Abstract model of the globe depicting DLT trade

Can banks build a sustainable finance system for a sustainable world?

Our financial system is not sustainable. Beyond the environmental and social causes that raise headlines, a fundamental issue is the widespread financial exclusion that still exists in our world today. With a third of adults worldwide excluded¹, people and economies cannot thrive – and the sustainable issues that need to be addressed will not receive the flow of resources needed.

For the financial system to be truly sustainable, it must “integrate sustainability considerations into its operations, including the full costing of positive and negative externalities that sustainability implies, leading to a reorientation of the flow of resources toward more inclusive and sustainable activities,” the UN Environment Programme noted in its 2017 Roadmap for a Sustainable Financial System.²

On a practical level, this means the financial system needs to play a central role in directing funds towards and combating the biggest problems facing the world today. Given their unique role as the connector between consumers, corporates, regulators and governments (and as sources of capital and risk assessors), banks can and should take the lead in creating this sustainable system.

Technology upgrade needed

Building this means addressing problems in the current system. Chief among these, according to the UN roadmap, is a lack of information. There is broad recognition within the industry that technology and new financial solutions will assist to close the information gap and support the development of a truly sustainable system. “Digital finance has the potential to deliver environmental outcomes and support a transformation in financing for sustainable development,” the UN notes.³

Arguably the technology that will have the biggest impact on access to information is distributed ledger technology (DLT). Also referred to as blockchain, DLT has the potential to deliver more secure, faster and frictionless information in financial services.

DLT allows for all participants in a transaction to receive the same information at the same time, thereby providing increased transparency and connectivity between participants. This transparency also makes it easier to verify what has taken place at every stage of a transaction, which can help reduce fraud (and build trust).

But new technology can only help deliver a sustainable finance system if all participants are connected. The importance of connectivity was highlighted in one of the recommended initiatives from the UN’s sustainable finance roadmap: to “establish a cooperative platform and/or industry task force of leading fintech companies, working with others to influence enabling business, policies, and standards to effectively connect fintech and sustainable development.”⁴

It’s with that same consideration in mind that Standard Chartered has approached the development of DLT solutions. Specifically, it has joined a number of initiatives exploring how to use DLT for trade. Examples include Contour⁵ — which is using DLT to digitally create, exchange, approve and issue letters of credit — and Marco Polo⁶ — a collaboration between banks, corporates and fintechs to create a unified platform for trade finance and data.

Standard Chartered is also a participant in a number of government-backed initiatives that are harnessing DLT for trade, including the Singapore Networked Trade Platform (NTP)⁷ and Hong Kong’s eTradeConnect.⁸ Both schemes aim to create single portals for trade within their respective market, and link to similar platforms in other regions to create a global trade network. The development of cross-border trade platforms will help create a sustainable financial system by increasing the exchange of information between corporates, banks and governments, and connecting more companies to the global trading system – a key driver of economic growth and development.

Innovating to advance financial inclusion

Of course, building a sustainable finance system goes beyond easing flows of information. Creating a more inclusive system – and one that delivers improved data, greater connectivity and increased collaboration - will ensure the foundations of a sustainable system are set. In particular, addressing the problems of financial exclusion in communities (which can include low-income consumers, small enterprises, or those in high-risk markets), will go a long way to addressing significant sustainability goals.⁹

Thanks to its network coverage, Standard Chartered has developed a detailed understanding of the importance and the challenges of ensuring excluded communities in emerging markets are connected to the global financial system.

In 2018, Standard Chartered launched a digital-only offering in Cote d’Ivoire, a country with a financial inclusion rate of only 40 per cent in 2017.¹⁰ Based on its success, the digital banking service has now been extended to Ghana, Kenya, Tanzania and Uganda. Leveraging application programming interfaces (APIs), the service provides QR codes, peer-to-peer (P2P) payments, loan and overdraft facilities, and instant fixed deposits.¹¹

“Standard Chartered’s client universe is fairly divergent and therefore we must be very nimble, very modular and very flexible in our approach and how we change to meet those client needs,” said Michael Sugirin, Global Head, Open Account Trade & Trade Implementation at Standard Chartered.

Another example where technology is helping promote sustainability and inclusion is in Bangladesh, where trade processes are still heavily paper-based and require companies to pick up title documents in person from their bank. However, by collaborating with clients, Standard Chartered now uses new technology to improve the process, explains Aarthi Fernandez, Global Head of Trade Operations at Standard Chartered.

“Biometric authentication has been hugely successful in retail businesses, so we wanted to bring that technology to authenticate document collection. Now when the authorised representative comes to collect the title documents, we use biometric identification, making the process faster and more secure,” she said.

“It’s been so successful that we are now in the process of rolling it out as a global solution to other markets where biometric data is available.”

Getting to grips with climate change risk

Naturally, a sustainable financial system needs to be fully aligned with global efforts to combat climate change. Some banks are already helping the transition to a low-carbon economy by collaborating with governments and regulators in initiatives like the Task Force on Climate-related Financial Disclosures (TCFD) and UN Principles for Responsible Investment (UNPRI) to ‘green’ the financial system.

But banks can also act as a transmission mechanism by ensuring climate change risk is accurately assessed and measured.

“We absolutely need to put climate change into mainstream risk management discussions and take a decision on how we’re seeing that impacting our own credit risk assessment,” said Adityadeb Mukherjee, Head, Climate Risk Management at Standard Chartered.

“For example, if you take a large oil company that, on a standalone credit basis, carries a rating of double-AA, but our climate change risk framework says they are a high risk, that could bring their adjusted credit rating down to triple-B.”

The evolution of sustainable finance

One major area of progress for the banking industry has been the development of green and sustainable financing initiatives. Take the example of green bonds for which volumes rose 48 per cent year-on-year to USD117.8 billion in H1 2019, the earliest point in the year that the product has crossed the USD100 billion milestone.¹²

Moreover, banks are creating new sustainable financing solutions to meet evolving environmental and social challenges. For example, last year in partnership with the World Bank and the Global Environment Facility, Standard Chartered supported the Seychelles Government to launch the world’s debut ‘blue’ sovereign bond.¹³ Proceeds will be used to help expand and protect marine areas, improve governance of priority fisheries and develop the Seychelles’ blue economy.

Sustainability loans are another exciting recent product development. These index the margin to a sustainability-related outcome, such as C02 emissions or energy efficiency. Importantly, sustainability loans can also be adapted to local standards and structures. For example, in October 2018 Standard Chartered acted as green coordinator for the Middle East’s first sustainability loan in an Islamic format - a USD2 billion Conventional and Murabaha revolving credit facility for DP World Limited, linked to the company’s greenhouse gas emissions.¹⁴

Banks have taken some of the first steps on the journey towards creating a sustainable finance system. By fostering continued collaboration with consumers, corporates, regulators and governments, banks will ensure capital flows to where they are needed, and help combat the challenges facing the world today and in the future.

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