Sustainability, a recurring theme
Contrary to popular assumptions, commodity trading and its financing is by no means an industry that operates in a regulatory vacuum. There is a wide range of internal (self-regulation) and external regulations and initiatives that impose strict requirements for the dutiful execution of the various activities. In recent years, the regulatory landscape has predominantly been influenced by a call for more sustainability and transparency along the whole spectrum of the value chain from the sourcing, storing, processing and transporting of raw materials to delivering them to the end consumer. This is a natural phenomenon, since a rapid human population growth translates into a surge in demand for already constrained natural resources. Therefore, the 2015 Sustainable Development Goal (SDG) 12 calls for a profound business transformation towards sustainable consumption and production patterns. It was only recently with the Swiss Responsible Business Initiative (RBI) that this trend was accelerated. The transparency and sustainability agenda is being driven by legislators and regulators as much as by consumers whose scrutiny is adding new challenges to demonstrating a products’ provenance and to tracing its story. Innovative traceability initiatives built around a Blockchain core no longer present a mere competitive advantage but are becoming an integral part of companies’ risk management.
Blockchain’s ability to transparently record complex transactions, track goods, and reduce fraud makes it a natural fit for the commodity industry, which is still inherently based on an antiquated paper trail system. In the case of agricultural commodities, sustainability is most often associated with the sharing of improved farming or processing techniques and many traceability solutions have already been developed. These allow companies to holistically assess their environmental and social impact. Physical trading firms have been able to work with certification bodies, improving living conditions for producers and enabling them to tap into growth markets with higher margins. At the same time, consumers are able to track their coffee beans by directly scanning the QR-code on the package. When it comes to other commodities like metals and minerals for example, it is more difficult for consumers to know if a component of their phone or car was produced while respecting the surrounding environment and international responsible sourcing standards set by the OECD. Notwithstanding this difficulty, the trend for responsible sourcing from conflict-free zones and sustainable supply chains is gaining traction (e.g. in the EU Conflict Minerals Regulation which entered into force in 2021).
Increasing expectations for responsible business conduct (RBC) can also be seen in the financial industry; not only in wealth management but also in trade finance. The role for banks in driving sustainable behaviour in global supply chains has been gaining momentum after a sequence of events, such as the financial crisis 2007-2008, the introduction of the SDGs in 2015, the Paris Agreement 2016, the European Green Deal 2019 and several climate protests in 2020. With the OECD potentially establishing a sub-group looking into sustainable trade finance, potential future sustainability-linked trade finance regulations might soon become a reality. On the EU level and following the European Green Deal, also the European Commission intends to put forward a renewed sustainable finance strategy. Banks may then measure the borrower’s performance against specific sustainability targets (United Nations Guiding Principles, SDGs) and make the terms of financing dependent on a number of Key Performance Indicators linked to Environment, Social, Governance criteria.
Stability of the banking system
Drawing on the lessons of the financial crisis, the Basel III reforms aim to bolster capital and liquidity requirements to enhance the stability of the financial system. This impacts banks who provide the significant working capital required by trading companies to operate. The progress of the National Working Group, which is working on a draft legislative text got delayed by the COVID-19 pandemic. Hence, following a decision by the Basel Committee to postpone the final implementation of Basel III, the new rules are expected to enter into force on 1.1.2023 (1). A second Qualitative Impact Assessment is scheduled to take place in Q2 of 2021.
Transparency at the forefront of change
In Switzerland, the transparency trend is also gaining traction, not least with the indirect counter-proposal to the RBI imposing new non-financial reporting duties notably in relation to environmental, social and employment-related matters. Parts of the indirect counter-proposal are expected to enter into force in early 2022. In the meantime, various unanswered questions need to be clarified by the Federal Council with respect to its implementation. The most urgent ones include affected entities and the scope of requirements.
The Federal Council’s recommendation following the postulate 17.4204 Seydoux-Christe published in February 2020, urged the industry to develop sector-specific guidelines on due diligence (in particular related to corruption) (2). It is worth highlighting that like all natural and legal persons, commodity traders are subject to the Swiss Criminal Code, and anti-corruption legislation applies. Equally applicable are the Swiss Unfair Competition Act, the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and the UN Convention against Corruption. Nevertheless, in an effort to increase transparency, sector-specific guidelines that set out a risk-based approach and identify the red flags will soon be developed by the industry under the auspices of the Swiss Trading and Shipping Association (STSA).
The commodities industry is known for its agility and know-how when it comes to rapidly adapting to a changing environment. Change is important and we should embrace it. It is what makes us call established practices into question and gives us a fresh perspective on ways to improve. In the face of these multiple regulatory developments, working together with all the stakeholders - the Swiss authorities, international bodies, industry experts and beyond is what will be key to a successful and sustainable transition.
