ESG Impacts on International Trade and Financing
The Role of The Private Sector In Driving International Collaboration Through ESG.
• Impact of International Regulatory Frameworks on cross-border collaboration
• Enhancing export capacity through ESG
• International sustainable financing opportunities and access to capital for T&T businesses
Good afternoon, everyone.
It is my pleasure to begin this important discussion concerning the ESG Impacts on International Trade and Financing - or, more specifically, the role of the private sector in driving international collaboration through ESG.
It feels like we are in this vortex in the world today, right? We are just coming out of the pandemic; we are on the brink of a World War; and we've been hearing about a water crisis. The deserts are getting bigger that are fuelling the storms coming to Trinidad and Tobago and the rest of the Caribbean, and also all the way up to South Carolina, Virginia in the U.S., and all down the South into Houston, Texas, and so on. And with the Water Crisis, we have a food crisis but when we grow food, we exacerbate the water crisis. So, what do we do? And how do we start to wrap our heads around these things?
A couple of years ago, I was reading a book by Robert Reich, a former labor secretary of the U.S. entitled "Saving Capitalism" where he was giving good examples of how the view of a CEO in a business used to take into account a lot more of the business stakeholders. And, then we had the rise of the activist shareholders and the concerns of quarterly profits because there are certain groups of investors who were only concerned about the next quarter and the next quarter and the next quarter. And it seems like the pendulum is swinging back to a kind of conscious capitalism.
Notice, I haven't used ESG, yet. I'm kind of picking up on Bill's language where he said ESG is an evolution of many different streams of thought that are rooted in the same thing. It's just a different context in which we are having the discussion or framing the discussion or measuring the discussion.
So, as we start to look at these things, it was Alison who earlier was talking about her students and why they want to work, and what kind of companies they want to work for. But those are also our consumers. So, not only would they be the people to power the enterprises, but they would also be the people for whom the enterprises exist.
And so, when we look at what we are doing as businesses, I would argue, at least in my opinion, that the vast majority, and by vast, I mean upward of 98% of the business people with whom I came into contact, were in business for more than just profits. They see their responsibilities as not just the next quarter or next year, but they see the long-term value that they can create through having a successful business. So first, you must have a successful business to exist and create value, but that's not the only goal. That is also a tool so that we can serve our various publics.
So, in terms of ESG and what's happening?
Let me give you some data here. According to the U.S.-based investment research and management services firm, Morningstar - Global ESG fund assets reached $2.5 trillion at the end of 2022 - this figure represents nearly a 12 percent jump in assets from the previous quarter and is almost double the growth of the broader global fund market.
Since the regulatory environment in Europe has been more kind to ESG investing, it should come as no surprise that the vast majority of the ESG fund assets are held in Europe which accounted for 83 percent at the end of 2022, and saw positive inflows of $40 billion during the fourth quarter. That's primarily because Europe has adopted an Action Plan for Sustainable Finance that included legislative measures on a unified EU classification system, low carbon benchmarks, strict disclosure requirements, and passed laws requiring EU countries to comply with the Paris Climate Accord. This shows the impact of legislation on the capital market.
Meanwhile, the U.S. accounted for 11 percent of ESG fund assets and saw outflows of $6.2 billion during the final quarter of 2022.
So, as the debate between sustainability versus profitability rages on - which is sort of a dichotomy - the evidence shows that private sector companies that embrace ESG principles in recent years have enjoyed higher revenues, stronger growth of profits, and greater access to finance.
A survey published in late 2022 by Moore Global, a London-based economic consultancy firm with 1,262 companies in Australia, France, Germany, Italy, the Netherlands, the UK, and the US showed that 84% of companies that follow ESG principles, reported their ability to raise capital had become slightly or significantly easier. The majority of those companies were in the U.S. with almost half or 48.1% saying that ESG frameworks had significantly improved their ability to attract investment from external sources.
This is where I believe the private sector also has an important role and gets an opportunity. It did surprise me, and I am sure it will surprise you to learn that public trust in the private sector is at an all-time high. If you don't believe me, then I refer you to the 2022 Edelman Trust Barometer which surveyed 36,000 people across 28 countries and found that 61% of respondents said they "trust" businesses more than both government, NGOs, and media. In the previous year's report, businesses were listed as the only institution seen as both "ethical" and "competent".
Now, 61 percent in the American system is a Grade "D". So, while 61 percent is good, comparatively, there is still a significant minority, and I would argue vocal, that don't trust business. And so, I see that both as an obligation and an opportunity. An obligation to those who do trust us and an opportunity for those who don't.
It does mean that we still have a significant capacity to influence the conversation if we can maintain that trust. So, we must deliver on the leadership they want from us and we must be able to prove that what we say we are doing, we are in fact, doing.
As most of you would know the ACCA for example, has sustainability standards and auditing and they're being developed more and more to be more and more rigid and robust every year. Also, we know there's a plethora of ESG reporting standards. So what we have to do, of course, is be careful that we're not just using something that gives us the veneer of reporting, but doesn't actually do that and then opens us up to the very real claims of greenwashing and the like, because that will also factor if we are seeking financing from institutions that are serious about their sustainability investing,
Addressing the social needs and other challenges of today's world requires an approach that is built on mutual trust, respectful engagement, and meaningful collaboration by all entities and institutions. After all, this is what our citizens and clients are expecting and requesting from us. But we all know that it won’t be just up to us because there are increasing demands and regulations that are coming into effect.
Today, both the EU and the U.S. have key regulatory developments for private businesses to report on and prevent adverse impacts on climate, the environment, and human rights which forces compliance by companies. (I should note the U.S. Security Exchange Commission proposal on climate disclosure rate is still in the proposal stage but faces mounting challenges against its full implementation.)
With these new regulatory frameworks either in place or about to come onstream, local and international companies must get ahead of the curve to maintain competitiveness and attract future investors. That's another reason why businesses and fund managers have to take into account ESG considerations and measurements so that we cannot be negatively impacted by these developments.
According to the United Nations COMTRADE database on international trade, the European Union imports from Trinidad and Tobago totaled US$5.88 Billion in 2022, while U.S. imports were US$5.61 Billion.
So here you have a little picture of the updated United States-Mexico- Canada Trade Agreement and there's a significant environment chapter in that for environmental safeguards.
You also have something called the Escazu agreement which is, in this Hemisphere, and the language is sufficiently broad that it will be open to significant interpretation by countries that adopted it. And in some countries, I can tell you, my colleagues at other AMCHAMs are vehemently against it, even though on principle - when you read it, it reads like a nice document to protect the environment - however, the way it's written, there is significant latitude for interpretation.
Meanwhile, Trinidad and Tobago has not yet ratified the Escazu agreement for example, but these are the kinds of things that we have to look at.
The one that is most likely to affect us in the short term is the EU's Carbon Border Adjustment Mechanism or CBAM.
Starting October 1, 2023, CBAM will apply to EU imports of iron & steel, aluminium, electricity, certain fertilizers, cement, and hydrogen, as well as certain precursors (i.e., cathode active materials) and a limited number of downstream products such as screws and bolts. This mechanism would impose a tax on imported carbon-intensive products to trigger behavioral change and prevent companies from carbon leaking: where companies transfer production (and emissions) to other countries outside the EU to prevent the high costs of polluting in Europe.
This is something that I know several companies in Trinidad and Tobago have already started looking at but even more have not yet started to consider.
There will be a gradual introduction of the CBAM, and it will be aligned with the phase-out of the allocation of free allowances under the EU Emissions Trading System (ETS) to support the decarbonization of the EU industry. During the period 2023-2025, the EU will monitor and report on the implementing rules to be adopted with a view to the full implementation of the CBAM in 2026.
So far, the WTO has said that there is nothing wrong with this proposed tax – they are calling it an adjustment mechanism - but this is where countries like Trinidad and Tobago have to be active early on.
This mechanism has a potential impact on exporters of commodities originating outside of the European Union, including from the Caribbean. The EU shall also assess the methodology for indirect emissions and the possibility to include more downstream products. Currently, there are no indications of plans to extend CBAM's scope to LNG or natural gas.
The point here is that all of these regulations will have a major impact on business, and by extension, the local economy. If we are unable to meet the ESG requirements that these international institutions and countries will now have built into their laws and regulations, we will be under threat.
It is my view however - not to undermine the good intent and the actual outcomes that we all want, which is a reduction in emissions, and reduction in harm to the environment - CARICOM governments have to be more proactive in rule setting as opposed to rule-taking.
We wait till after these rules are set - whether they be realists and blacklists in the financial sector - and then we sort of react and respond and we need to be more proactive. We know this is coming. It's here in 2023. We should be very active in this rule setting.
We have some resources. Most of you here would know Kishan Kumarsingh who is one of the leaders in the global dialogue around the COP meetings. But we all have to get involved and find mechanisms to get involved so that we can ensure that we are part of the conversation and we are not responding after to things that we could have had a chance to influence even if we take advantage of things like special and differential treatment or International principles that we have gotten enshrined in trade agreements as a result of our status as a small island developing States.
Having said that, there are also opportunities that can emerge because in dealing with things like the CBAM, there will be the potential for offsets. Then we need to develop carbon markets here in Trinidad and Tobago that are, in fact, credible - meaning, if we don't develop them in a manner that is in line with the monitoring, reviewing, and verification system, we run the risk of not being able to have those credits counted because we may not be able to verify that they're not double counted. What do I mean?
So, we can't, for example, allow company X to say that they are preserving a part of the forest and therefore, they get X number of carbon credits and then we as a country, count the preservation of that forest in our greenhouse gas reduction efforts, right?
This is where when we talk about legislation and regulation, the government has to play a role. The private sector can't do that. The government needs to be involved in that so that we can benefit from the potential opportunities out there. Opportunities that until it is realized remains an opportunity. So, let us not let it go to waste. And of course, we have to be conscious and aware of what consumers are demanding.
So, all that to say, what I try to do today is present a different angle on some of the potential impacts, what is happening internationally, and how it will come back home to us. But all of what has gone before and what has been previously said underscores not just the importance of this year's conference but why we must prioritize this issue as a business imperative to maintain value and increase our competitive advantage in the global market.
Of course, we may have some catching up to do. And there's no denying that the international frameworks for ESG investing, rating, and reporting are complex, but so too are reducing our emissions, eliminating social inequalities, and building good governance systems in our businesses. So, to us overall at AMCHAM Trinidad and Tobago - you can go back over our speeches over the years and our initiatives - ESG is more than just an investment topic or something that is fashionable today. We view it as a catalyst for systemic and institutional change across all sectors. And we hope that as we incorporate more and more ESG strategies in our businesses and we incorporate the metrics to measure them, we will, in fact, be contributing to a fairer, more just, and sustainable society.
Thank you very much.