Trade Finance Global (TFG) spoke to president and CEO of BAFT at Sibos 2022 about the role that banking organisations can play in developing environment, social, governance (ESG) and sustainability best practices within global trade.
COVID-19 has changed a lot of things, for better and for worse.
On the one hand, the knock-on effects of the pandemic, including supply chain delays, have been a significant contributing factor to the economic downturn and difficult trading circumstances the world currently finds itself in.
But on the other, many believe that it has also helped to accelerate several much-needed reforms within trade finance, including the introduction of digital systems to help streamline documentation and fraud monitoring processes, as well as the implementation of more sustainable business practices.
At Sibos 2022, TFG spoke to Tod Burwell, president and CEO of the BAFT (Bankers Association for Financing Trade), a global trade finance association headquartered in Washington DC, about the key issues within the industry.
Burwell said, “That still remains a top priority. There’s also been a lot of emerging energy around ESG and sustainability.
“There were a couple of things that I’d say sort of went silent a little bit for a while, but it re-emerged. One of them is the implementation of the Basel Framework, with several jurisdictions now going through their implementation process.”
In his view, one of the challenges of introducing key reforms around ESG and digitisation within the finance industry is trying to deal with existing gaps in existing legal frameworks so that they better support the introduction of digital trade documentation.
ESG: sustainability about more than climate
In terms of the connection between digitisation and greener trade practices, Burwell feels that technology has a role to play in making ESG reporting and monitoring a lot easier.
However, as far as the role of banks is concerned, Burwell believes that the banking community can help provide the ‘connective tissue’ from a standards point of view.
This is particularly true when it comes to the question of interoperability––a major pre-requisite for the rollout of the digital agenda.
To achieve this, you have to introduce international standards––something that large financial organisations have a lot of experience with.
Burwell said, “And so I think a lot of the discussions are going to focus on: where are we in the standards process, with the adoption process of those standards and the like?”
And while they aren’t in a position to help trading companies source, produce, or transport goods sustainably, banks and trade finance organisations can potentially help with the financing of more sustainable supply chains, thereby incentivising more importers and exporters to adopt sustainable practices.
However, he also feels it is important to gain clarity on what precisely sustainability means to trade organisations.
Burwell said, “The UN has their 17 sustainable development goals (SDGs). But then when you look at the policy community, everything is focused on climate and environment.
“So much of trade actually facilitates SDGs outside of climate change. And so one of the biggest issues for our members is how do you apply the concepts of sustainability across the spectrum of trade, measure it in a way that’s consistent with policy frameworks?”
Legal frameworks: a region-by-region affair
On the issue of legal frameworks, BAFT has teamed up with the legal reform advisory board of the ICC to try and drive forward the adoption of the Model Law on Electronic Transferable Records (MLETR) region-by-region.
Burwell added, “There are about seven countries that have already adopted MLETR, but there are some major jurisdictions [are] on the cusp of making significant steps forward.
“The UK has an electronic documentation bill that’s under consideration right now.”
Indeed, the Electronic Trade Document Bill which is currently making its way through the UK Parliament has been designed to address a long-term bugbear within English law around the question of legal ownership of intangible items.
Up until now, this has made it hard to address the issue of control, without which it is difficult to develop a reliable document control and verification system.
In the US, where BAFT is based, recent amendments that were made to the Uniform Commercial Code at a national level still need to be approved by all 50 states before these will apply universally across all major US trade jurisdictions.
When it comes to things like cross-border trade and global payments, the situation is a bit more complex.
Burwell said, “When we look at cash management, particularly on the payment side, we’re trying to focus on the unevenness of regulations and how that’s impacting the disparate faster payment systems around the world: What are the rules, who’s allowed to participate, how is [know your customer] KYC––as well as banks versus non-banks––being considered?”
Basel and closing the trade finance gap
When it comes to trade finance, BAFT is advocating for ways to encourage more financial inclusion so that the standing trade finance gap doesn’t continue to widen, especially given the current tough trading environment.
Here, Burwell feels it is also important to introduce some basic legislation around capital frameworks in accordance with the Basel Framework for international settlements. This directly impacts how much liquidity banks are able to provide to trade organisations, which in turn, determines their ability to help close trade finance gaps.
Overall, though, Burwell feels that things are headed in a very positive direction, and BAFT is doing all it can to facilitate this process through a mixture of policy advocacy, education and training, alongside global community building.
Burwell said, “You need to collaborate in order to solve those challenges, and they do it through us.”