UK Export Finance (UKEF) has become the first export credit agency in the world to allow debt repayments to be deferred in the event of emergency situations caused by climate change.

Announced on Finance Day at the Cop27 meeting in Sharm El Sheikh, UKEF’s climate resilient debt clauses (CRDCs) will be offered in new and amended direct sovereign lending and previously restructured sovereign transactions to low-income countries and climate-vulnerable small-island developing states.

If an eligible borrower country is hit by a natural disaster or other climate shock, it will be able to request a 12-month suspension of all principal and interest payments due to UKEF, and deferred payments will be repayable over a five-year period following a one-year grace period.

CRDC deferrals will not be considered events of default, preserving finance and project continuity while providing liquidity for the country authorities.

“Some countries are now facing tough choices between protecting their citizens as they respond to climate shocks or paying down their debts,” says Tim Reid, UKEF’s director of business group. “UKEF can play an important role in helping governments navigate these decisions. By suspending the debt service payments, UKEF will enable borrowing countries to focus on responding to and recovering from a crisis.”

UKEF says it encourages other official creditors to consider including similar provisions in their own lending to countries most vulnerable to climate change, while a Cop27 private sector working group chaired by the UK Treasury has also launched a model term sheet to embed climate resilient debt deferral into standard bond and loan contracts.

In a statement, UKEF says that multilateral development banks (MDBs) have also agreed to form an informal working group to further explore CRDCs and other approaches, building on leadership of the Inter-American Development Bank – which is the only MDB that currently offers a form of CRDC in its lending, through a principal payment option.