Export credit agencies (ECAs) are lagging private financial institutions in setting targets for reaching net zero greenhouse gas emissions and are missing opportunities as the energy transition gets underway.

That’s the argument of a University of Oxford paper published last week by a group of five researchers, including experts in trade, law and economics.

Former Bank of England governor Mark Carney says in the paper’s foreword that ECAs “are increasingly conspicuous by their absence” in efforts by financial institutions to back a transition away from fossil fuels. Seven European countries announced in April they intend to wind down finance to fossil fuels and boost sustainable financing, but stopped short of setting emissions reduction targets.

Export Development Canada became the world’s first ECA to set a net zero target late last month. It is aiming to reach neutral emissions from its operations by 2030 and net zero for its portfolio by 2050. The move is significant because the agency has long been a major backer of fossil fuel projects thanks to Canada’s large natural resources sector.

Many countries have adopted net zero targets, usually by 2050, but the report says ECAs “are only at the beginning stages of this seismic transformation” and that none have adopted a net zero framework and implementation plan “comparable to the commitments emerging at the policy level and amongst private financial institutions”.

A lack of momentum from ECAs risks damaging the energy transition because they play a key role in financing some crucial sectors, the report argues. ECAs provide government-backed financing, guarantees and insurance, sometimes in concert with other lenders.

One of the report’s authors, Professor Andreas Klasen, director of the Institute for Trade and Innovation at Germany’s Offenburg University, suggests that the European Union and 10 countries that form the OECD Arrangement on Officially Supported Export Credits could collaborate to become “net zero pioneers”.

He discussed the paper in an interview with GTR.

GTR: Do you expect further ECAs will follow Export Development Canada’s lead and announce a net zero target before the COP26 summit?

Klasen: Export credit agencies play an important role in the transition to a net zero global economy. They are lagging behind countries, the corporate sector, and private finance institutions. EDC’s announcement of a long-term net zero target represents a notable milestone for the sector. I expect that other agencies will rapidly catch up – existing work from governments and ECAs creates a strong basis to build on!

GTR: Is 2050 soon enough for net zero? Is it within the capability of some ECAs to adopt more ambitious targets such as 2030 as we have seen with several private financial institutions?

Klasen: Given that industries supported by ECAs are often relatively emissions intensive, it makes it more difficult to be part of the transition to decarbonisation. Furthermore, there are barriers and risks such as conflicting principles of intervention and limited capacities. However, renewed mandates for innovation and industrial policy as well as green growth opportunities allow the setting of more ambitious targets. ECAs with ‘green’ portfolios can and should be first movers, adopting more ambitious targets such as 2030.

GTR: The report says “collaboration across the sector is key” – how do you think ECAs should collaborate and how can they overcome differences in climate change policy of their governments? While some Western Europe countries may have similar approaches, that may not be the same across continents. 

Klasen: If OECD Arrangement participants across continents are ready to commit, they can form a powerful core of net zero pioneers. This group is able to create a useful platform, discussing technical questions on measurement and transition with like-minded peers. Furthermore, OECD participants would be able to adopt short-term steps to accelerate the transition. While they might be first movers, the role of developing and emerging economies especially will be key.

GTR: How much can ECAs do on their own, when it is usually up to governments to set the policy and climate change targets of their ECAs?

Klasen: The alignment between government policies and forward-looking ECA strategies is crucial. It is, of course, the mandate of an ECA to finance or insure and guarantee exports, fostering trade and helping to secure jobs in the domestic economy. Because climate action is becoming much more important for governments, however, there is an opportunity to include these policy objectives in the agencies’ mandates. Climate considerations thus acquire greater urgency for both governments and ECAs.

GTR: Do you think organisations/mechanisms such as the Berne Union or the OECD Arrangement should or could be changed to include or mandate specific net zero targets or ways of measuring emissions reduction? 

Klasen: Current approaches to climate alignment in officially supported export credits circle around multilateral regulations, international frameworks, as well as national commitments and policies. The OECD Arrangement is the most relevant regulatory framework for ECAs at the international level. It is a missed opportunity that the Arrangement only covers a few climate-action related constraints and no incentives such as lower minimum pricing or an alignment to net zero. The Berne Union is a non-political organisation, but it could also pioneer creating global standards for targets, strategies, methodologies and reporting. Therefore, global organisations like the OECD and the Berne Union can help ensure a sector-wide transition that leaves all ECAs in a stronger position in a net zero economy.

GTR: Are offsetting initiatives available on a big enough scale to neutralise emissions created by trade in fossil fuel energy? For example, many Asian countries are still heavy users of oil, LNG, and thermal coal for energy because they do not yet have meaningful renewable generation, meaning ECAs in those countries are likely to be financing significant fossil fuel imports for some time yet.  

Klasen: Offsetting can play some role on the path to net zero, but cannot substitute for or delay decarbonisation. For ECAs themselves, as for other financial institutions, offsetting is not likely to play a major role in their own strategies since the cost of offsetting financed emissions is typically prohibitive. However, ECAs can play a constructive role and control future risks by encouraging their clients to adopt a science-based approach that builds offsetting into a broader decarbonisation strategy, rather than seeing it as a way to deflect from the deep changes ultimately required.