The role of export credit agencies (ECAs) in supporting sustainable finance is changing rapidly, with new policies and incentives expected from agencies across OECD countries in the coming weeks, according to a landmark paper from the International Chamber of Commerce (ICC).
ECAs have historically failed to keep pace with changes in the wider sustainability finance industry, with their activities often omitted from national-level greenhouse gas emission targets and other commitments, the paper finds.
It cites a parliamentary inquiry from 2019 that described UK Export Finance’s (UKEF) activities as “the ‘elephant in the room’ undermining the UK’s international climate and development targets”.
“However, this is now changing fast,” says the paper, which was produced by an ICC working group comprising several senior industry executives as well as the non-profit Rockefeller Foundation. It follows years of research, including surveys and interviews across the global export finance sector.
“Virtually all OECD ECAs interviewed for this report (and many of the non-OECD ECAs) reported that they were in the process of developing a climate policy, with publication expected in the next few months,” it says.
“A key driver of this flurry of activity appears to be the COP26 conference in November 2021, where countries are expected to provide updated emission reductions targets.”
In July this year, Export Development Canada became the world’s first ECA to set a net zero emissions target by 2050, which also includes an ambition to reach neutral emissions from its operations by 2030 – a move seen as significant given its prior role as a major backer of fossil fuel projects.
UKEF followed suit in September, unveiling its own net zero target by 2050 as part of a wider climate change strategy. The agency – which has also faced criticism over its funding for fossil fuels – says it will also increase support for green exports and improve its understanding of climate-related risks.
Hussein Sefian, founding partner of Acre Impact Capital and co-author of the paper, said during a recent GTR roundtable held to discuss the paper’s findings that many ECAs “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,” Sefian said.
Historically, however, the paper points out that coordinated ECA action on sustainability has lagged behind progress made in the private financial sector.
No new multilateral decisions have been reached among ECAs since a 2016 agreement on coal-fired electricity generation, the paper points out.
“In contrast, innovation in the banking industry has increased significantly since 2015, with the issuance of green, social and sustainable and sustainability-linked bonds and loans rapidly multiplying over a short timeframe,” it says.
Though in some contexts, export finance could have advantages over green bonds or social loans due to extended tenors and tighter control of proceeds, the paper says its use as a sustainable finance product “is still fairly nascent”.
Co-author Jennifer Loewen, director of projects at International Financial Consulting, says the gap between ECAs and commercial banks was highlighted during the research process.
“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,” she said at the GTR roundtable discussion.
The paper also finds that despite progress around green policies, ECAs still face barriers when looking to boost support to sustainable finance.
It says the scope of incentives ECA can currently offer “is limited by the rigidity of the OECD Arrangement”, which sets terms and conditions around the provision of export credits across all member countries.
The Arrangement prevents export finance contracts from supporting more than a certain percentage of local costs, which the paper says can hold back local economic development and increase greenhouse gas emissions by forcing companies to import certain inputs.
It also imposes “inflexibility” around pricing, and does not grant preferential terms to public social infrastructure projects such as the construction of hospitals and schools.
“The most promising opportunity lies in the modernisation of the OECD Arrangement,” the paper argues.
“These ongoing discussions present a unique opportunity to integrate the [sustainable development goals] and the Paris Agreement objectives within the rulebook of OECD ECAs, creating incentives for certain industries and technologies while ensuring that public finance no longer supports projects that are not congruent with these goals.”
That said, the paper highlights a 2020 green loan to multinational utility company National Grid as an example of multi-ECA sustainable financing allowable under existing rules.
The US$743mn financing package included guarantees from Euler Hermes and Sace, and was used to fund construction of Viking Link – a 765km subsea electricity cable supplying renewable energy from Denmark to the UK.
The ICC paper describes it as “the first project in which multiple ECAs have come together to finance a green project of this size”.