Co-authored with Gerardo Salonia
An introductory article focused on financial institutions
Strictly speaking, sustainable trade and sustainable trade finance do not exist in the sense that there is neither a methodology nor a regulatory framework in place to assess and report it. However, this is likely to change during the coming years as first steps have been taken by the international trade community to:
- Define sustainable trade and sustainable trade finance
- Draft a methodology to quantify a trade transaction sustainability level
Concretely, the International Chamber of Commerce (ICC) launched a positioning paper at November 2021’s COP26 panel in Glasgow, which was written alongside several major global banks’ executives with the collaboration of Boston Consulting Group. This is the output of the first sprint of a longer-term programme, and it outlines the first-ever standardized framework and assessment methodology to qualify the sustainability profile of trade and supply chain finance transactions.
ICC’s paper’s detailed content will be elaborated in a second publication, while this article:
- Illustrates the implementation timeline for the framework
- Provides a perspective on potential implications for banks
The main intention of this publication series is to distil the paper’s essence from the perspective of a financial institution that will probably need to adapt its business model, systems, and processes to a certain extent to meet either regulatory requirements or market standards in the near future.
Understanding the timeline
By suggesting first definitions of sustainable trade and sustainable trade finance, as well as a possible methodology to assess it, ICC’s positioning paper lays the ground for start defining the sustainability standards that will be used within the framework. A basic roadmap describes which framework components will need further iterations and agreements on. Finally, a consultation process was set up to engage main trade stakeholders into the discussion and incorporate their feedback.
We believe that this is a great starting point and even though it is far too early to present concrete implications for banks, it would be wrong to ignore the matter and not trying to venture likely impacts. We will also focus on these in a second publication following shortly.
There are currently two time horizons considered. Only the first one is defined and goes until mid-year 2022, when the so called “initial state” is aimed to be reached with an MVP in place: the simplest version of the framework using draft sustainability standards that lean on the Green Bond Principles. The launch to market also includes a refined longer-term roadmap that will still require further iterations. As of now, there is no suggested end date for this.
The first of two milestones prior to the “initial state” was reached by the publication of the positioning paper and the start of a feedback collection process that shall be used to develop the standards to be used under the framework. The second is right around the corner, and by the end of this first quarter of the year, the ICC intends to finalize the feedback collection and evaluate it, iterate on the proposals made and launch expert groups to identify and map existing standards to the ICC framework.
Potential implications for financial institutions
From our perspective, implementing such sustainability assessment framework will have an impact for banks in one of the following dimensions:
- Business relationship model
- Operative processes
- Systems and technology
Focusing on the latter, banks will need to obtain and manage a much larger set of data from their clients on a transactional base. They will probably also need to rely on data from their clients’ counterparts, whether provided by their clients themselves or via the counterparts’ bank. This will imply a standardized information sharing system or platform to securely share the data in a similar way payment data is shared nowadays.
Not only data and technology implications are yet unclear, but so are many other points like governance and reporting functioning or ICC’s role in the long-term. For instance, shall the institution validate, certify or supervise the assessment? If not, who should? Most importantly, will such a framework turn into regulation? While neither we nor anyone can answer these questions yet, we would like to support our clients during the definition phase. By starting to assess business and operative processes such as the current KYC, or data system landscape, we believe banks will be able to better envisage future needs to comply with potential business or regulatory requirements; thus being well positioned to decide upon financial and other resource allocation.
As mentioned earlier, this is an introductory article of a series of publications, which aimed to provide the necessary context to understand the subject. In a second publication, we will illustrate the main concepts and explain the suggested framework in more detail. In addition, the ICC had planned to finalize industry engagement, and expert groups will start iterating proposals. Stay tuned!
Gerardo Salonia is a senior principal within our financial services practice in Germany with a focus on compliance, AML and KYC areas. He has extensive consulting experience within the e-commerce and financial services domain. Gerardo has enabled several European companies and financial institutions to overcome the challenges posed by disruptive technologies and transform into digital-oriented organizations. Gerardo holds an MBA in business administration from the University of Mannheim. He is a certified AML officer and has a risk management certification from the Goethe Business School – Frankfurt University.
Jorge Martinez is Principal Consultant and has pivoted his professional career around strategy and technological implementation projects in retail, business, and corporate banking. After 10 years of experience delivering projects for many different banks around the world, he has been involved in revenue enhancement, cost optimization and efficiency improvement projects. His main technical know-how rests on trade finance product management, data analytics, IT implementation and change management. Jorge holds a master’s degree in economics from Berlin’s Freie University and a Diploma from Madrid’s Autónoma University. He is certified SAFe 5 Agiligist, Professional Scrum Master and Product Owner.