Trade finance includes bank guarantees, documentary credits and documentary collections, which are issued by commercial banks, insurers and traders. Compared to other financial instruments, trade finance has lagged behind in assessing environmental, social and governance (ESG) risks. Providers of trade finance can drive more sustainable practices.
Research shows links between stronger ESG performance and lower credit risk, providing an incentive for the finance sector to integrate these factors into trade finance. A number of global initiatives are working to support the application of sustainability criteria in trade financing. For instance, the OECD Common Approaches initiative provides guidance for undertaking environmental and social due diligence to identify, consider and address the potential environmental and social impacts and risks relating to applications for officially supported export credits. Likewise, the IFC Global Trade Finance Program offers confirming banks partial or full guarantees to cover payment risks on banks in emerging markets.
With supply chain finance becoming digital, new ways to assess and manage risk are emerging. Innovative trade digitalization solutions, such as Blockchain, can also support the traceability of sustainable goods and transparency of sustainability data.