Q&A: Trade is Key to Climate Action. How Can Multilateral Development Banks Help Make it Sustainable?

Ilona: Sustainable trade has long been recognized as a crucial component in achieving the global Sustainable Development Goals. The private sector is increasingly incorporating sustainable trade into its corporate social commitments. However, the terms "sustainable trade” or “climate trade" have never been universally defined, leading to a lack of clarity on what constitutes sustainable trade. Misalignment between the development and application of sustainable finance standards presents challenges across various levels, from trade documentation to defining sustainable trade products. There is an urgent need for a global trade finance ecosystem that can promote agreed-upon standards of sustainability and inclusive growth.

How can trade finance strengthen efforts towards sustainable trade and help in the fight against climate change?

Roberto: Global trade continues to be heavily dependent on access to trade-related financing with 80% or more requiring access to trade finance. While lenders and investors are actively looking for opportunities to support sustainable, ESG-aligned business activities, including trade. Combined with the potential to access financing – perhaps even at favorable rates – trade finance can motivate more sustainable behavior and trade flows through international supply chains.

For example, financiers are also motivated by regulatory and policy pressure to support sustainable trade, including climate-friendly trade transactions. The link between financing and increased sustainable trade is supported from several directions.

Ilona:   Trade and climate change are closely linked and can pose both challenges and opportunities for developing countries. While trade does contribute to emissions that cause global warming, it also plays a crucial role in enhancing both mitigation and adaptation efforts.

Sustainable trade can help mitigate climate change by facilitating access to low-carbon technologies and practices, allowing countries to adopt more environmentally friendly goods and services. This can lead to a long-term reduction in emissions, improve resilience to extreme weather events, and enhance overall environmental management.

Sustainable trade can assist in adaptation by enabling countries to access necessary goods and services during and after extreme weather events. Importing essential supplies can assist countries in recovering from natural disasters and ensuring the availability of critical items like food and medicines.

  Sustainable trade finance can play a key role in the transition to a low-carbon future by providing opportunities for countries to address climate change challenges, promote sustainable development, and reduce poverty.

How do Multilateral Development Banks like ADB and IFC support sustainable trade and supply chains, and what more can they do?

Ilona: MDBs play a crucial role in supporting trade by providing financing, technical expertise, policy advice, and knowledge to help our client financial institutions and the countries in which they operate to overcome trade barriers, promote sustainable trade practices, and achieve their development objectives.

MDBs can also offer price incentives or longer tenors to their bank partners that in turn can help enable their corporate clients to adopt energy-efficient technologies, cut carbon emissions, and implement sustainability measures across their operations and supply chains.

Roberto:   Our strength lies in collaborating to drive greater focus on sustainable trade and sustainable financing among partner banks worldwide. Together, we can help design and deploy innovative financing techniques targeting the lowest tiers of global supply chains, such as underserved Micro, Small, and Medium-sized Enterprises (MSMEs), especially those owned or managed by women.

ADB and IFC each run highly respected programs in trade and trade financing. Together, we recognize the need to better clarify sustainable trade and the opportunities to create a common understanding of sustainable trade and market definitions. As a result, ADB and IFC have jointly published a Reference Note on Sustainable Trade Finance, which can help financial institutions, manufacturers, producers, and other stakeholders better understand sustainable trade and the eligibility requirements for sustainable trade deals as reviewed by ADB and IFC.

What specific advice do ADB and IFC have for traders and bankers who want to focus on sustainable trade?

Roberto: We encourage local banks in developing markets and leading international banks to work more closely with MDBs to increase capacity to finance sustainable trade transactions with regional and local banks. We also urge banks and others involved in trade and global supply chains to take advantage of various forms of training and assistance provided through MDBs to enhance technical knowledge and capabilities around sustainable trade.

Ilona:   We believe that creating a standardized definition of sustainable trade will help MDBs, commercial banks, traders, and producers collaborate to ensure that the necessary criteria are met to make sustainable trade truly sustainable. We recommend that traders, bankers, and other market players involved in trade and interested in sustainable practices refer to the IFC-ADB Reference Note as a starting point to gain a better understanding of the various aspects of sustainable trade and the qualifications required for trade deals to be considered sustainable. After reviewing the reference note, they should feel free to reach out to us to discuss potential collaboration opportunities.

Is there a broad global effort to strengthen sustainable trade? How are MDBs coordinating their efforts?

Roberto: The International Trade Center, based in Geneva, and many other international institutions, as well as quasi-government entities like export credit agencies, are working towards advancing and increasing sustainable and ESG-aligned trade.

Various industry associations are also raising awareness, and the G20 has a Working Group on Sustainable Finance. MDBs actively contribute to many leading efforts, including through a working group hosted under the auspices of the WTO.

Ilona: MDBs collaborate in various areas to promote sustainable economic development, alleviate poverty, and enhance living standards worldwide. These areas of collaboration encompass climate change, sustainability, and Paris Alignment, among others. As an example, IFC and ADB’s collaboration in developing a Reference Note for sustainable trade, can be the foundation for a global trade finance ecosystem capable of advancing standards of sustainability and inclusive growth. 

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