From roads and railways to hospitals, water treatment plants and renewable energy installations, export finance transactions can be a key contributor to sustainable development. However, with no universal consensus on what constitutes an ESG-compliant deal, there remain numerous inconsistencies of approach within the industry. Faruq Muhammad, global head of structured export finance at Standard Chartered, discusses the current demand for sustainable export finance in the wake of the Covid-19 crisis, and outlines how banks can ensure that their lending activity contributes to a better future.
Q: By their nature, many export finance transactions are already contributors to sustainable development. What needs to be done to ensure that this impact is recognised?
Muhammad: Recently, there has been a lot of discussion within the export finance community on the need for a universally accepted definition of sustainable lending. Within the OECD consensus, preferential financial terms exist for water projects, for example, but other facilities that are also deemed as being sustainable under the Sustainability-Linked Lending Principles do not receive the same treatment.
Within the industry, there is a general acceptance that this needs to change. Through the International Chamber of Commerce (ICC) working group on export finance, we have been working with export credit agencies (ECAs) to shape a common definition for sustainable lending and also discuss required changes to the OECD consensus in order to encompass a wider range of sustainable projects, be that the construction of healthcare facilities – which are of particular importance as a result of the pandemic – or the implementation of critical infrastructure such as roads and bridges which connect populations to the global economy and create jobs and livelihoods.
Q: Earlier this year, the global loan market associations jointly launched the Social Loan Principles (SLPs). Does the publication of new guidelines such as these enable you to further make the case for sustainable export finance?
Muhammad: In June, Standard Chartered became the first bank to specifically structure an export finance transaction to comply with the recently published SLPs. Within the facility, which was a €280mn ECA-backed finance agreement with the Ghanaian government to support the development of a highway corridor, we were able to build in certain provisions to ensure its compliance with the principles: the upgraded route will positively impact the lives of local residents from underserved populations, as well as drive employment opportunities and trade, improve road safety and better access to healthcare and other essential services.
The OECD consensus is not something that can be changed quickly, but certainly developments such as the publication of the SLPs will assist us in making the case with the ECAs that they should be willing to offer better terms on some of these projects. While they have historically been very focused on climate change driven projects – the ‘E’ in ESG – we are seeing that the ECAs themselves are becoming more and more aware of the wider reach of sustainable lending, which is a positive sign.
Q: Has demand for sustainable export finance deals changed post Covid?
Muhammad: The impact has been quite visible in sub-Saharan Africa, which is a region with huge requirements for sustainable and critical infrastructure.
As a result of the economic crisis brought about by Covid, liquidity, and dollar liquidity in particular, retreated. In concert with this, there was a significant increase in credit spreads for sub-Saharan African sovereigns. This, coupled with the reduction in economic activity and the oil price crash, had a tremendous impact on the economies in the region. As a result, two things happened. The first was that most of the countries in sub-Saharan Africa had to take a step back and relook at their financial positions. Secondly, they also had to look at their prioritisation of projects, and because of the Covid situation, it was healthcare sector projects and critical green infrastructure that became a priority.
Meanwhile, internally, because we both originate but also distribute export finance business, what we see happening is that there are now investor classes who are coming back to emerging markets, and they have a strong preference for sustainable projects, so this becomes a further push factor, because a project which meets sustainable lending criteria is far more in demand than one which is not.
Q: Do banks have a role to play in helping export finance borrowers meet sustainability guidelines?
Muhammad: Most of the export finance transactions that we work on, particularly the large ones, are very bespoke.
You might have a contractor who is from a different country to where the sourcing is from, there might be multiple ECAs involved, and often your sovereign borrower’s local environmental and social (E&S) standards are very different to international ones. In those transactions we often take on an E&S advisory role, whereby our teams work with the borrower, the contractor and the sponsor to address upfront some of the potential E&S risks within the transaction.
We do see a bigger appreciation of being more ESG compliant by borrowers, but it must be appreciated that a lot of sustainable lending, particularly in emerging markets, is still being done with sovereign borrowers that may not have the systems in place to monitor and report compliance. We don’t want to impose restrictions upon the borrower that they can never follow; that would be like a covenant that you know your borrower will breach – this is not the purpose of what we do. Most sovereign borrowers will have a loan and a bond. The bond is not as restrictive, so if you push the envelope too far on the loan side, at some point they will say, forget it, I would rather go and borrow an expensive bond than do this loan, because I’m not going to be able to meet these requirements.
Q: How would you assess overall activity levels within the export finance market as we come to the end of 2021?
Muhammad: It may be somewhat counterintuitive, but volumes for 2021 are better than normal, and there is a healthy deal pipeline. This is a result of a confluence of factors. The first is that many of the projects set for 2020 were delayed due to the pandemic, and slipped into 2021. These are being realised alongside the projects that were already planned for 2021. Meanwhile, although governments have rationalised their priority list of projects, the favourable oil price since the beginning of the year has given some of them the fiscal breathing space to take another look at some of the deals they had de-prioritised. Of course, the proof of the pudding is always in the eating, and these deals do still take time to close, but overall, the activity level is good.
A blueprint for structuring sustainable export finance transactions
One of the most oil-dependent nations in Africa, Angola was hit hard by the fall in crude prices brought about by Covid-19.
As the country continues to implement economic diversification reforms and adopts measures to improve human and social development, a landmark multilateral and export finance transaction led by Standard Chartered is expected to substantially improve living conditions, enhance public health and scale up enterprise reform.
The US$1.1bn financing, signed in the first half of 2021 with the Angolan ministry of finance, will be used to develop critical water supply infrastructure that will serve areas of the capital, Luanda. The Luanda Bita Water Supply Guarantee Project will improve access for over 2 million of the city’s residents at a time when the country is experiencing significant climate change challenges, including regional droughts that put pressure on water supplies.
This transaction is the largest underwritten syndicated loan financing in the first half of 2021 for a sovereign in sub-Saharan Africa. Proceeds will be used for investment in water production, transmission and distribution facilities comprising a water treatment plant, a transmission system, water storage facilities, distribution centres and installation of new networks and metered connections. The project will also contribute towards meeting the United Nations Sustainable Development Goal 6, which relates to increasing access to clean drinking water and sanitation for all.
The financing consists of two loans. The first is a US$910mn loan supported by a World Bank IBRD guarantee, with Standard Chartered acting as sole advisory and coordinator bank, one of the joint underwriters and mandated lead arranger.
The financing was also supported by Africa Trade Insurance and the private insurance market. It sets a record as the largest IBRD partially guaranteed financing globally to date.
The second loan facility, backed by the French ECA Bpifrance Assurance Export (BPI), with Standard Chartered acting as the sole MLA and underwriter, is for US$165mn. Through this loan, Standard Chartered will support the financing of exports by French leading exporters Suez and Saint Gobain into the project.
“This innovative financing structure can unlock more sustainable investment for other countries that need it most,” says Muhammad. “We are hopeful that there will be increased appetite among insurers and investors for other projects in the region, with this project acting as a blueprint of how to structure future longer term, lower interest loans that benefit some of the world’s most underserved markets.”