Trade Finance TV: How is sustainable export finance stepping up?

Continuing the theme of sustainable finance from our previous episode of Trade Finance TV we welcome into the studio two experts on sustainable export credit agency finance, along with TXF Editor in Chief Jonathan Bell.

Since the publication of the ICC’s Sustainability in Export Finance report in September 2021, we have had the COP26 summit, which placed a particular focus on how transition to Net Zero will be financed. How are export credit agencies stepping up? How will we move beyond a mere 20% of current export finance deal flow being sustainable? And what should the OECD Arrangement do to support Net Zero transition?

As Jonathan Bell puts it, “There are wholesale changes taking place in the export finance sector and to a large extent this has been driven by the sharp move away from hydrocarbon financing to the financing of projects in the renewable energy sector.”

“We are highly optimistic that we will achieve very clear measurable objectives during 2022 and I think one of those will be to get a common definition of what is sustainable, what’s green and what’s social in the market,” reflects Investec Bank’s Chris Mitman

And Ed Harkins of GKB Ventures asks, “Why can’t countries be free to go beyond the OECD for projects that are sustainable and green?” having noted that this already happens for defence projects.

To hear more from this lively expert panel, do tune into Trade Finance TV!

Participants

  • Chris Mitman, Head of Export and Agency Finance at Investec Bank
  • Ed Harkins, Managing Director, GKB Ventures

Co-presenters

  • Jonathan Bell, Editor in Chief, TXF News
  • Clarissa Dann, Editorial Director, Deutsche Bank AG

Transcript of interview:

Clarissa Dann: Welcome to Trade Finance TV. I have huge pleasure in welcoming my co-presenter from TXF, Jonathan Bell, together with our guest Chris Mitman and Ed Harkins. We’re going to take a closer look at how export finance is doing its best to make history happen on the ground.

Jonathan Bell: Well, thank you very much, Clarissa. And thank you to Deutsche Bank for inviting me to join this session. There are wholesale changes taking place across the export finance sector and to a large extent, this has been driven by the sharp move away from hydrocarbon financing to the financing of projects in the renewable energy sector. At the same time, we are seeing much more attention to social and infrastructural projects to export finance structures. But with these big changes taking place in the sector, will some less developed economies lose out and will there still be enough deals and projects in the deal pipeline to keep banks, ECAs and others active?

Clarissa Dann: It’s been almost six months since the ICC Sustainability and Export Finance report. Are we any further forward? Chris.

Chris Mitman: The rising of the paper started the conversation. When you interview 150 people and get 500 survey responses and then you launched the paper at the UN General Assembly on the periphery of that and it gets covered in the F.T., you know, you’ve done something right. It’s got attention. The work of the Sustainability Working Group was initially about engaging with stakeholders on the paper, so we were invited to present the Bern Union Spring meeting in Budapest, we presented to the OECB. We’ve engaged with all the major ECAs individually as well as industry associations.

So there’s a work in progress and this is a guidebook for anyone who wants to understand export finance, what it’s currently doing in sustainability, and what it can do to drive the SDG agenda forward. So we’re highly optimistic that during 2022, we will achieve very clear, measurable objectives and I think one of those will be to get a common definition of what’s sustainable, what’s green, and what social and the market’s common definition is absolutely critical for the industry.

Ed Harkins: Before I came here today, I was looking at your quite interesting paper analysis on sustainability over the last five years in export finance. I don’t know if you guys have seen that, but it’s really stark. I mean, the industry is so far behind where it should be. So look at your data. What really is green in terms of renewable? One and a half percent last year. It’s tiny It’s it’s such a tiny fraction is the growth stream pool.

And so I think there needs to be complete fundamental change the framework in the OECD, it’s just out of touch with reality in my opinion. The defense is totally outside of the OECD, so countries can do all the things that need to be done already for the defense industry. But you know, sustainability is equally important, I would argue. And why can’t countries be free to go beyond the OECD consensus for projects that are deemed to be sustainable and green? The same sort of rules that apply to the defense industry should apply to sustainable green renewable projects in my opinion.

Chris Mitman: The framework is a good thing. Yeah. Orderly playing field for deployment of export finance. It’s just probably got a bit behind. I think the last three or four years the banks have overtaken the ECAs in terms of what they’re doing to respond to the sustainability agenda. Yeah, before that we were behind.

Since the White Paper came out, the Bern unit has formed the Climate Action Group, the VCAs who are active. It’s all about green and climate, which is very much we see the European Union, America’s issue. Less an issue in emerging markets like Africa. There’s very little talk about social infrastructure and climate-aligned infrastructure because that’s where the development is.

You build a hospital in Africa, it costs money to build it. It’s usually on the government balance sheet and then it costs money to operate and you get ten years to repay that loan. You build a wind farm which makes money and is self-financing 18 years. So the humble suggestion is certain types of social infrastructure should get longer, particularly against the backdrop of the DSSI and debt sustainability in Africa, affordability of debt. So there’s two discussions going on now. One is around affordability, and that’s a product of tenner, but it’s also a product of interest rates. And that’s probably where the conversation is going to go next. Is is sustainable finance inherently lower risk or not? And we don’t have the data for that yet.

Jonathan Bell: Yeah, the export finance sector itself has always been looked upon as like a dinosaur, you know, that’s sort of stuck in the mud. But at the same time it’s always been there and it has always performed, you know, and it’s always performed when it’s really needed to. Having said that, there’s been quite a lot of export credit agencies, in particular countries that are very flexible and they actually push the boundaries probably beyond where the OECD arrangement is. The white paper that you produced, it’s a real landmark in the sector. This is a wake up call to everybody. The DFI is the developmental institutions, but a multilateral, a bilateral can do what the hell they like.

Where you’ve got export credit agencies, there is a consensus and it does work in some aspects, but we do need to move on. So, I mean, there are great recommendations within the white paper, but I mean, Ed, what are you seeing in terms of certain ECAs actually doing sustainable things themselves just ahead of that?

Ed Harkins: Agencies like UCF that have stopped outright carbon financing, they seem to be leading the way. I think other ECAs should do exactly the same thing. My personal view is actually there shouldn’t be any export credit financing of carbon intensive power or anything like that know, because what is it actually doing is fundamental halt. We’re subsidizing the exports of something that’s going to burn carbon often to export it to a poor country that’s going to hold on to it for more than 20 years we might use it for here. I say let the commercial market finance it because export credit is just not needed to finance oil and gas and deploy the resource to renewables.

Chris Mitman: When I joined Investec ten years ago, I began to understand the risks involved as a private sector investor to invest in renewable power development. And what was very helpful when you’re putting development equity into developing a site for a 200 megawatt wind farm is knowing that there’s an agency there waiting to come in to put term debt into your project once you reach financial close. So ECAs could also look at that development risk element. You need those developers to be encouraged to go in and take those risks.

Clarissa Dann: We all need to trust the definitions of what is sustainable. So for example, let’s take a project that we all know about. Ghana Railway that’s made a huge difference to those communities, but to get the railway down, there may have been a bit of digging that happened. There may have been some emissions that happened, maybe the old tree came down. So what is the overall net ESG impact when you factor everything in together and we’re not there yet, are we?.

Chris Mitman: First, let’s be clear. We’re export financiers. We’re not specialists.

Clarissa Dann: Exactly.

Chris Mitman: The banks are helping tool us up and other ECAs to get good at. Environmental social is largely a risk based analysis of implementing the project. What we’re not saying is the impacts side of the equation as well. So what will the long term health outcomes be? What will the mobility outcomes be? These are things which the industry isn’t yet geared up to look at but is hopefully beginning to. We’re seeing banks label loans, social or green, but it’s just the start.

Measurement is everything. It allows you to start classifying and reporting projects consistently. It then gives confidence to a number of people, to my shareholders, to the Export Credit agencies board, also to investors coming to fund that loan that has been properly evaluated and classified, leading to an SPO. And then once you’ve got that, you’ve got new entrants, a tsunami of impact money coming into the export finance market, not all commercial, it could be concessional as well. And that’s the great opportunity for the market.

Ed Harkins: Yeah, I remember being asked to cover Africa in sub-Saharan in 2006 and when we looked at the map in which Western agencies actually had some cover, it was not very much that was seen the daunting prospect to be looking at driving this business, but now lots of cover out there, lots of cover from lots of different agencies, definitely more happening. I mean, I did an export credit deal in Ghana back in 2012. It was the first UK deal. And actually I like to think there’s been a whole bunch of them done off the back of that since. So I think things have got better. I’d like to see the OECD move to really incentivize borrowers to actually move towards sustainable green projects because to move the needle on this, that’s what it’s going to take cheap premiums, longer tenures and cheaper debt.

Clarissa Dann: Are we confident we will be further forward in 12 months? Jonathan, what do you think?

Jonathan Bell: I think we’re moving in the right direction. But the trouble is that was supposed to be a level playing field and we’re not know it because we have East Asian Asia is actually financing coal fired power stations. At the same time, we’ve got countries that are losing out. Mozambique, for instance, they have gas, they want to produce their gas and they’re going to really lose out. We have ECAs that have stopped the financing of hydrocarbons. The UK is one, EK is another, and the traders is about to do that as well. But we’re seeing a development of really good social projects, particularly in Africa. And these two guys that are with us today are doing those sort of projects. Yeah, I think we just need to see some more incentives going in to export finance to make that more of a reality.

Clarissa Dann: Chris, Ed, Jonathan, lovely to be with you.

All: Thank you.

Published on March 11, 2022

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