In September, after years of planning and research, a working group at the International Chamber of Commerce (ICC) published a landmark whitepaper on sustainability in the export finance market. GTR gathered participants in that working group, including the paper’s two co-authors, to review its findings, consider its policy and product recommendations, and discuss the export finance sector’s next steps.
Roundtable participants:
- Adam Connaker, director, innovative finance, Rockefeller Foundation
- Yasser Henda, global head of export finance, BNP Paribas
- Jennifer Loewen, director of projects, International Financial Consulting (report co-author)
- Shannon Manders, editorial director, GTR (moderator)
- Chris Mitman, founder and head of export and agency finance, Investec Bank (working group co-chair)
- James Pumphrey, managing director, structured trade and export finance, Deutsche Bank
- Paul Richards, global head of structured export finance, ANZ (working group co-chair)
- Hussein Sefian, founding partner, Acre Impact Capital (report co-author)
- Kelly Wess, vice-president, export agency finance, Citi
GTR: What was the catalyst for this whitepaper?
Richards: This goes back to the establishment of the Sustainability Working Group within the broader ICC Export Finance Committee. Sustainability seemed to be an obvious topic for a working group, so at the beginning of 2018 we brought a paper to the committee profiling the opportunity for this market to be more proactive in supporting sustainable exports and projects.
We spoke about how the sustainability agenda would underwrite the relevance of the export finance market for years to come, and the establishment of this working group was endorsed unanimously by the committee membership. We then went about an engagement process with the market, and primarily with export credit agencies (ECAs), holding workshops to raise awareness and exchange information on the topic.
Each session had more interest and more participants, but we knew that to move forward we would have to start talking about actions the industry needed to take, to move the conversation from one of compliance to one of contribution.
ECAs have always been tremendous at the compliance piece, with strong ESG analysis of projects as they come along, but we wanted to move onto the contribution this industry as a whole is going to make to the global sustainability agenda.
GTR: What was the approach to producing this paper, and what methodology was used?
Sefian: Our ambition was to be as consultative as possible with the industry, and we took a pretty broad definition of relevant stakeholders to include ECAs, banks, exporters, buyers, NGOs, and industry organisations like the OECD, European Commission and European Banking Federation. We wanted to have as many perspectives as possible contributing to this report.
The ICC working group also wanted this to be an independent report, reflecting the views and feedback of the industry in as participatory a way as possible. To achieve that we did two key things. The first was to launch an industry-wide survey, customised for different types of audiences, to capture the feedback of market participants. The survey was designed to allow multiple answers from people within the same organisation. The objective was to capture individuals’ perceptions and not the official line of institutions. We received more than 500 responses in total, across various stakeholders.
The second strand of work was a programme of interviews with nearly 150 participants across various stakeholder groups. We were thoughtful about ensuring geographic and industry representation. For example, we wanted input from buyers and exporters in green industries as well as those that are transitioning or are in hard-to-abate carbon sectors – and as well as ECAs and guardian authorities – in order to have the broadest possible approach. All of that information fed into the report.
GTR: Is this the first time a project of this kind has been initiated in the export finance market?
Wess: Absolutely. 16 banks that would naturally be competitors have all come together to facilitate this report, so it’s certainly distinctive. There have of course been previous conversations, and conferences too, but this project demonstrates the importance of this topic to all of our banks and the wider industry. It’s really brought the export finance industry together.
Pumphrey: It’s also worth underlining the global nature of this. It’s not just European-centric; the report covers Asia, the Americas, Africa, and that pulling of information from across the globe is critical, rather than just having a regional focus.
Richards: To get 16 banks to align on a scope of work, a set of objectives; the significance of that shouldn’t be understated.
Mitman: Agreed. The resulting paper provides an unprecedented and incredibly helpful snapshot of current sustainability practices and policies across the market, gathering and presenting views of export finance market stakeholders. In this fast-evolving area, it should help the market consider actions which may be taken individually, as well as collectively, on sustainability.
GTR: What is the background for the involvement of the Rockefeller Foundation, and what is the value of its support for this project?
Connaker: The Rockefeller Foundation isn’t usually in a room with 16 banks. They would not be our typical partner; we tend to work more with other non-profits. However, the social development work that we want to do in this decade – and in this century – is very different to what it’s been in the past. It’s risen well beyond what even public sector budgets can cover.
The tool that has the scale to address these issues is the capital markets. That means when we look for solutions today, we look to non-traditional partners so we can potentially mobilise actors that have that kind of scale. So it’s an unusual partnership, but at the same time, an obvious one in directing capital towards those things that need it.
For us it’s about thinking in terms of climate change, food insecurity and various inequalities. All of those are normal areas for us to take action, and they all require, quite frankly, global pushes from everyone involved, so we’re really excited about this, and about the potential contribution the export finance market can make in some of those challenges. Ultimately, we’re excited about what will be financed as a result of being more intentional and directive about where that capital goes.
GTR: Sustainability and ESG goals have come to the fore across the export finance market, particularly since the start of the pandemic. What practical contribution is this whitepaper expected to make to that discussion, and how will its success be measured?
Wess: The huge amount of research that has gone into this project already, not only with the banks, but with importers, exporters and various government agencies, is already linking together what could be considered a strong basis to develop best practices in the industry. Looking ahead, it produces a set of recommendations that the banks have not been involved in – they were produced by the researchers and subject experts – so I believe their adoption will be how success is measured. Climate change is the most important challenge the world, let alone the export finance industry, is facing. This is a common problem that requires a common solution through a unified approach.
Many of those recommendations are quite specific, looking at the ICC trade register to leverage information about the performance of ESG credits, for example. However, it is an increase in sustainable export finance volumes that would be the ultimate success of this whitepaper, and of the work that all of us have put into furthering the inclusion of sustainability principles.
Richards: In terms of measures of success, I think it’s important to mention that we never started out with an objective to talk about what the industry should do less of. The paper notes there are exclusions and policies some ECAs are putting in place. But I believe a better measure of success is to look at the new transactions we do in the years to come that we wouldn’t have done before.
Henda: If you go back to the question of the genesis of this project, there is a shared conviction that this market – despite its potential – is punching below its weight on sustainability topics.
One issue is that while everyone may be willing to do more and better, you run the risk of having different standards and different frameworks on the export credit market. The whitepaper goes a long way in pushing awareness of the need for alignment, and one measure of success could be the level of alignment that is achieved across banks and ECAs. That could be difficult to measure but we all feel the need for something more readable from outside the export finance ecosystem.
Mitman: I agree on the alignment and standardisation point. It will be a critical differentiator for the market and one which will make the asset class more investable by non-bank investors such as pension funds, insurance companies and asset managers.
GTR: It can sometimes feel that any projects in developing markets, or those involving goods other than oil and gas, are labelled as ESG-compliant or sustainability-linked in some way. Does the paper address ‘greenwashing’?
Sefian: This is a very important point. One of the key drivers of this whitepaper was around the observation that the banks and broader industry, from various sectors, were defining sustainability in different ways. There was a strong view from the 16 banks, and from others, that the industry should start to develop common definitions of what is sustainable.
The survey included questions around greenwashing, and more than two-thirds of individual respondents from banks, ECAs and other institutions said they are concerned about it. That speaks to the need for some sort of common set of definitions and frameworks around what projects are considered sustainable.
One of our observations from various conversations with banks is that there are at least two different perspectives on how to define sustainable transactions, even within the same organisation. The bulk of export finance professionals strongly believed that export finance is different, and that the industry should come up with its own definitions of what is sustainable, something unique to the industry. But when we spoke with sustainability professionals within the same institutions, the overwhelming feedback was that the existing toolkits are widely used by the banks and well understood.
I’m referring here to the ICMA [International Capital Market Association] and LMA [Loan Market Association] green, social, sustainability and sustainability-linked bonds and loans principles, which interviewees feel provide a widely used and understood framework for reviewing and classifying transactions accordingly.
Another important trend is an increasing focus on independent verification. Some of the guidelines coming out of ICMA really stress the need for independent verification of sustainability claims, and that’s a trend we’re seeing more broadly in the sustainable finance market. That is increasing and will probably become a mainstay of the industry.
Loewen: The banks appeared more advanced in having their own internal classification, aligning with ICMA and LMA principles, whereas many ECAs are just starting. Some of these frameworks are developed in-house, not necessarily aligned with ICMA and LMA, and they’re often more focused on climate rather than on the broader sustainability picture that we have seen on the bank side.
Also, the initial objective of this project was to increase the share of sustainable export finance.
A shared definition is a stepping stone towards that objective. As such, aside from agreeing on a definition, it will be equally if not more important to link the definition to specific incentives. This way ECAs and banks can make it more attractive for exporters and buyers to structure deals in a sustainable manner. And having clarity and transparency around what is considered sustainable, and what benefits this entails was a key ask of many of the exporters and buyers we spoke to.
GTR: What are some of the other key findings from the surveys and interviews with industry participants?
Sefian: Another key observation is that the potential of export finance as a sustainable finance product is significant, but is probably under-appreciated, especially in the broader landscape of the sustainable finance industry. Export finance addresses gaps and provides support where the private market is not able to do so.
An important benefit is the traceability of use of proceeds. In other words, what exactly is your financing going to contribute to? When you issue a green bond, for example, you are trusting the issuer to follow their green framework and invest in the relevant projects. However, with an export finance transaction you know exactly what the proceeds of the financing will be used for. That’s another real benefit of this product.
We also carried out a market sizing exercise to estimate the proportion of industry volumes that would be considered sustainable, which was around 20%. We found examples across renewables, wind, solar, water treatment facilities, essential infrastructure, healthcare facilities, even educational facilities, highlighting the remarkable diversity of the product.
The final point I would make is that a lot of this financing for sustainable projects is going to emerging markets, where the financing is most needed and where the private sector is less able to play a role because of the risks involved.
GTR: How would you characterise the action taken by the export finance sector, and by ECAs, around sustainability?
Sefian: As an industry, export finance has very much led in terms of broadly defined sustainability topics, introducing controls and guidelines all the way from 1998, when the first commitments around the environment were put in place by the OECD. Early on, the industry started thinking about what I would define as managing environmental and social risk, and reducing the negative impacts of its activities.
However, our strong impression is that while the ECAs are trying to keep pace with all of the innovation and growth around sustainable finance, much has happened since 2015. After the COP events in Paris and the announcement of the Sustainable Development Goals (SDGs), the banking industry took on a lot of initiative, innovating around products like social bonds and green bonds and loans and announcing some important restrictions on financing certain sectors.
Lately, some ECAs have come up with new initiatives, but generally speaking, the export finance industry as a whole has struggled to keep pace with that flurry of activity.
Loewen: Interestingly, one of the questions we asked survey respondents was whether they believe their institution is doing enough to support the sustainability agenda, and only 40% of ECA respondents confirmed that, compared to 60% of bank respondents.
Some ECAs have been more proactive than others, but given the regulated nature of export finance, they are dependent on their governments taking certain actions at the national, regional or OECD levels. One of the main findings of the whitepaper is the need to strengthen the whole-of-government approach towards the Paris Agreement and the SDGs. Most governments have signed the Paris Agreement, but why haven’t the commitments automatically trickled down to ECAs that are, by nature, public policy instruments?
Sefian: Few governments have to date included export finance or ECAs into their climate agendas and targets, and so many ECAs have so far not tried to align with the Paris Agreement and the SDGs. Some NGOs spoke strongly about this, describing ECAs as exporting greenhouse gas emissions; there are different views on this, and it’s a complex question, but the observation we would make is that guardian authorities have rarely included ECAs in the wider discussion – although this is now changing.
Pumphrey: If guardian authorities in any country get involved in this, that encourages ECAs to get involved too. Most of them have been very enthusiastic, they’re an important part of the interviews, and almost everyone is saying this is something that needs to be pushed up the agenda.
Mitman: The ECA market has ESG practices and approaches which until now have not existed in other markets and could not easily be recreated. So the track record so far is good, but the opportunity now is to recognise these unique attributes and how they can be leveraged to grow industry support for green and social projects.
Richards: It’s worth making the point that there’s a risk of inaction. If we do nothing, or don’t move quickly, in this industry we risk being left behind and becoming irrelevant. The places where support is required will shift, and if we don’t shift with it, we’ll wither and die.
GTR: Are there other positives that can be drawn from your research?
Sefian: One good news story of this whitepaper is the finding that a lot of ECAs, and the industry as a whole, are really starting to mobilise. We’ve seen announcements from ECAs exiting certain sectors, and in some ways going beyond what the banks are doing; completely stopping support to oil and gas being a notable example. I suspect we could see more announcements like that this year with COP.
We’re also seeing governments come together under the E3F initiative [Export Finance for Future] to see how export finance can contribute to sustainable finance, and that’s a huge development, albeit still a little light on detail.
Then, when we ask the questions around risk appetite and incentives for sustainable projects, there are two important observations that we can make.
The survey results show many are reducing risk appetite for projects that have negative environmental and social impacts, but at the same time are looking for incentives for projects that have positive environmental and social impacts.
We took a broad definition of incentives, from management encouragement and support, easier internal approval processes, all the way to financial incentives, which some ECAs are starting to introduce. Incentives are still relatively modest at this stage, but I think there is a strong view that the ECAs can play a really important role in driving increased sustainable financing volumes by offering stronger incentives, even if that may require reform of the OECD Arrangement.
Loewen: Green projects can often have higher costs than traditional technologies, so the industry needs to think about how to offset this additional cost in order to promote exporters, national exports and, ultimately, the sustainability agenda. The good news is that there is a huge opportunity to leverage all the different types of financing available in the export finance market, as well as from blended and development finance instruments.
GTR: With COP26 coming up in November 2021, does the whitepaper go further than just seeking to reduce carbon emissions?
Henda: The definition of sustainability in the whitepaper is based on goals from the Paris Agreement and the SDGs, so the aim goes beyond just reducing carbon emissions. Export finance plays a key role in emerging markets, in securing capital funding for exports and investments, with a clear focus on some sectors – social housing, education, healthcare, public transportation, water and sanitation – that are contemplated by the SDGs.
If we were to narrow the paper only to climate change and carbon emissions, we would actually be narrowing the remit of the export finance market. There is still a critical need to meet net zero targets and timelines, of course; we need to reduce carbon emissions, and help technologies evolve and force transition on the fossil fuel, or more generally the hard-to-abate carbon, sectors. But while the emphasis on social is significant, there is still a more developed framework on green than on social, and we need to highlight the critical nature of tackling both.
Sefian: There is a big focus on climate from the ECAs, and perhaps that is because it’s easier to quantify, but we can see that the banking community and buyers are also focusing equally on social aspects. This is not only around climate, and tackling those other impacts this industry has will be just as important.
Mitman: As a bank focused on Africa, we see first-hand the direct, measurable and dramatic impact social infrastructure can make on people’s lives, so welcome the paper’s exploration of this critical area. Export finance can play a growing role in improving affordability of such infrastructure for governments, particularly against the backdrop of the Covid-driven debt relief programmes.
GTR: What are the next steps you think are likely, or that you’re hoping to see happen, as a result of the paper?
Wess: The most important thing is to get the paper circulating in the industry, and to ensure people read it and take notice of the recommendations. There will need to be a huge amount of work around standardisation to be done across the industry. Above all, this is a call to action to all relevant stakeholders. We would like everyone to be a part of this.
Connaker: The long-term vision goes back to this issue of the export credit market being left out of conversations. This is a powerful tool, and there is no reason why it shouldn’t be part of the discussion around SDGs or other broad social and environmental objectives, and I think the paper will inspire those conversations and point out we’ve been missing out on a major tool on the development sector side.
It’s also an invitation to have a much deeper conversation, bringing together the two worlds of ECAs and the development sector, and it would be great to see the export credit market forming part of this conversation. Of course, it would also be great to see some more incentives put in place.
Pumphrey: There has to be a sense of urgency. There is a need to ensure that the paper does not just come out and everyone gets on with business as usual; it has to be integrated in every discussion and credit decision over the next months and years.
Henda: We now need to ensure this is not just another document on sustainability and export finance. It’s absolutely critical, we need the visibility that this ecosystem and this industry deserve, and we need it urgently. The next step will be to engage with policymakers in order to make sure that happens, and quickly.
Mitman: The market is already incredibly consultative compared to other markets through its various platforms and forums. I hope the paper will help galvanise further stakeholder engagement and action on this important topic, both individually and collectively.
Richards: This has been three years in the making, and we’ve put blood, sweat and tears into it, but now that we have the recommendations, a roadmap and an action plan, the real work starts. Urgency is definitely the order of the day.
