The International Chamber of Commerce (ICC) has launched the first iteration of its industry framework to assess the sustainability performance of trade transactions, selecting the textile sector as its testing ground.
The ‘Wave 1’ framework, launched today during the 2022 United Nations Climate Change Conference (Cop27), is the product of a year-long consultation with banks, corporates and technology providers. It represents the first-ever standardised industry definition of sustainable trade that takes into account both environmental and socio-economic dimensions over the entire lifecycle of a transaction – covering both the Paris Agreement objective of limiting global warming to 1.5°C above pre-industrial levels, and the United Nations Sustainable Development Goals (SDGs).
Employing 300 million people worldwide, many of them women in developing countries, the textile industry is an important contributor to global economic growth. However, it is also one of the largest contributors to the climate and ecological crisis, with a 2019 World Bank report estimating that it accounts for around a tenth of the world’s greenhouse gas emissions, and is particularly vulnerable to human rights and labour abuses.
In recent years, numerous standards and certifications have been developed for the sector to measure its performance against. This multitude of metrics, plus the fact that the ICC received what it calls “good engagement” from its apparel industry members following the release of its position paper during Cop26 in Glasgow last year, contributed to the body’s decision to trial its sustainable trade and trade finance framework with the textiles sector.
The initial position of the ICC was to assess trade across five components – the buyer, supplier, good or service being exchanged, transportation and purpose – and look at whether the underlying purpose or end use of the transaction supports environmentally and socio-economically sustainable objectives. The output would therefore be a matrix showing the sustainability of each of the five components of a transaction on the two dimensions. Each position in the matrix would contain a grade from ‘A’, which would represent an “active contribution to sustainability”, to ‘N’, which would represent “does not meet minimum standards”. These grades can then be aggregated, generating an overall score for a transaction on each of the two dimensions.
This cross-dimensional perspective tackles an important pain point, since financiers have also found themselves caught between competing objectives when deciding what is or isn’t sustainable – such as in the case of coal, which although objectively bad for the environment, remains a vital energy source in some developing nations and a key source of foreign exchange for exporters.
Because of the challenges inherent in obtaining the high-quality data necessary for this type of grading, and the patchy availability of standards to measure each of the five components, for this first iteration of the framework, the ICC has instead chosen to use what it calls a “simplified minimum viable” matrix. This simple version assesses trade across four components – leaving out transportation for now – and rather than giving an aggregate score, it uses binary ticks to show whether a component meets an ICC-approved standard of sustainability on a given dimension.
“We have been careful to ensure that this initial framework is immediately implementable – making use of recognised standards, data and technology that are readily available to banks and corporates,” says Raelene Martin, the ICC’s head of sustainability. “This will allow us to test the framework in a real-world setting and build a more comprehensive view on the sustainability of global the value chain over time.”
A number of banks – including BNP Paribas, Commerzbank, Commonwealth Bank of Australia, DNB, Santander, Société Générale, Wells Fargo and Yes Bank – have pledged to pilot the application of the framework with their corporate clients in the textiles sector over the next three months, running assessments on at least 20 transactions or five counterparties.
Once the findings of the pilot have been collated, the ICC says it will use them to develop the second iteration of the framework by mid-2023, which will expand beyond textiles and add a further layer of detail to the scoring.
“Trade finance is arguably one of the hardest areas of the global financial system in which to define robust and workable sustainability standards. But we are confident that we have succeeded in defining a framework that is both methodologically robust and, crucially, readily implementable by banks and corporates,” John Denton, ICC secretary general, tells GTR. “Today’s launch represents a major leap forward towards our shared goal of embedding sustainability at the heart of global commerce. We look forward to piloting the framework with banks and corporates over the coming months and to progressively extending the use of the framework to other industry sectors.”
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