The Wake-up call for ESG difficulties in pursuance is getting more obvious as a report finds four-fifths of world trade ‘unsustainable’. Here it is.
Wake-up call for ESG as report finds four-fifths of world trade ‘unsustainable’
The overwhelming majority of global trade contributes negatively to the United Nations’ (UN) Sustainable Development Goals (SDGs), according to new research, which calls for better guidance for banks and corporates around what sustainable trade should look like.
Released this week by trade data and analytics provider Coriolis Technologies in partnership with MEP Saskia Bricmont and the Greens/European Free Alliance in the European Parliament, Measuring sustainability through trade maps countries’ export and import data against the 17 SDGs to identify negative and positive contributions.
It found 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.
A closer look at the numbers reveals some interesting findings. First, if the SDGs are broken down into their environmental, social and governance (ESG) elements, world trade scores -0.73 with regard to its environmental impact, and an almost entirely negative -0.91 for its social impact. However, when it comes to the ‘G’ in ESG – governance – global trade scores a positive 0.43.
“In other words, the world of trade and trade finance, alongside regulators, has put in place the governance structures to minimise economic risks in the form of employment, economic growth and provisions of basic health, but the price for the environment and for social equality and justice is overwhelmingly high,” the report says. It adds that trade policy can do “significantly more” to promote the basic human rights of trade as represented by the commitment to fair and open trade to promote sustainable cities and communities, responsible consumption, and to shore up the institutions of trade that help peace and justice.
Perhaps unsurprisingly, it is the most advanced economies that have the least sustainable trade, with the G20 nations accounting for some US$18.5tn in value terms in negative contributions to responsible consumption and production (SDG 12).
“These are economies where automotives, consumer electronics and machinery and components are routinely among the top five sectors for both imports and exports,” the report says.
However, while the poorest nations in the world score better, this is because imports are often for subsistence purposes rather than being aimed at luxury or consumption-based markets.
“If we are to meet the ambitious targets laid out at Cop26, we cannot afford to ignore the messages here – that the majority of world trade is unsustainable, and where it is not, it is a symptom of under-development,” the report says.
Defining what is and isn’t sustainable in global trade is a topic that policymakers, financiers and exporters alike have long tussled with. Unlike other asset classes, such as bonds, there are currently no standards that allow financial institutions to properly assess the entirety of the sustainability performance of trade finance transactions, leaving the industry open to accusations of greenwashing.
In its research, which it calls “an initial contribution to the process of creating an automated and consistent mechanism for measuring sustainability”, Coriolis Technologies has built on a methodology established by the UN Economic and Social Commission for Asia and the Pacific, which takes HS codes – the internationally standardised system of names and numbers to classify traded products – and compares them against the 17 SDGs.
For example, trade in tobacco negatively contributes to SDG 3 – good health and wellbeing – while trade in medicine would be a positive contributor. Because the methodology uses HS codes at six-digit level, it is 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 methodology isn’t without its shortcomings. For example, while specific goods may not in themselves be sustainable, they can often be used for purposes such as sustainable infrastructure. The same also applies in reverse when it comes to the trade of sustainable goods for non-sustainable purposes. What’s more, Coriolis Technologies adds that the scope to distinguish between 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,” the report says.
However, industry bodies and regulators are in wide agreement that the SDGs are an adequate taxonomy of reference to enable a comprehensive framework for sustainability, including the International Chamber of Commerce (ICC), which refers to them in its recent position paper on defining and setting common standards for sustainable trade and associated financing.
By providing a quick and simple measurement, Coriolis Technologies has laid bare the enormous amount of work ahead to make global trade more sustainable – but has also provided a call to action for policymakers.
“Since we know the sustainable development goals where the largest negative contributions are likely to be across world trade, we know the levers we should pull,” the report says, adding that too much of world trade contributes negatively to zero hunger, affordable and clean energy, clean water and sustainable cities.
“We also know the sectors which are to blame for the low scores of some countries: automotives, consumer electronics, machinery and components, plastics, iron and steel, and oil and gas. Oil and gas alone contributes some 10% to the value of EU trade, so if we can reduce our dependency on it, we can also reduce the negative contributions to the SDGs,” the report says, adding that the countries that have the worst scores all have automotives in their top five imports and/or exports. As a solution, it puts forward policy incentives towards the use of electric cars and clean energy in order to address the negative role that automotive and fossil fuel trade play at present.
Although Coriolis Technologies admits that the challenge of ensuring trade becomes a positive contributor to sustainable development is not an easy one to address, its development of a model to map out ESG weaknesses in trade should go some way to focusing minds as the trade and trade finance industry attempts to become more sustainable.
Emerging market investments are shrinking. How will MENA countries hit FDI targets?
By Amjad Ahmad in Atlantic Council
As the pandemic-fuelled liquidity begins to wane and the reality of inflation and higher interest rates sets in, many economies will face considerable challenges. Middle East and North Africa (MENA) countries are vying to attract global investors and increase Foreign Direct Investment (FDI). Yet, capital flows are reversing from emerging to developed markets—specifically in the United States, where interest rates are rising to levels not seen since 2018. The year 2018 is illustrative: during that time, emerging markets experienced substantial capital outflows as international investors reduced their exposure and consolidated their risk into emerging economies with fewer perceived risks, given their proactive and progressive economic policies.
Attracting foreign investors into emerging market economies has always been difficult. Nevertheless, thanks to the extended period of near-zero interest rates, emerging markets were blessed with investors hungry for higher returns. The plentiful supply of money coupled with historically low yields in rich countries led investors to explore higher yields in riskier markets across various assets, including public equities, public debt, private equity, and venture capital. The lower cost of capital allowed investors to finance opportunities that otherwise would have been unfeasible.
Unfortunately, the party is over, and the pain is just beginning. The US Federal Reserve has started an aggressive interest rate hiking campaign, which will likely be the sharpest rise in interest rates since former chair of the Federal Reserve Paul Volcker’s war on inflation from 1979 to 1982. Many economists believe this will likely lead to a recession in the world’s biggest economy.
A US economic slowdown or a recession couldn’t come at a worse time for emerging markets, particularly those in MENA, where most are fighting chronic unemployment, especially among youth and women, slowing growth, and higher debt levels. Large oil-exporting countries in the Gulf Cooperation Council (GCC) — such as Qatar, Saudi Arabia, and the United Arab Emirates (UAE) — are better positioned given heightened commodity prices. However, their lack of interest rate autonomy given the dollar peg limits their ability to deviate their monetary policy from that of the United States.
Additionally, the global demand destruction cannot be ignored as the post-pandemic surge in demand levels off, with consumers beginning to feel the pinch from inflation and rising interest rates. This may put a damper on global energy demand and tourism. Inflation also impacts global emerging markets, causing a perfect storm for the arrival of tough economic times. Currency depreciation against the dollar is increasing the cost of imports and repaying foreign currency debts for banks, companies, and governments, many of which racked up significant debt during the pandemic.
Research suggests that the impact of US monetary tightening on emerging markets will vary depending on the factors for the change. Interest rate hikes driven by US economic expansion will likely lead to positive spillover effects that benefit more than hurt emerging markets and, therefore, are neutral on capital flows. On the other hand, interest rate hikes to fend off inflation will likely lead to emerging markets disruption. Here, there are two key points to mention. First, there is a more significant effect on emerging markets from rising interest rates due to inflation than those due to growth. Second, emerging economies with stable domestic conditions and policies tend to fare better and experience less volatility. In a global economic environment with slower growth, higher cost of capital, and a shrinking capital pool for riskier assets, discerning international investors will consolidate their investments in the highest-quality emerging markets.
The Goldilocks moment experienced in markets over the past couple of years is subsiding. Geopolitical risk, inflation, and US interest rates are all rising. In addition, two crucial macroeconomic trends will impact the future capital flows to emerging markets. First, globalization policies that have focused overwhelmingly on cost efficiency and rationalization will now focus on resiliency and values-based investments. At an Atlantic Council event on April 13, US Treasury Secretary Janet Yellen articulated a blueprint for US trade policy, stating, “The US would now favor the friend-shoring of supply chains to a large number of trusted countries that share a set of norms and values about how to operate in the global economy.”
Second, Environmental, Social, and Governance (ESG) issues are gaining more attention with countries and companies putting them on the agenda. For an indication of what’s to come, consider Total, the French oil and gas giant, marking its shift to renewable energy and rebranding to TotalEnergies, as well as Engine No. 1, a US impact hedge fund, hijacking ExxonMobil’s board to drive a green strategy at the company. As a result of the confluence of these complex issues on top of challenging macro-economic concerns, investor appetite for emerging market assets is weakening. It will become more discerning in the coming years.
But all isn’t lost. There will be divergent outcomes and risks depending on the domestic conditions of each emerging market. Thoughtful investors will continue to seek opportunities in emerging markets, especially in private markets, where the predominant share of opportunities exists. However, as financial conditions tighten, differentiation between emerging markets will increase. MENA countries can better position themselves amongst others competing for capital by:
- Attracting and empowering strong policymakers to make dynamic and bold decisions that complex changes in the global economy require. Deepening the bench of talented policymakers should be another priority.
- Driving policies supportive of private sector development and investment. Reducing government-owned enterprises and providing ample space for private companies to grow and prosper on an even playing field is critical to building a dynamic economy.
- Continuing to nurture the nascent entrepreneurial ecosystem. Entrepreneurial economies are consistently more resilient and lead to better outcomes over the long term.
- Enhancing regional and international economic integration through bilateral and multilateral agreements with more robust economies. Proactive engagement with multilateral financial institutions will also increase financial stability and resilience.
- Standardizing policies according to global norms for greater regional and international integration. Investor appetite is greatly improved in emerging markets that adopt regulations and standards from developed countries.
- Increasing transparency and reducing uncertainty around laws and regulations. Investors and companies need more clarity on the game’s rules in order to play it confidently and competently.
Several MENA countries continue to take bold steps to improve their global competitiveness. One such example is the privatization programs of government-owned enterprises in Egypt, Saudi Arabia, and the UAE to increase liquidity in local capital markets, improve transparency, and expand private sector participation. Those countries that maintain their momentum will be clear winners in the coming years. History is rich with evidence that economic challenges are followed by periods of historic gains.
Amjad Ahmad is Director and Senior Fellow at the Atlantic Council’s empower ME Initiative at the Rafik Hariri Center for the Middle East.
The above-featured image is that of the World Bank’s MENA Economic Update on how ‘Insufficient, uneven’ growth rates to weigh on MENA, is explained in Gulf Times of Qatar ViewPoint. Here it is:
Just as the war in Ukraine is disrupting supplies and fuelling already-high inflation, economic growth in the Middle East and North Africa (Mena) region is forecast to be “uneven and insufficient” this year, according to the World Bank.
Growth rates in the region envisage a narrative of diverging trends.
As oil exporters benefit from surging prices, higher food prices have hit the whole region.
The GCC is expected to notch up 5.9% growth this year, buoyed by oil prices and helped by a vaccination rate much higher than the rest of Mena.
But most Mena economies — 11 out of 17 — are not seen exceeding their pre-pandemic GDP per capita in 2022, says the World Bank.
GCC economies have seen a relatively strong start to 2022 with the hydrocarbons sector having benefited from increased oil production so far this year, says Emirates NBD.
Its survey data for the first quarter of the year point to a solid expansion in non-oil sectors as well, with strong growth in business activity in the UAE, Saudi Arabia and Qatar.
In the wider Mena region, however, countries like Egypt, Morocco and Tunisia – home to large, mainly urban populations, but lacking oil wealth – are struggling to maintain subsidies for food and fuel that have helped keep a lid on discontent.
Egypt has been struggling to maintain a bread subsidy programme used by about 70mn of its citizens with the coronavirus pandemic hitting the national budget, and surging wheat prices are exacerbating the challenge.
The World Food Programme has warned that people’s resilience is at “breaking point,” in the region.
Global foods costs are up more than 50% from mid-2020 to a record and households worldwide are trying to cope with the strains on their budgets.
In North Africa, the challenge is more acute because of a legacy of economic mismanagement, drought and social unrest that’s forcing governments to walk a political tightrope at a precarious time.
The MENA region’s net food and energy importers are especially vulnerable to shocks to commodity markets and supply chains resulting from Russia’s war on Ukraine, according to the International Monetary Fund.
That’s in countries where the rising cost of living helped trigger the Arab Spring uprisings a little over a decade ago.
The region’s GDP is forecast to rise 5.2% this year after an estimated 3.3% expansion last year and a 3.1% contraction in 2020.
“Even if this high growth rate for the region as a whole materialises in this context of uncertainty, and there’s no guarantee that it will…(it) will be both insufficient and uneven across the region,” according to Daniel Lederman, World Bank lead economist for the MENA region.
Countries that are net importers of oil and food and which entered 2022 with high levels of debt as a ratio of GDP are most vulnerable, he said, pointing to Egypt and Lebanon as examples.
Even before Russia invaded Ukraine, food prices had been rising around the world, driven by the higher shipping costs, energy inflation and labour shortages that have followed in the pandemic’s wake, along with extreme weather.
Food crisis was likely to worsen in the Middle East and North Africa as Covid-19 continued, according to a report from the regional directors of Unicef, the Food and Agriculture Organisation, WFP and World Health Organisation in July 2021.
The news of more than a month now has been and still is that of Ukraine. The refusal of the latter to get in step and put itself in the lap of the big brother gives us all this crash of landscapes and other nuisances of the country’s built environment. What if Russia played all its cards except that of Global Warming. Explanations on Russia and Climate Change benefits can play in its favour. After all, Climate Change is Cataclysmic — but not apocalyptic, to say the least.
The above-featured image is for illustration and is of WorldAtlas.
Indeed, it is easy to see that with this, Russia with a good part of its now sterile land set aside because covered with snow for most of the year, will be thawed and possibly turned and transformed into a good land and potentially farms.
Climate change is therefore not negative as it should be for the rest of the planet’s network. Canada, the Scandinavian countries, Iceland, and Greenland must also benefit.
On the other hand, it is the opposite that is confirmed day by day in its southern parts. Would this hint at a redistribution of food production around the world?
As everyone should know today, arctic poles and tips of glaciers are melting, seawater rising, temperatures going up, semi-arid lands drying up, desertification advancing in bordering areas, and countless natural disasters among many others are the convincing results that dominate our planet. Few can deny these anymore.
So, the great Russia, which is only great because it is adjacent to this huge and vast Siberia. This one with frozen ground and/or covered with snow all-year-round had never allowed any large-scale human settlement, except for some exploitation of natural resources at great expense, here and there.
Global warming is remedying all this. That said, with or without the blessing of the rest of the world, Russia may end up with vast tracts of agrarian mounds. A situation that will prevail once this skirmish is concluded with not only this direct impact on Russia’s geography but also on its future position as a food giant.
With a little luck, Ukraine could be able to find itself but with some modestly in the same position of a major supplier of food to the world and if it incorporated into the EU, it will be able to turn the latter, into another great of the new “Food Power”.
In conclusion, we seem to be at the dawn of a novel distribution of world food shares with the ultimate heavy price still on the countries of the south.
Why and how does open banking make MENA an oasis of financial opportunities for investors? Maddyness answers quite elaborately as follows.
Economic growth in the MENA – Middle East and North Africa – region is on the rise, with Gulf countries leading the charge. The pace of innovation in places such as the UAE and Saudi Arabia is attracting foreign investment at a rapid rate, which, combined with dedicated tech programmes and an increasingly skilled workforce, sees the region stand out on a global front.
Although MENA’s escalating influence is widely known, it’s not necessarily talked about for facilitating financial progress in particular. Nonetheless, that’s about to change. In the past decade, the region has carefully cultivated a fertile soil that’s ready to flower. And it’s starting to blossom thanks to technological advances driving concepts like open banking that have the power to transform our financial future forever.
The UK’s longstanding relationship with MENA
It’s safe to say that the extensive opportunities haven’t gone unnoticed in Britain. Over several decades, the UK has maintained strong business ties and fostered stable relationships with MENA countries. For example, the UK has consistently been one of the largest investors in the global hub city of Dubai. So, with such a strong history, why is now an especially opportune moment to take notice of Middle East fintechs?
The transformation of the financial ecosystems in the region is certainly clear. MENA’s finTech sector is growing rapidly, with a compounded annual growth rate of 30%, paving the way for it to become a leading destination for digital financial activities in the very near future.
However, there is still plenty of room to maximise MENA’s full financial potential. The great disruptor of open banking (not to mention the even more progressive world of open finance) will be a driving force in attracting British investors to the region.
MENA as an emerging hotspot for investment
Before discussing the opportunity for fintechs, let’s take a step back. Why is there an opportunity in the first place?
The region’s demographics should enthuse any investor looking for innovation. The MENA population is one of the youngest globally, with an estimated 60% of the population under 30. Much of the region’s youth are also motivated to embrace new ways of thinking and leverage digital technologies to improve both their own lives and those of their communities. Internet penetration in MENA is one of the world’s highest.
Furthermore, the local population has proved willing to adopt digital solutions for their financial needs. According to research by Deloitte in 2020, 82% of customers in the Middle East are eager to start using fintech solutions, which coincides with the rise of a cashless economy.
Savvy entrepreneurs are already stepping up everywhere to capitalise on this market demand. Backed by the financially progressive infrastructure – which provides fintechs with regulatory support and government incentives – the fintech sector in the region has a very high growth rate. The UAE has become a hive of fintech activity – 465 fintechs there are set to generate over $2B in investment capital funding in the upcoming year, compared to merely $80M five years ago.
Open banking as the game changer
MENA is ready for disruptive innovations, which open banking can plentifully provide. Regulated access for fintechs to use financial data in order to provide solutions to a hungry audience will drive significant and sustainable economic growth. Consumers want more freedom to handle their finances and there is a need for better banking solutions, such as instant access to money and fully digitised payments.
Open banking makes all of this possible and more when banks, fintechs and even telcos work together to improve their products and put the customer in control. Against this backdrop, everyone can benefit if we move quickly to meet demand.
The emergence of a solid regulatory framework
We’re seeing MENA tread in the footsteps of the UK when it comes to regulating open banking. The PSD2 directive, which kicked off the concept in the UK, informs much of MENA’s recent developments in terms of its financial ecosystem. In Europe, the regulatory framework proved successful in levelling access to the financial services market and promoting the role of non-traditional financial institutions. As a result, the framework enhanced competition between financial service providers and provided consumers with better financial tools.
Similar regulations are shaping the evolution of MENA’s financial landscape, offering security for investors while remaining flexible enough to stay relevant in the face of constant technological development. Although the regulations differ across jurisdictions, making it potentially challenging for fintechs to scale throughout the region, any obstacles are well worth overcoming.
How to navigate your fintech journey in MENA
Considering the whole picture, MENA should get your attention as a rising star of the global financial scene. It is easy to see how becoming part of an emerging, but promising ecosystem yields tangible benefits for investors.
To comply with the regional frameworks and regulations, interested parties should seek local experts who know which paths to travel and how to traverse them. The rise of open banking is already a fundamental factor driving MENA’s financial environment forward, and its growth will only increase. As opportunity knocks, it’s better to be at the front of the queue than at the end of it.
Justin Henry is executive director at KMMRCE Pay.