on small suppliers, who often find themselves having to align to numerous standards depending on their buyers’ requirements – leaving them at risk of being shut out of sustainability-linked financing as a result.
What’s needed are the right standards to measure data against in a repeatable, transparent, consistent way. Work is currently underway to achieve this. Last year, the International Chamber of Commerce (ICC) began a consultation process with the aim of creating an overarching sustainable trade and trade finance framework, and has recently commenced a pilot with banks, corporates, and technology companies to test the applicability and feasibility of determining whether the different elements of a trade transaction are sustainable.
With this initiative, we will have a meta framework that standardises all of these disparate ways of looking at ESG in trade. If everyone agrees on the ICC framework, we can combine this with the structured, standardised data to provide unparalleled transparency. This is a huge step forward, and will give the industry an evidence base to work from.
To create this evidence base, Surecomp has piloted new functionality on RIVO that maps datasets and methodologies from numerous ESG data providers to the ICC’s proposed framework, and then uses a scoring algorithm to combine trade transaction inputs to provide a single rating according to pre-defined criteria.
By making ESG measurement simple, buyers can demonstrate their commitment to better outcomes for the environment and society, suppliers can gain better access to favourable financing conditions, and banks can better target their advisory services to help their clients do better on sustainability goals.
What’s more, the insights gained can contribute to the fine-tuning of future sustainability frameworks. On an academic level, the ICC framework is feasible, and with RIVO we are demonstrating that it is also feasible at a technical level. We have tested it on a dataset of more than 1,000 transactions across numerous trade routes, and our findings can be leveraged to help define the framework going forwards, as well as give insights to policymakers around the true picture of sustainability in trade.
Collaborating for scale
However, harnessing the billions of gigabytes of trade data being produced every day to drive sustainability at a global scale will require cross-industry collaboration. We need better data quality across the board. Issues such as unstructured or poor descriptions of goods on invoices or purchase orders, or ambiguous naming conventions for companies are holding back the industry’s ability to use data to its fullest potential.
This isn’t an insurmountable problem. The World Trade Organization-ICC Standards Toolkit for Cross-Border Paperless Trade, released early this year, outlines close to 100 available standards, frameworks and initiatives that offer the potential to enable all parties in global supply chains to speak the same, universal language using a core set of standardised trade-related document and data formats.
With the adoption of the tools set out in the toolkit, such as the Legal Entity Identifier (LEI) and standards for naming products, packages, persons, entities, carriers and containers, we will be able to seamlessly assess suppliers, products and sectors at scale, saving time and money and enabling even the smallest participants in global trade to measure, monitor and improve their sustainability impact.
For now, though, as the sustainability imperative in trade grows ever more urgent, taking the data that’s available and enabling it to be utilised to take real action now is an important first step. Sustainable global trade promotes growth and improves people’s lives. The better the world trades, the better society. The technology and tools are now available to analyse and drive real-time decision making like never before to make a real difference. All we have to do is start.