Sustainable Trade and the Role of the Banking Industry

Trade can support sustainable development in the global economy. Ruediger Senft, Head of Corporate Responsibility at Commerzbank, argues that banks can therefore be a major part of the movement toward a sustainable future.

Sustainable trade is key to global development. Not only does it spur economic growth, it raises living standards, helps to fight poverty, and safeguards the environment.

As the vital facilitators of global commerce, financial institutions are best placed to identify the dynamics of sustainable trade and help pave the way toward sustainable economic development for the future.

Key to this is the banks’ ability to mitigate environmental, social, and governance (ESG) risks for trading companies – supporting environmental protection, respecting human rights, ensuring fair labor conditions, and tackling corruption – thus upholding the core principles of the UN Global Compact. But for sustainable trade to truly take hold, increased levels of collaboration between the financial, political, regulatory, and consumer sectors will also be vital.

The drivers of sustainable trade

The global economy is being presented with important challenges regarding growth, such as the demand for increasingly scarce resources, which put the future of trade at risk.

Of course, this means that banks such as Commerzbank, whose business is financing world commerce, are heavily invested in sustainable trade as a long-term solution. By conserving resources across supply chains, offering fair prices to workers, and protecting the environment, sustainable trade provides a long-term way of maintaining stable economic development worldwide.

To explore sustainable trade in depth and identify its key dynamics, Commerzbank published an extensive report in March 2015 titled Insights: Five Drivers of Sustainable Trade. The report found that sustainable trade relies on enacting progressive governmental regulation, building informed demand among consumers, ensuring sustainability in commercial supply chains, applying ethical standards and labels, and taking innovative approaches to finance.

Such a variety of drivers stem from the fact that corporate responsibility has now become a very broad concept. Whereas originally it referred only to environmental concerns, it now encompasses all ethical and social concerns.

Banks have a crucial role to play

Given their central role in facilitating global trade flows, banks are particularly well placed to meet corporate demands for sustainability. Indeed, because they possess the organizational infrastructure to mitigate risks, they can ensure that global trade complies with ESG good practice.

For example, as part of its commitment to sustainability, Commerzbank checks every single potential transaction it receives against its ESG guidelines. The bank’s ESG Risk Management department uses a qualitative approach to environmental, social, and ethical risks, and to this end cooperates closely with other relevant units at Commerzbank. Transactions, loans, and business relationships in which aspects of sustainability play a material role are extensively researched, analyzed, and subject to wide-ranging evaluation. In some cases, this may lead to the rejection of a transaction or the termination of a business relationship. On average, the department checks more than 5,000 transactions a year.

The Roundtable on Sustainable Palm Oil (RSPO) is a case in point about the progress being made by banks, among others, in driving sustainable trade. With global demand for the vital resource increasing constantly, rainforests in Indonesia, Malaysia, Africa, and Central America are subject to destruction, with negative impacts both on the indigenous peoples who call the areas home and on the planet’s ability to absorb dangerous carbon emissions. Yet, the RSPO demands that all signatories meet stringent sustainability criteria. As a member of the RSPO, Commerzbank will not finance the trade of palm oil if suppliers fail to meet such criteria.

Making the business case for sustainability

In addition to ensuring that trade is sustainable, banks can also lead the way in making the “business case” for sustainability in the corporate world, reconciling a company’s motivation for profit with the need to respect the environment, society, and good governance.

For example, no company will want to see its public image tarnished by links to poor working conditions in a developing country. But banks can mitigate against this type of risk by demanding respect for human rights, fair labor conditions and anti-corruption measures across supply chains – hence avoiding considerable negative repercussions on a company’s global reputation.

Indeed, with their knowledge of local trading environments, banks can ensure that companies deal with reliable partners abroad who offer good standards in corporate governance, thus safeguarding local workforces and the sustainable development of communities.

How does the future look for sustainable trade?

Making the business case for environmental, social, and ethical best practice in future world trade also depends on raising awareness about sustainability. In this respect, the financial sector must take a lead when it comes to promoting it among key stakeholders. This is why Commerzbank followed up with the release of a second report, Insights: Scenarios for the Future of Sustainable Trade, in October 2015, releasing it to other banks at the Swift International Banking Operations Seminar, the premier banking conference of the year.

The latest report projects Commerzbank’s findings on sustainable trade into the future. Assessing the global economic outlook for the next 10–15 years, it offers the “best-case” and “worst-case” scenarios for sustainability in the global economy – and gives recommendations for a likely outcome.

Without doubt, the pressure for sustainable trade will continue to grow in future. For example, consumers around the world are likely to become more aware of the ethical and environmental impacts of products and services. Thanks to raised awareness of ESG risks, they are likely to hold companies to stricter sustainability standards.

Sustainability will also depend on all key stakeholders collaborating effectively, whether in the financial, political, regulatory, or consumer sectors.

Banks form just one avenue toward realizing the goals of the UN Global Compact. But given their ability to finance sustainable trade, mitigate key ESG risks, and communicate their work to key audiences, banks will be essential to driving sustainability in the world economy.