Corporate TreasuryFinancial Supply ChainTrade & Supply ChainSustainability in trade: Leadership paves the way for progress, but barriers remain

Sustainability in trade: Leadership paves the way for progress, but barriers remain

More needs to be done to ensure sustainability within global supply chains despite progress made Sponsored by Standard Chartered

Large international companies have become critical to the global economy by moving goods across borders reshaping supply chains.

However, whilst their leadership can enable greater sustainability in global trade there is still a long way to go.

As supply chains drastically shift, in which products, parts, and raw materials are now being exported and imported from a range of different countries – as represented by the famous Apple logo “Designed in California, Assembled in China” – so has the role of multinationals.

These international companies are now the enablers for change as they can shift the supply chain landscape by improving sustainable trade finance and metrics through their leadership in global trade.

From a public perception point of view, multinationals consider reputational risk as a key driver for adopting responsible conduct. For this reason, they will want to ensure they have great ESG ratings – and the cost of finance will also be driven by these ratings as well. But while reputational risk certainly encompasses a key driver for sustainability, change within these multinationals remains in the hands of leaders, in which the tone on sustainability will be set by whoever is at the top.

Microsoft, for instance, has been particularly bullish in terms of its carbon neutral commitment. In January, the company announced it was aiming to become carbon negative by 2030, to remove its historical carbon emission by 2050, and to fund $1bn in climate innovation.

“Like most carbon-neutral companies, Microsoft has achieved carbon neutrality primarily by investing in offsets that primarily avoid emissions instead of removing carbon that has already been emitted. That’s why we’re shifting our focus. In short, neutral is not enough to address the world’s needs,” said Brad Smith, president of Microsoft, in the press release.

Firms have been working to improve key areas outlined by the UN’s Sustainable Development Goals (SDGs) by changing their supply chain models, but there remains a leap towards reaching sustainability.

In a study conducted by the Economist Intelligence Unit (EIU), commissioned by Standard Chartered Bank, most executives in key industrial economies said they felt confident that their companies’ supply chains were responsibly managed.

The majority of respondents stated their firm’s responsible supply chains standards were in accord with government regulations and industry standards, such as certain countries including China that have improved their sustainability in trade. Two-thirds of firms have indeed reported an increased focus in responsible supply chain management, according to the research.

Xi Jinping recently told the UN general assembly that China was aiming to become carbon neutral by 2060, according to The Guardian.

China’s policy over the past five years has shown a clear ambition of encouraging further sustainable trade activity. Its 12th five-year plan, adopted in March 2011, targeted a reduction in energy and carbon intensity along with a rise in non-fossil energy usage – considered a major shift for the Chinese government.

The 13th five-year plan also outlines China’s appetite, as the world’s leading workshop, to accelerate the forming of industrial systems for a green supply chain.

However, the report conducted by the EIU also highlights that international companies tend to only focus on areas that impact them, meaning they fail to look across the spectrum – underlying a poor performance on their behalf.

Only 22 percent of respondents were found to focus on child labour and 23 percent address climate change as well as carbon footprint. Nearly a third also did not address gender equality.

In 2013, the International Labour Office (ILO) estimated that 168 million children were in child labour across the globe, which accounts for 11 percent of the child population – most of these working within the garment and textile industry to satisfy consumer demand.

Child labour is yet only part of two of the UN’s Sustainable Development Goals (SDGs). In total, the UN presents 17 goals that multinationals are required to invest in – but industries are beginning to identify the areas that impact their businesses, which is why sustainability in trade still lacks today.

For this reason, measurement within supply chains is key to understand the progress made by international firms. It is the metrics, trackers, and ratings that enable us to grasp which multinational is moving towards further sustainability.

More formalised ratings mean we can now compare apples with apples if two corporates are governed by the same ESG. However, the challenge now is to compare sustainable supply chain programmes between themselves. We need transformation over the next few years to enable us to measure this more systematically, without adding significant cost to the business.

Trade agreements and regulations

In the EU, China is the biggest source of imports and the second biggest source of exports despite no trade agreement. Both trade on average over €1bn a day. For Germany alone, China has been considered its main trading partner for the fourth consecutive year, in which €206bn were traded between the two countries in 2019.

Not only do trade agreements not necessarily contribute to higher amounts of exports and imports between the cooperative countries, but they also do not always have a significant impact on ESG ratings.

Despite an extended focus on climate change over the years, most contemporary trade deals still fail to support environmental goals, according to a report published by the EIU and commissioned by the International Chamber of Commerce (ICC).

Border adjustment carbon taxes, for instance – which aims to prevent activities from being shifted to offshore countries where carbon emissions are not costly – is only mentioned in the Comprehensive Economic and Trade Agreement (CETA) but is non-existent in others including the EU-Singapore Economic Agreement, Korean-Australia Free Trade Agreement (KAFTA), and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Even then, the CETA mentions the goal but presents a low level of ambition in implementing it.

The EU taxonomy, however, is set to have a huge impact on improving sustainability in the supply chains of multinationals. As it presents specific measures for these to follow to become compliant, it will create an entire new industry around it.

The Taxonomy aims to encourage companies to contribute to one of the six environment objectives that include goals such as climate change mitigation and the protection and restoration of biodiversity and ecosystems.

Recent work undergone by regulators and central banks has also been positive.

In June, the FCA and PRA published a guide explaining that climate change will have a drastic impact on the financial services sector and will affect the decisions of consumers.

As more investors become exposed to climate-related financial risks, this will now become part of the overall risk assessment, meaning banks will start to think about how to encourage certain behaviours. Certain banks have already started to reduce the capital charge that is deemed a sustainable product or business. The change in focus is now leading banks to adjust internal behaviours to get the right outcomes.

However, a challenge remains for sustainable finance: to produce a ripple effect. How can sustainable finance become a win-win-win – to improve the capital treatment for banks whilst improving their returns of dealing with suppliers, and on the supplier and buyer side, to get a lower cost of financing that enables them to reinvest to improve their environmental impact?

No solution has yet been found, but the change in investors attitudes is certainly a good indicator that regulators and banks are helping that direction of travel.

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