While successive crises have rocked the global economy, we can be hopeful that when the recovery does gather momentum and take hold, the political and economic landscape will have changed, with environmental, social and governance (ESG) prioritised in order to create a sustainable future.
In this environment, businesses, corporates and financial institutions alike are under increasing pressure to align their business strategies to deliver a sustainable development impact – including mapping out a path to net zero carbon emissions to fight against climate change.
The pandemic and its related disruptions have underlined the urgent need to invest worldwide to achieve the UN Sustainable Development Goals (SDGs) by 2030, especially in emerging markets and developing economies.
Export credit agencies are prioritising sustainability by embedding ESG provisions in their products and solutions
Building on the momentum of COP26, optimists hope the pandemic might serve as a catalyst not only for pushing sustainability to the top of the agenda, but also in paving the way for the required annual investment.
The UN estimates that around 7–10% of global GDP[1] needs to flow into where it matters most: clean water and sanitation, affordable and clean energy, industry, innovation and infrastructure in emerging markets and developing economies.
In this new political and economic landscape, there are emerging opportunities along with changing dynamics and new risks for corporate treasurers worldwide. As sustainability is becoming more of a strategic and operational imperative for businesses, sustainable finance is emerging as a meaningful response to address the SDGs.
There is an opportunity for export and agency finance, as part of the broader sustainable finance ecosystem, to contribute to sustainable development by supporting export, trade and growth worldwide.
But it has further significant potential – so far untapped – as the recent landmark white paper in sustainability in export finance explains (see below for its key recommendations).
The pandemic has also provided businesses with a clear incentive to focus on stakeholder value, from business development to governance and control through to talent management.
Export credit agencies (ECAs), development finance institutions and multilateral lending agencies are also prioritising sustainability by embedding ESG provisions in their products and solutions in order to support the transition to a more enlightened form of economic development.
These agencies’ role can be transformational over the next few decades as they support export, trade and growth while helping businesses determine the investment case for change and drive this change at scale.
Take Northvolt, a European supplier of electric battery cells and systems, which sourced $1.6bn debt financing from a consortium of financial institutions along with the German and Japanese agencies to support the growth of the battery sector in Europe.
Similarly, Dogger Bank – soon expected to be the world’s largest offshore wind farm – recently closed £2.5bn-plus ancillary facilities with the support of French, Swedish and Norwegian agencies, and is in the process of driving the transition to renewable energy sources at scale.
Finance agencies are taking a more active role in providing products and solutions that contribute to sustainable development.
That means supporting further cooperation across the public and private sectors, adopting the Organisation for Economic Co-operation and Development (OECD) Agreement on Officially Supported Export Credits and encouraging new behaviours and regulations to enable export and trade flows at scale.
To better understand the agencies’ potential role, the International Chamber of Commerce (ICC) and the Rockefeller Foundation commissioned International Financial Consulting Ltd and Acre Impact Capital to produce an independent white paper[2] on the current state of sustainability in export finance.
It presents views of export and agency finance stakeholders, and makes recommendations to increase export and trade flows towards sustainable development.
By definition, export and agency finance contributes to sustainable development by enabling the private sector’s participation in the financing of export and trade flows where they matter most.
But it also impacts on ESG performance through ensuring the necessary due diligence procedures and processes are followed.
For example, the agencies conduct environmental and social impact assessment over two decades and follow associated risk management practices such as Equator Principles, IFC’s Performance Standards and the World Bank’s safeguard policies.
Additionally, the agencies observe a detailed governance and control to ensure debt sustainability, compliance and execution.
However, export and agency finance is not considered part of the sustainable finance ecosystem, where loan and debt capital market products dominate the market, along with associated green, social and sustainability and sustainability-linked loans and bonds.
According to the white paper, the volume of sustainable export and agency finance amounts to $28bn, around 21% of $134bn total transactions in 2020 – a blip compared to the global sustainable debt issuance of $700bn in the same period as reported by Bloomberg[3].
The dynamic is changing, though, as governments and sponsor countries look to include sustainability in the agencies’ broader mandate worldwide.
For example, seven European countries – Denmark, France, Germany, Spain, Sweden, the Netherlands and the UK – launched the Export Finance for Future initiative in April 2021 to help reshape their export, trade and growth strategies.
Meanwhile, the World Bank Group has a climate change action plan supporting green, resilient and inclusive development, and the OECD is also adopting the agreement to be consistent with global sustainability commitments.
Furthermore, some agencies are going beyond the agreement and sector accords to develop incentives to support emerging economies’ transition to a more sustainable product and supply chains for export, trade and growth.
However, it should be said that, for all the existing frameworks and definitions in the form of high-level principles, objective settings, definitions/taxonomies and new products, there is still considerable subjectivity as to what constitutes a sustainable transaction.
Clearly, there is a risk of divergence in the market that may hamper progress.
But sustainable finance – including export and agency finance – will surely emerge stronger in response to the pandemic and its related disruptions.
If it does, it will encourage corporates, public sector and financial institutions to collaborate and unlock meaningful lessons and opportunities for all to contribute to social and economic development in a more sustainable way.
The landmark white paper represents progress in helping to underpin the role of export and agency finance to support export, trade and growth for a sustainable future.
Semih Ozkan is a trade finance director in an international bank. He is also regional head of the International Trade and Forfaiting Association (ITFA), and adviser to the ITFA Middle East Regional Committee
This article was taken from Issue 2, 2022 of The Treasurer magazine. For more great insights, log in to view the full issue or sign up for eAffiliate membership
