Climate ActionGlobal EconomyTechThought

Digital trade is good for growth: can it also solve our ESG challenges?

The world expects a lot from SMEs (small and medium sized enterprises). These businesses account for between 70% and 90% of job creation in most economies (OECD and developing economies respectively), and their importance will only increase given the demographics in the developing world.

In Africa, for instance, one billion people will need jobs by 2050, almost 400 million more jobs than exist today. SMEs are the first step in formal employment for many unskilled workers, offering them skills and a way out of poverty. SMEs also provide essential services to poor and rural residents, contributing to social and economic stability, particularly where governing institutions may be weak.

Increasingly, SMEs are being called upon to play their part in the fight against climate change. 60% of the world’s CO2 emissions occur in global value chains largely comprising SMEs, in particular for consumer products and light industrial goods.

SMEs are the source of most Scope 3 emissions (ie. emissions generated along the company’s value chain) for many large companies, which in many cases are 90% of a firm’s total footprint. Put simply, the world will not meet its net zero imperative without massive action on the part of SMEs.

Alas, SMEs face myriad challenges to simply stay afloat: one survey reported that 80% of SMEs in Africa will fail within their first five years. While this is just one statistic, anecdotal evidence shows that many of the challenges facing SMEs are deeply set, persisting despite development aid, foreign investment, training support, and even periods of high growth.

The International Finance Corporate estimates that 40% of SMEs in developing countries have unmet financing needs totalling $5.2 trillion. Surveys by organisations such as We Mean Business show that SME climate action is hindered by a lack of financial resources, lack of capacity and technical know-how, and a lack of physical tools and technologies needed to drive their net zero programmes.

SMEs typically have a low capital base and fewer operating reserves even in the best of times. So, asking them to step up – whether for jobs or climate – particularly in an economic downturn, requires a new approach.

This is where digital trade could play a big role.

The digitalisation of trade and supply chain processes is well known to be an economic opportunity with almost unparalleled upside from a growth perspective: it is good for business because it cuts costs, increases speed and transparency, and produces valuable data that can be used inside the supply chain and especially in financing.

For governments, digital trade is a potential growth driver and an accelerator of crossborder trade. It saves time and labour at the border, while offering transparency and traceability that make compliance easier and less corruptible.

And yet digital trade is difficult: physical systems must be converted; standards must be created and adopted; legal frameworks must be upgraded to acknowledge electronic records and forms; IT systems and networks must be connected; people must be trained to do things in new ways.

A digital trade environment, with its transparent rules and uniform standards could significantly level the playing field for SMEs across borders

Digital trade does not just affect customs and border departments: in many cases a commitment to digital trade may involve over 20 government departments and agencies, including trade, finance, science, tax, interior, and so on.

Notwithstanding the complexity, there is a palpable sense of progress globally on the issue: over half the G7 (by GDP) is on its way towards a regulatory environment that legalises, and enables, digital trade. In the UK, the recent passage of the Electronic Trade Documents Act has the potential to kick-start trade transformation far beyond its borders because of the use of English law in many jurisdictions globally.

Digital trade has been recommended in a number of multilateral fora such as the G7, G20, APEC, the Commonwealth and others. Digital trade and economy agreements are being pursued by several major trading economies such as the EU, Korea, Australia, and Singapore. At least half a dozen other members of the G20 are making concrete steps towards legislation to support digital trade.

Drawing upon years of groundwork on trade standards by public bodies such as UNECE/UNCEFACT and the World Customs Organization, industry is making headway on digital standards for all key trade documents to be ‘translated’ into interoperable data by the end of 2023 in an effort led by the International Chamber of Commerce’s Digital Standards Initiative (DSI).

Convergence toward key data standards will enable interoperability of data across networks and trade platforms, which will address a key barrier faced by SMEs seeking to trade internationally.

Today, trade platforms which facilitate data sharing do exist, but many are closed, meaning that data sharing can only take place between approved members. All companies within a supply chain – sometimes 10-15 different enterprises – must be on the platform so that the supply chain can transact digitally. At the same time, companies along a supply chain may have several customers, each using a different trade platform.

Multiple memberships and platforms become complex when these different platforms each uses their own data formats and data sets, meaning that for every instance, data must be reconfigured, reformatted, or recut entirely if taxonomies and standards differ.

SMEs, being lean by design, will more acutely feel such an administrative burden, while large companies can simply add administrative staff. The more platforms write their own rules, the more SMEs are disadvantaged. Add the complexity of different crossborder regulations, and it is no surprise that most SMEs do not trade internationally, and of those that do, most only manage to trade in one other market.

In other words, a digital trade environment, with its transparent rules and uniform standards could significantly level the playing field for SMEs across borders.

This is exactly what the evidence about paperless trade, customs single windows and digital aspects of trade facilitation shows: the implementation of these key measures not only boosts growth but is particularly empowering for SMEs.

Beyond this, initial work on digitalising trade documents by ICC offers hope in addressing financing hurdles faced by SMEs. Put simply, a consolidated dataset derived from digitalising seven key trade documents could address a significant portion of a bank’s data needs for a typical trade finance transaction.

In essence, the supply chain dataset could function as the vaunted ‘single source of truth’ provided it uses globally interoperable standards, is secured by technologies of trust, and anchored by the use of verifiable digital identity.

The bank would not need to mount its own effort to ascertain this same information, potentially lowering the cost of financing, thus reducing the administrative burden which prevents many large banks from serving more SMEs.

This core supply chain dataset can also be applied to environmental data needs that must be met on the road to net zero. Virtually all of the critical data required to calculate Scope 3 – from raw material specs, quantities and product codes, shipment modalities, and ports of call – can be found within this core dataset, for obvious reasons.

Trade documents which summarise key terms of trade, enable goods to flow from partner to partner within global supply chains. The problem today is that in the analogue supply chain, data is manually gathered from different players and then passed along using spreadsheets, email, or other methods. It is rarely automated, prone to errors, and cannot be analysed in aggregate without a lot of effort and time.

As a result, the calculation of a Scope 3 footprint today is very painstaking across the supply chain, which is impractical for large or complex supply chains or for companies running thousands of products.

The alternative is to rely on a combination of big data or scoping of a part of a supply chain followed by extrapolating outward. And yet, the use of big data has already been challenged by European governments who realise, quite rightly, that such tactics are imperfect.

So, while climate activists may rejoice that Scope 3 emissions will eventually be disclosable (and subject to third party verification) under the recently released ISSB and European Corporate Sustainability Disclosure guidelines, it is openly known that most current methodologies for gathering such data are unfit for purpose, at least for many consumer-oriented supply chains.

Trade data from digitalised supply chains can provide the crucial bridge needed to close the gap. Indeed, the systems for sourcing and delivering such data are essentially the same whether for supply chain transactions or supply chain environmental impact calculations.

Moreover, secure, verified datasets sourced from key trade documents are by nature auditable; they will have passed multiple borders, customs authorities, and regulatory bodies. If financing can flow on this basis, so can climate data.

For companies in which sustainability still relies on the same practices – survey, upload, audit, monitoring – that have been used for years by social compliance programmes, the push for auditable, automated environmental data from the supply chain may seem like an impossible task. It need not be.

Of course, it is one thing to say that digital trade can help deliver the data needed to understand supply chain environmental impact, and another to say that mitigation actions are actually occurring. But providing transparency on the problem is a crucial first step. And for small enterprises serving dozens of customers, digital supply chain practices – delivering standardised approaches to data, interoperability across platforms, and digital identity and credentials – hold the potential to drive the shift from an enterprise overwhelmed by data and the complexity of competing demands, to a future ready, environmentally, and socially conscious business.