Sustainable Finance In Action

COP26 emphasised that funding plays a huge role in achieving the agreed climate goals. “Every company, every financial firm, every bank, insurer and investor will need to change” says the UK Government

This will mean going beyond the “do no harm’ sense check before investing, insuring, or lending, by taking a more proactive approach towards how the financial support shapes ESG-aligned behaviour.

Economists Tedd George and Rebecca Harding join us in our new post-lockdown studio to discuss how the evolving set of frameworks are shaping supply chains and trade flows. “There is a lot of new legislation punitive to anyone who does not have a sustainable model,” reflects Tedd. And Rebecca comments that given the length of the ESG transition process, “anything that now tries to put things into an actionable framework is helpful”.

Both agree that ESG alignment creates scope for arbitrage, given the global backdrop of trade wars and economic recovery from the pandemic.

To hear more, tune in to Trade Finance TV!

Participants

  • Dr Rebecca Harding, Independent Economist and CEO of Coriolis Technologies
  • Dr Tedd George, Founder and Chief Narrative Officer of Kleos Advisory Ltd

Presenter

Clarissa Dann, Editorial Director, Deutsche Bank

Transcript onf interview:

Clarissa Dann: After COP26, it was clear that funding played a huge role in achieving the agreed climate goals. Every company, every financial firm and bank insurer and investor will need to change, says the UK Government. This will mean going beyond the do no harm sense check before investing in shoring or lending. And that means taking a more proactive approach to how the financial industry supports and shapes the ESG aligned behavior we need. Our panelists are here to discuss what that means in practice. Please welcome Rebecca Harding and Tedd George.

Rebecca Harding: It’s a pleasure to be here.

Tedd George: Great to be here.

Clarissa Dann: So this all started with the Sustainable Development Goals. Tedd, would you like to walk us through the frameworks and how they got going?

Tedd George: The SDGs were first released in 2015 and they really try to follow the Millennium Development Goals. They continued some of them, but essentially they are the guiding framework that governs everything to do with sustainability, and a lot of them are just based on the MDGs from before. Hunger, poverty, equality, access to education, health, water. And it’s only later that you get to the environmental ones. And then by goal 16, you’re basically left with peace, justice and sound governance. And you’ll find that most governments actually do link a lot of their sustainability agenda directly to the SDGs.

And around the same time they introduced as well a framework for how you can look at assets and see if they’re sustainable. And that’s the first time they use this expression ESG, environmental, social and governance. Everyone’s talking about it, but of course, a lot of people are completely confused about what ESG is. I think a lot of people tend to see it as almost like it’s a category of risk and it’s a box. You know, you put it there along with a separate box to reputational risk and one for legal. But the thing is, ESG cuts across everything. And so I think we really need some kind of clear framework and everyone is scrambling to put their own together.

Rebecca Harding: I think it’s very helpful what’s happening at the moment, because it is beginning to conceptualize everything that we’re trying to measure. We have CSR, we had CR, then we couldn’t talk about that anymore and then we were talking about ESG and SDGs and MDGs. It’s become very complicated and I think anything now that tries to put that into an actionable framework is helpful. That’s exactly what COP26 did. But there’s one thing that we have to remember. If we are going to move more and more towards the environmental aspects of ESG, we also have to remember that there’s a long transition process. During that we going to exclude or have to reframe some of the work with emerging economies that we do, tier three, four or five supply chains. There’s a lot of transition and potentially a lot of hardship. So we have to focus on the S as well as the E.

Clarissa Dann: Turning to how they all balance each other out and the various different rates at which economies are tightening up their frameworks. Do you see common agreement happening any time soon, or will it be some sort of arbitrage that goes on and off?

Rebecca Harding: I think we’re already seeing some arbitrage and I think it’s inevitable. I mean, Clarissa, you and I talked about this pre-COVID. We said coming into trade agreements through the European Union is a regulatory framework that actually defines regulation to preserve ESG criteria, particularly with Mercosur. At the time, Mercosur stepped back and said, hang on a minute, we see that actually as a way of superimposing a set of inappropriate regulations on our economic development.

Since then, you’ve also seen the trade war between China and the United States actually shift a little bit into a framework that is now playing out through supply chains. So if you look at the regulatory framework and the emerging supply chain review and how that’s being implemented, that’s turning into a bit of arbitrage as well because of human rights abuses. So you’ve got a lot of examples of different regulations, different frameworks and then financial services. Actually, the key thing is standardization.

Tedd George: Very often when it comes to standards you find for an industry, if we’re talking about something which is relatively new, which people don’t understand. You find that the industry tends to coalesce around some sort of area. And where there’s a real danger here is very often people produce papers or frameworks for discussion and they work so well the government say, actually I’m going to use that. And I think the classic example is TCFD, because that is all about financial disclosure to do with the climate. It started as a list of recommendations. It was Bloomberg and Mark Carney who were the chairs of that and has now become standard. And I wouldn’t be surprised if that becomes a regulation or something very close to us.

There are various organizations who can lead this when it comes to taxonomies. And we’ve seen, for example, the EU has done a risk taxonomy. We see the UK government, the French government, a very strict one. US, California, they had their own regulations. But what is kind of changing the game, I think, is the fact that there is a lot of new legislation now coming out which is potentially punitive to anyone who does not have a sustainable model.

And so we’ve seen, for example, the EU is talking about banning any imports which are linked to deforestation or forced labor. That’s almost the entire commodity supply chain. The UK government as well is said specifically that they’re going to think about a carbon tax on everything coming in, including agricultural products. And of course then that really opens a big question that agriculture is responsible for 20% of greenhouse gas emissions, also things like methane, which do a lot more damage. So if you add all these things together, it shows that actually it’s getting a lot more dangerous out there.

And I think the big issue with ESG, there’s such a focus on E at the moment, understandably, after COP26. But what about the social? So that is the people working on the value chain, everything from the sweatshops to the child labor to dangerous work sites. And things like that, but also governance, because big issues with corruption, big issues with lack of traceability, but also this more important thing which actually the SDGs are all about, which is society, it’s accountability of the board and also things like shareholder rights.

Clarissa Dann: Turning to you, Rebecca, you’ve been telling me before about how data can be one of the ways balance between the S and the G and the increasing that can be achieved. So tell us your thoughts on that one.

Rebecca Harding: So the framework that we’re beginning to see coming out of international organizations is giving us a mechanism for matching the data to goals. For example, the International Chamber of Commerce, the ICC, came out with the Sustainable Development Goals, Sustainable Trade and Sustainable Trade finance framework during COP. And what was interesting about that was that it said we can actually measure trade against all of these sustainable development goals. Now, of course we can do that because every single customs authority collects the product code of the company that’s trading overseas. So we can actually use that as a way to give the ESG footprint by transaction or by shipment. And that’s a very exciting development.

There’s a huge amount of work to be done around all of that. But I think the really exciting thing about data is that we finally can start with something simple that everybody gets and start to make more complicated from there. At the moment in trade, only $1 in every five is contributing towards positive sustainable development goals. Wouldn’t it be wonderful to sit here in a year’s time and say, Because we’ve got data and we can measure progress, it’s now $2 in every five or three or four.

Clarissa Dann: Getting every economy to agree on one data set and to use it in the same way does seem far away. How confident are you both this could actually become a reality?

Tedd George: A lot of it comes down to what are you measuring and the ability to measure stuff meaningfully. So it’s been incredible, actually, if you think of all the investment that there’s been to try and make things more sustainable and to improve development in the developing world. All of the agencies, all of the governments have been very poor at tracking impacts and this is really the biggest thing of all. So I think where I see the real interest in data is now what you can do in terms of combining it. So one thing is actually what you’re doing using AI and really trying to extract insights from the data there to give you that picture.

But I think the other thing is what you can do with data visualization, particularly if we’re trying to think about things like destruction to the environment or abuses of human rights as well, because using satellite visualization, using LIDAR, using sensors on the ground, etc., you can build up a picture in real time of exactly what’s happening on the ground. It’s too often the case that years after a deal has happened, you discover there was mass destruction of forest in some area. You can do that in real time. So it’s about getting use from this data now.

And I think the thing is it is happening is that as Rebecca said everyone is attempting to do this. So for a lot of the big institutions like banks and a lot of organizations that have very good risk management like the big trading houses, they don’t necessarily need advice on ESG, they’re doing it. But if you think of the vast majority of people in the value chain, and as you said, those tier two, three, four or five, all of those different parts of it, they really do need support and help on this one because the transition to go to something more sustainable, if they don’t within five years, they literally won’t be able to trade with EU.

Rebecca Harding: I hate to say this and end on a slightly downbeat note, but it’s already a little bit too late. I mean, we are already seeing climate destruction and I think that is our wakeup call. It’s the fact that we know we’re too late on this. So we have to do something quickly. We have to make sure that we bring everyone with us so that we don’t leave people behind because everybody wants to get there. That’s what’s going to drive this forward. And I think it’s possible to start looking at data and doing something relatively quickly next 18 months, two years. I think it’s going to take longer to transition that change.

Clarissa Dann: Thank you very much, Rebecca, and thank you Tedd for joining us.

Tedd George: Pleasure.

Rebecca Harding: Thank you.

Clarissa Dann: I’m Clarissa Dann, your presenter of Trade Finance TV. Thank you for watching.

Published on January 10, 2022

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