As the export credit agencies of Germany, Italy and the US continue to face accusations of breaking a 2021 pledge to end international public finance for fossil fuels, Jenny Messenger asks whether the ESG bubble has finally burst for ECAs, and if so, what the consequences might be.
At the close of 2022, yet another climate deadline sailed by, this time for countries that promised to end international public finance for unabated coal, oil and gas, and prioritise clean energy.
Known as the Glasgow Statement, the agreement was made between 34 countries and five public finance institutions during Cop26, held in the Scottish city in 2021.
A few months later, in May 2022, the ministers of climate, energy and the environment for the G7 countries reiterated their commitment to discontinuing “new direct public support for the international unabated fossil fuel energy sector by the end of 2022”, aside from specific circumstances that had to be “consistent with a 1.5°C warming limit and the goals of the Paris Agreement”.
Struck in 2015 between 196 parties, the Paris Agreement includes a commitment to “make finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development”.
NGOs and think tanks hailed the Glasgow pledge as a significant step forward, with Oil Change International (OCI) noting that the “joint statement unites some of the largest historic providers of public finance for fossil fuels – Canada, the US, the UK and the European Investment Bank”.
The International Institute for Sustainable Development, a Canada-based think tank, estimated in June 2022 that the promise could see clean energy finance pumped up from US$18bn to US$46bn a year, if all current fossil fuel financing was redeployed to fund green sources of energy instead.
The organisation found that if “signatories’ development finance institutions, export credit agencies (ECAs) and government departments fully redirect their US$28bn a year in public finance for oil and gas, they would more than double their clean energy finance”.
In 2021, the International Energy Agency (IEA) said that clean energy finance needed to triple by 2030 to limit warming to 1.5°C.
“Over the past few years, we’ve seen political momentum building around this topic. I think there is increasing acknowledgement that the export finance system must be reformed,” says Igor Shishlov, head of climate finance at German think tank Perspectives.
Paul Heaney, secretary general of the Berne Union, the international association for the export credit insurance industry, tells GTR that “our industry has a significant role to play in tackling the impacts of climate through both mitigation and adaptation and Berne Union members are helping to support this through economic development, innovation and technology transfer in the energy sector and beyond”.
“In the renewable energy sector alone, Berne Union members supported US$10.3bn in new financing during 2022,” Heaney says, adding that the association’s climate working group “maintains a regular dialogue among members and external stakeholders around areas including product development, methodologies for assessment and policy implementation”.
The OECD reported in May this year that “the number of ECAs/countries with a methodology for labelling new transactions according to their potential impact on climate change has more than doubled compared to 2021”, and that these largely use the EU taxonomy, which defines criteria for economic activities aligned with a net-zero trajectory by 2050.
Some countries have stuck to the Glasgow Statement, including Denmark, Sweden, France, the Netherlands and the UK, which was the first high-income country to pledge to end its international public finance for fossil fuels, back in December 2020.
But since then, a number of the richest countries and largest funders of fossil fuels have failed to honour the promise and continued to support oil and gas projects, waylaid by concerns over energy security and politics.
Prominent laggards include Germany, Italy and the US, whose ECAs have this year provided US$2.2bn in funding for fossil fuel projects, according to OCI’s fossil finance tracker.
These deals include Sace’s guarantee of a US$500mn loan to the Talara oil refinery in Peru, and US$240.7mn in financing from US Exim and Sace to support facility expansion as well as fuel efficiency and safety upgrades at Indonesia’s Balikpapan oil refinery.
Both projects will see the refineries’ crude oil processing capacity bumped up by tens of thousands of barrels a day.
In a written statement provided to GTR at the time the deal was publicised, a senior US Exim official said that the organisation had “performed a full due diligence review of the [Balikpapan refinery] transaction according to the agency’s statutory and policy requirements, including a feasibility review and alignment with Exim’s environmental and social due diligence procedures and guidelines”.
Think tank Perspectives has undertaken a series of case studies analysing whether the ECAs of certain countries are aligned with the Paris Agreement, grading the ECAs of South Korea, Japan, the US and Italy as “unaligned”.
ECA influence
It is widely accepted that the transition away from coal, oil and gas is a complex process that will take substantial time, money and effort. Within this, ECAs continue to balance their economic, political and strategic considerations when deciding whether to support fossil fuel projects.
Some market experts, however, suggest that ECAs do have a degree of influence in diverting financial flows from polluting industries.
A 2020 report from the Oxford Institute for Energy Studies notes that in 2009, PNG LNG – the entity behind Papua New Guinea’s liquefied natural gas development – raised US$10.5bn of third-party debt in what was at that point the biggest ever project finance project.
The funding included US$8.3bn-worth of contributions from six ECAs: US Exim, Japan’s Bank for International Cooperation and its ECA, Nippon Export and Investment Insurance, China Exim, Sace and Export Finance Australia. “It could not have been done without them,” the report says.
“Historically, officially supported export finance has been strongly entrenched with the expansion of fossil fuel infrastructure globally, for two main reasons,” Philipp Censkowsky, researcher and consultant with Perspectives, tells GTR.
“The first is because often fossil fuels are sourced from politically unstable environments. So, companies seeking profits in such countries may simply not do business there without a state-backed guarantee. The second is the scale of investments in the energy sector, which are often much larger than what private insurance would cover, especially in risky environments,” he explains.
For example, for an offshore gas development project, Censkowsky says, there might be 20 different financiers involved, including ECAs and commercial banks. “You need so much technical expertise: someone to clear the seabed with dredging ships, someone to instal pipeline equipment or an onshore liquefaction plant, and a lot of highly specialised service and engineering personnel.”
Moreover, given ECAs’ historic links to the fossil fuel industry, the switch to green energy faces significant hurdles, Censkowsky says.
“We need to harness ECAs as active agents of green industrial and trade policy and accordingly re-define their political mandates.”
“At the Cop climate meetings, science has some role to play, but ultimately it is a political process,” says Censkowsky. “It is scientific consensus that we need to drastically reduce fossil fuel production and demand by mid-century to stick within an acceptable carbon budget. However, in its 28 years of existence, the Cop has never substantively discussed 1.5°C compatible levels of fossil fuel production nor its equitable distribution.”
Part of the problem is that the Glasgow Statement is a voluntary pledge that carries no penalties, nor does it include some of the major polluting countries, like South Korea, Japan and China.
“The Glasgow Statement was a side deal at the Cop. It wasn’t an official agenda point. Countries can either stick to it or simply ignore it,” says Censkowsky.
“One main ramification would be a loss of reputation, which is something governments want to avoid.”
Though the Paris Agreement is legally binding and has been used in litigation against corporates – including a 2021 Dutch court ruling in a case brought by Friends of the Earth that Shell must cut its CO2 emissions by 45% by 2030 – there are no sanctions attached to it.
In April 2021, Denmark, France, Germany, the Netherlands, Spain, Sweden and the UK set up the Export Finance for Future (E3F) coalition, with the intention of starting “a climate-orientated review” of export finance activities, though no set timeline has been agreed.
And a net-zero alliance for ECAs has also been mooted, under the rubric of the Glasgow Financial Alliance for Net Zero, but it is currently at a very early stage of development.
“Essentially, the only policy at the international level that can affect export credit agencies is the OECD Arrangement on Officially Supported Export Credits,” says Perspectives’ Shishlov.
Nevertheless, the OECD Arrangement has only agreed to prohibit ECA support for unabated thermal coal power generation. Bans on other fossil fuels are not being considered.
“I would love to see stronger commitments at the OECD level, and I would love to see restrictions being expanded to oil and gas. To achieve this, we need a champion to table a proposal and convince other countries to support it. NGOs and researchers like us are pushing for this, but I don’t know how fast this can be done,” says Shishlov.
Securing supplies
Russia’s invasion of Ukraine, the resulting spike in energy prices and the scramble to secure supplies of gas hit Europe hard. Germany has been among the worst affected.
In 2021, Russia provided 55% of Germany’s gas imports, a proportion that had dropped to 26% by June 2022, according to the World Economic Forum.
The war has been used as justification to invest in new oil and gas exploration, and in a draft policy released earlier this year by the German Federal Ministry for Economic Affairs and Climate Action, which oversees Germany’s export credit guarantee programme, it says it intends to continue providing export credit guarantees for certain projects involving oil and gas fields, gas pipelines and infrastructure.
Yet in the latest update to its net-zero roadmap, the IEA says that “no new long-lead time upstream oil and gas projects are needed” if the world is going to keep within the 1.5°C limit. “Sequencing the decline of fossil fuel supply investment and the increase in clean energy investment is vital if damaging price spikes or supply gluts are to be avoided,” it adds.
Censkowsky notes that the lifespan of new infrastructure can run between 30 and 40 years, in addition to the time taken to set up the project, and claims Russia’s invasion of Ukraine does not justify investment in new fossil fuel projects.
The IEA also pointed out that under the net-zero emissions (NZE) scenario – in which warming is limited to 1.5°C by reducing annual emissions to 23 gigatonnes by 2030 and net zero is reached by 2050 – global demand for LNG is set to peak by 2030, meaning “any new LNG projects approved after 2022 are at risk of not recovering their invested capital in the NZE Scenario”.
Germany’s draft policy on public support for fossil fuel projects has undergone a consultation process. As of press time, Germany’s Federal Ministry for Economic Affairs and Climate Action is slated to release the updated guidelines in early November.
A spokesperson tells GTR in a statement that “the aim of these new guidelines is to stimulate innovations and climate-friendly technologies, to support their development and to promote the export of green technologies abroad. At the same time, the financing of climate-damaging activities is to be ended.”
Political will
Alongside the other factors that shape decisions made by ECAs – including the economic significance of the project, job creation, existing commitments and a lack of viable alternatives – political influence is also instrumental.
“ECAs’ major constraints are their political mandates, on the one hand, and the international environment where they’re competing, on the other,” Censkowsky says.
He adds that alongside loopholes in ECAs’ policies, there are major concerns over the level of domestic financing they provide for fossil fuels, particularly in the case of Canada, where “around nine-tenths of Export Development Canada’s portfolio in the fossil fuel energy sector is domestic”.
“It’s a flaw in our world economic system, that competitiveness is something that is so often stated as one of the most desirable policy objectives. But for the climate crisis, what we need is cooperation and not competition,” he says.
Nowhere is this seen so starkly as in the US, where US Exim has faced political difficulties in the past due to the influence of an anti-ECA lobby. Between 2015 and 2019, it was prevented from authorising transactions of more than US$10mn or with tenors longer than seven years because it did not have the requisite minimum of three members on its board of directors.
US Exim thinks the Glasgow Statement doesn’t concern them, Shishlov points out. “It was the US government who took the commitment. There was a leaked guidance to restrict fossil fuel finance, but it was not made official, and US Exim continues to support fossil fuels despite the US commitment.”
A senior US Exim official tells GTR in response that the ECA “seeks to align with the Administration’s climate agenda while still respecting Exim’s statutory limitations, including the Charter prohibition against discrimination based solely on industry, sector or business” – including the fossil fuel sector – as well as “its mission to support US jobs”.
They add that US Exim is on track to approve over US$900mn in renewable energy transactions during this fiscal year, “the largest single-year amount in the bank’s history”.
Looking ahead, Cop28 will be held in Dubai at the end of the year, but as yet it doesn’t seem likely that export finance will be top of the agenda, which looks set to be dominated by issues such as the loss and damage fund for developing countries vulnerable to the effects of climate change.
“A colleague once said, why don’t they just make a commitment to follow through with all the previous commitments? If we can follow through with the Glasgow commitment, and if new countries can join it, that would already be quite some progress,” Shishlov says.
