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Trade ‘critical’ to achieving SDGs, says ICC ahead of sustainable trade finance framework launch

Ahead of the release of its standards for sustainable trade and sustainable trade finance later this year, the International Chamber of Commerce (ICC) has published an analysis outlining the crucial role trade plays in achieving the United Nations’ (UN) Sustainable Development Goals (SDGs).

Drawing from numerous academic studies, as well as statistics from the OECD, International Energy Agency, World Trade Organization and various UN agencies, the ICC’s analysis begins by exploring how trade can be an engine of economic growth and poverty reduction, thereby addressing SDG 1 – ending poverty, and SDG 8 – promoting decent work and economic growth.

“Countries that are open to international trade tend to grow faster,” the ICC says, adding that by providing access to new markets and improving resources allocation, trade opening has helped spur economic growth. “Evidence showed that countries that liberalised their trade regimes between 1950 and 1998 experienced average annual growth rates that were about 1.5 percentage points higher than before liberalisation,” the ICC says.

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The organisation adds that trade can also lead to job creation and increase in real income. “By allocating resources to the most productive sectors, trade involves shifts in the concentration of employment and thus wages in specific sectors,” it says, pointing to a 2009 study of 20 OECD countries that found a 10% increase in trade openness reduced unemployment by nearly 1%.

Climate change

The ICC then turns its focus to the fight against climate change, which is encapsulated in SDG 13, affirming that trade is “essential” in achieving this.

“While trade in some circumstances may adversely impact the environment, it is also widely recognised as a central part of the solution to climate change,” the organisation says.

It posits that trade can be a “channel for environmental technologies diffusion”, especially for developing economies. “Developing low-carbon technologies is a slow, complex, and hard-to-replicate process. Knowledge and expertise on clean technologies are hard to transfer,” the ICC says, adding that only a small number of countries have a comparative advantage on these technologies – such as China, which holds a greater than 80% share in the manufacturing stages for solar.

“As a result, developing economies often rely on imports to access clean technologies that will support the low-carbon transition. Therefore, trade in environmental goods provides access to technologies with a level of efficiency that cannot be replicated domestically in importing countries,” the ICC says.

However, in its analysis, the ICC recognises that tariffs and non-tariff barriers on environmental goods and services are limiting investment in clean energies and hindering the energy transition from fossil fuels. As an example, it says that tariffs for products on air pollution control, heat and energy management and renewable energy plants are well above the global average and can exceed 20% in island states and economies such as Argentina, Brazil, Ethiopia and the Central African Economic and Monetary Community countries.

Mitigating trade’s potential negative impact

The ICC also recognises that trade can have a negative impact on the SDGs. For example, it says that trade liberalisation may spur environmental degradation, especially when it encourages pollution-intensive activities.

Globally, CO2 emissions associated with the production and distribution of traded goods and services (8 billion tonnes) constitute a quarter of total global emissions,” the ICC says. “More generally, advanced countries are net importers of CO2 emissions, whereas emerging or commodity-producing countries are net exporters.”

The organisation goes on to acknowledge the potential negative impact of trade liberalisation on employment in some markets, where trade has been seen as a cause of the growing inequalities between skilled and unskilled labour. “High-skilled and mobile workers will benefit more from trade liberalisation,” the ICC says.

Nonetheless, the ICC puts forward solutions such as the inclusion of precise and binding environment-related provisions in regional trade agreements, as well as active labour market policies, to help lessen the potential negative impact of trade on the SDGs.

Measuring sustainability in trade

The ICC’s analysis comes in the wake of a study by trade data and analytics provider Coriolis Technologies in partnership with MEP Saskia Bricmont and the Greens/European Free Alliance in the European Parliament that found the majority of global trade currently contributes negatively to the SDGs.

Released in June, Measuring sustainability & ESG through trade: A wake-up call for policy makers all around the world builds on a methodology established by the UN Economic and Social Commission for Asia and the Pacific. The study takes HS codes – the internationally standardised system of names and numbers to classify traded products – and compares them against the 17 SDGs to identify negative and positive contributions.

The study showed that, on a scale of -1 to +1 where -1 means that all trade makes negative contributions, zero is neutral and +1 means that all trade makes positive contributions, world trade scores -0.58, with 80% of global trade by value being unsustainable.

In its analysis, the ICC rejects Coriolis’ findings, calling its approach “severely misleading”.

“It is unclear how the Coriolis paper addresses a positive or negative relationship to SDGs,” the ICC says.

Although in its study, Coriolis used HS codes at six-digit level, which mean it was able to distinguish between, for example, a diesel car (870332) and an electric car (870380) or, indeed, a hybrid car (870360), each of which have varying impacts on SDG 7 – clean and affordable energy, and SDG 12 – sustainable consumption, the ICC calls for greater granularity when assessing the sustainability profile of goods trade.

“Attributing a basic score of -1, 0 and 1 to HS codes to measure their sustainability is extremely misleading as it underestimates the complexity of trade flows,” says the ICC. “How would one, for instance, rate the sustainability HS codes for hybrid vehicles? Or, for that matter, minerals used by carbon-intensive industries but crucial for the energy transition, such as aluminium, copper, cobalt and lithium?”

In Coriolis’ methodology – which the company itself referred to as a “quick and simple measurement” – the scope to distinguish between, for example, resource utilisation for the same product in different countries is limited: “For example, a fruit such as a strawberry produced in the Middle East requires more water and energy to produce than in its indigenous environment,” Coriolis said at the time its study was published, adding that its intention was to lay bare the enormous amount of work ahead to make global trade more sustainable – but also provide a call to action for policymakers.

The ICC, however, rejects this approach, saying: “Any assessment presenting a highly distorted view of trade sustainability should, in our view, be rejected as a basis for policymaking. Overlooking the complexity of trade and the multidimensional aspects of trade policy is not only puzzling but also could lead to poor policy recommendations.”

Speaking to GTR in response to the ICC’s statement, Rebecca Harding, CEO of Coriolis Technologies, says: “The Coriolis Technologies research was a starting point from which we have continued to develop our sustainability tracking methodology. It’s been a fascinating exercise to map as much world trade to SDGs as possible, including services. However, we understand that there is much more to be done and we hope we can work collaboratively across the sector to do this.”

“Coriolis Technologies is taking bold steps to measure sustainability against a backdrop of resistance in the industry to anything that challenges the status quo,” she adds. “We think it is irresponsible not to recognise the size of the challenge ahead. While we agree that trade and trade finance can be a mechanism for transitioning to a more sustainable economic system, if we want to avoid greenwash accusations from regulators, we have to acknowledge that there is much work to be done.”

Harding says that Coriolis Technologies is continuing to work with its industry working group to drive the adoption of standardised ESG scoring criteria, tools and methodologies for the trade and trade finance industry.

The ICC, for its part, also says it is continuing its work with governments, academics and industry leaders to transform trade into an engine for sustainable development.

“Trade and trade policy are means of implementations of sustainable development SDGs,” the ICC says. “The ICC Standards for Sustainable Trade and Sustainable Trade Finance is a first step in this direction. By defining and setting standards for sustainable trade, the ICC aims to establish a comprehensive framework to measure and assess the sustainability of a given trade transaction. This will help businesses and financial institutions to design their ESG impact strategy and monitor their progress and assess their impact of sustainable development.”

In November last year, the ICC launched a global consultation exercise involving over 200 banks and corporates to create what the organisation says is the first-ever standardised framework and assessment methodology to qualify the sustainability profile of trade transactions.

The results are expected to be produced later this year, providing the industry with a consistent definition of sustainable trade and trade finance and setting out what specifically constitutes a sustainable trade transaction.

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