Frank talking for ECAs on ESG: On comparing apples and pears

Transparency, measurement, consistency and collaboration. Those are the four watchwords emerging from discussions at TXF’s sustainable finance and resilient infrastructure event on 9 February on how export credit agencies can learn from each other in terms of sustainable finance, managing their COP26 commitments, and sticking to the UN Sustainability Framework principles of ‘do no harm’ and do good. Frankness – it’s another word for transparency – will remain important in the discussion. 

ECAs are going to have to tread carefully. TXF data shows the cumulative total volume of sustainable export finance deals in the five years to end 2021 was $109 billion across 353 deals. There’s progress, but a long way to go. And in a wakeup call to potential ‘greenwashing’ last week, the European Union's markets watchdog ESMA, says it will draft a legal definition of greenwashing to underpin enforcement action. It’s a shot across the bows that regulations such as EU Sustainable Finance Disclosure Regulation (SFDR) could be better enforced. Meanwhile, last week, commercial research company Morningstar removed 1,200 environment, social and governance (ESG) funds with a combined $1.4 trillion in assets from its European sustainable investment lists after tightening its criteria on ESG tagging, as it believed those funds were not delivering on their stated ESG goals. 

The Swedish, Danish and Dutch ECAs, (EKN, EKF and Atradius Dutch State Business) are advanced in their awareness of ESG issues and they have complimentary expertise and challenges. They discussed their progress in terms of products, policy, incentives, and disincentives in 2022 with TXF. How replicable is their experience to other ECAs with divergent fossil portfolios?

Transparency is important

ECAs with a lower fossil fuel portfolio could be said to have it easier than others, but all three agencies highlighted the importance of transparency and also the challenges of using common (and science-based) methodologies so they are not ‘comparing apples and pears’ and on focusing on climate ‘adaptation’, which is as important as mitigation. 

Climate has been one of the core strategic focuses in the Netherlands for Atradius DSB. The Dutch ECA has been working on incentives since 2019 and in early 2021 it launched its ‘green label’ scheme to track progress on greening its portfolio. “Over the last couple of years, we have seen an increasing volume of new transactions that we can classify as green, ranging from SMEs and their off-grid solar systems, green ships to large offshore wind farms,” says Arjen Walbroek, senior lead sustainability, team strategy & international relations at Atradius DSB.

Atradius DSB also launched a new green incentive in the fourth quarter of 2021 in the form of a product called ‘green cover’. This is for Dutch entrepreneurs who want finance to invest in green technologies and, for example, investment loans for increasing production capacity in green capital goods or scaling-up innovations.

The incentives programme is expected to to expand this year. Atradius DSB is increasingly looking at ways to mobilise private capital to help fund the energy transition. “This highlights the importance of transparency with respect to both incentives and disincentives,” Walbroek says. “The green label programme and our mapping fossil fuel exposures [about a quarter of the portfolio is fossil related], has already been introduced by Atradius DSB. But we need to work together on climate related reporting as we don’t want to be comparing apples and pears, rather apples and apples.”  To that end, Atradius DSB is planning on reporting on its fossil and green related exposure for the second year running and is looking into adding the green label to its export-exposed reporting on a transaction level.

Inspirations for incentives

EKN has been taking a slightly contrasting approach. “We started off in the opposite direction to our friends at Atradius,” says Karin Wessman, head of sustainability at EKN. The Swedish ECA also launched its first green product in 2021, but that was focused on export-related domestic green transition. “Now we are developing a green export credit guarantee that is very much inspired by Atradius. This is one example of how valuable it is that some of us are moving ahead on certain areas and we can learn from each other and also then create a level playing field,” she says, adding, “We will be launching our green export credit guarantees for the sort of bread and butter type of transactions that we do at EKN, which are often quite small.” The inspirations for this are the EU Taxonomy and green bond standards.

However, there is one challenge that Wessman argues will require more collaboration. “What is a ‘do no significant harm’ criteria that makes sense when you look at activities where the exported goods will be used far beyond European borders?”

There is a need for nuance for those incentives. She points to Swedish exporters selling electrical mining equipment that can help decarbonise the mining sector.

The ECA ‘green stamp’ of approval?

“We've all collectively in the ECA community, been struggling with what we can offer as incentives for both large green projects, but also for smaller transactions,” Wessman notes. “What's increasingly clear to us is that the fact that we provide a green ‘stamp’ as a state actor is a large incentive in itself.”

Being able effectively to communicate and being transparent to exporters and financiers about “what is green and what is not” is one way ECAs can help incentivise sustainable activity. “We are exploring what we can do within the current rules and regulations, and how together we can change the OECD [Consensus] frameworks too,” Wessman says. 

Net zero targets as ‘build it they will come’?

Denmark has an ambitious target set around COP26 for achieving net zero by 2045, and by 2030, EKF expects to be financing green projects worth €27 billion. Kristin Parello-Plesner, director, head of ESG at EKF says, “It doesn’t make sense having a bold target like this if you don’t put it at the core of your strategy.” 

The ambition is to make Denmark more prosperous, acknowledging that even if Denmark is green, it won’t have a significant global impact unless it can export it. What does that mean in real terms? “We're going to promote exports and internationalisation and green transition to the benefit of Danish companies and investors by providing increasingly internationally competitive financing,” Parello-Plesner says. Underpinning the work towards carbon neutrality are, “the gradual cessation of export financing for fossil fuels and more green exports. We're already heavily engaged in wind projects which is also a key initiative that we will continue to be best in.”

EKF’s focus is also shifting further toward releasing both the potential of large corporates internationally and also increasing SME support. In terms of incentives, in 2021, the Danish ECA also launched a green guarantee to allow it to be more flexible and take more risks. This is on the back of its Green Future Fund which became operational in 2020. EKF is also measuring and accounting for carbon on the basis that the more you can measure, the more you can manage. “We’re working on defining the baseline of our portfolio and on the back of that, we will be able to have much more strategic discussions with our commercial partners, banks and exporters,” Parello-Plesner says.

Reporting methodologies a challenge: Ask science

There remain challenges of methodologies for emissions, and how to find common methodologies that avoid double counting. EKN is also reporting under Task Force on Climate-related Financial Disclosures (TCFD), with a pilot report for 2021 out soon and a joint report with SEK for 2022. There are methodologies around, but as Wessman says, “It’s not very clear how we can adapt them as ECAs.”

EKN has found value in underpinning its actions in science. It engaged its Scientific Climate Advisory Council to ask whether it had the right financial information to make informed judgements on two particular issues – renewable hydrogen and natural gas. It added value in an unexpected area, Wessman says, by, “Helping us to understand the financial risks in terms of, for example, fossil fuel projects.”

Pricing is going to become a vital incentive to help green export finance, and better information around pricing these incentives is important.

‘Lock-ins’ and infrastructure finance

For instance, Wessman cautions against the danger of ‘institutionally locking in’ developing market countries into longer term fossil fuel projects rather than transitioning them straight to renewable energy projects. This risk is when ECAs and financiers are approached to finance a fossil project based on financial information that is not regularly reviewed, and when costs are not revised on a regular basis, particularly when renewables project costs are becoming relatively lower, and could even be cheaper on longer term infrastructure projects.

Technology is moving fast. For example, SSAB, the Swedish steel producer, which emits 10% of Sweden’s carbon dioxide emissions, began an industry collaboration with a power company and mining company and some public support to produce fossil free steel. “Everybody was laughing at their timeline. But nobody's laughing anymore because Volvo Construction Equipment has produced the first hauler from fossil free steel,” Wessman says. It remains expensive, and requires large amounts of additional green electricity to produce that Sweden does not yet have, but nonetheless, SSAB is cutting its timescale to eliminate carbon dioxide emissions from 2045 to 2030. “This requires additional investments in green electricity infrastructure in Sweden. This is where developing and developed countries are similar in the fact that we all need to make huge investments and we need to make them fast.”

Atradius DSB, meanwhile, along with its green label scheme, has been developing a methodology to map fossil-related exposure to report progress on whether disincentives and incentives are working, Walbroek says. Atradius DSB is also supporting infrastructure projects that involve climate adaptation, which Walbroek argues is as important as mitigation, and the Netherlands is looking at how to address the “adaptation finance gap” with blended finance between private and public sectors.

EKF too is helping support enabling green investment in the new Power-to-X (PtX) projects in Denmark which aims at reducing carbon dioxide emissions, balance the Danish power system and provide export opportunities for green fuels and PtX technology. It is also working on engaging other sectors such as transportation and construction materials. 

Collaboration is going to be key

The momentum for change after COP26 is something that the ECAs feel will help with transition. There is still clamour for modernisation of the OECD Consensus to help build on energy transition. There are now multiple forums for the ECAs to discuss change. Berne Union, for instance, has a working group on ESG, and there are other industry-level initiatives such as the Glasgow Financial Alliance for Net Zero (GFANZ), and the Export Finance for the Future (E3F) coalition, and there is scope for all these coalitions to broaden.

“We want to work with ECAs that have set significant targets and find out how we can both find the flexibility within our mandate to push in the right direction and at the same time push at the political level to see that we are getting the right instruments and the right structures around what we're trying to accomplish,” says Parello-Plesner. “Denmark has a long tradition in this field. We've worked historically with very hard to create longer tenors, for example, for wind energy. That's paid off really well. There's a lot to build on that we can create and push in the same direction, building on that historical experience and knowledge.” 

“I had not foreseen a year ago that so many countries would actually go out to commit to alignment with the 1.5 degree centigrade target. When governments committed, it makes our life much easier because our government is pointing in the same direction for many of us and that facilitates dialogue and cooperation. It makes sure that as one, this year, you do not have to do everything yourself. You have different specialties and then you learn from each other,” says EKN’s Wessman. “Our challenge is how does it all fit together? We have to roll up our sleeves and make sure that we do not lose track of all the different commitments.” What are the important steps that ECAs can take collectively? First is methodologies second is policy commitments and incentives is third. “If we can really get action on that, it's going to help us all. But our governments have said their piece. We know what they want us to do.” 

Being held accountable

If ECAs are to avoid criticisms of greenwash, common methodologies are vital. “It's really important that we find a level footing or a joint approach in order for us to be transparent and able to compare and be consistent in our approach,” says Parello-Plesner. That means being able to compare both between countries, but also, like the rest of the financial sector so, “there's an opportunity for external stakeholders to actually look at us and compare and hold us accountable. It is extremely important that we collaborate and it will be to the benefit of everyone. We have no advantage in just going ahead and developing our own methodologies of accounting approaches.”

Become a TXF subscriber for unrestricted access to TXFnews.com 365 days a year

Contact us for individual and team rates by emailing subscriptions@txfmedia.com

Take a look below at some of the exclusive subscriber articles published last week

Full details revealed of the bank syndicate for Axpo’s new €2.5 billion RCF
Axpo Holding, Switzerland's largest producer of renewable energy, has signed a new...Read on here

Sirius Petroleum nears close on $200m oil field loan
Africa-focused oil and gas development group Sirius Petroleum is in the final phase of securing a...Read on here

Trailstone’s annual revolver oversubscribed and upsized
UK-based gas and power trader Trailstone Renewables has reached financial close on an upsized one-year...Read on here 

Zenobe Energy raises £241m for e-bus projects
Zenobe Energy has raised £241 million of limited-recourse debt to finance the roll-out of up to...Read on here 

More details emerge on Gerald Group’s RCF
In late January, independent and employee-owned metals trader Gerald Group closed its annual one-year RCF at...Read on here

Obton refinances Italian solar PV portfolio
Denmark-based solar developer Obton has refinanced its 117MW solar PV portfolio in Italy...Read on here 

Axicom bids due end of March
Final bids are due on March 22 for Axicom – the Australian towers portfolio company owned by infrastructure investors led by...Read on here 

JERA closes on debt for first US renewables investment
JERA Renewables has raised a tax equity bridge loan and the construction funding required for its 301.5MW El Sauz wind project in Texas...Read on here

Gerald Group appoints two woman executives in leadership roles
London headquartered metals trader Gerald Group has appointed two new senior women executives to its leadership team: Daniele La Porta is taking on the role of...Read on here 

Alyson Henshaw appointed CCO for MENAT HSBC
Alyson Henshaw has been appointed as the new chief commercial officer, global banking, Middle East, North Africa and Turkey (MENAT) at HSBC...Read on here

EKF expands large corporates coverage team
EKF has expanded its team with the appointment of Tina Myler as vice president within the large corporates and institutions coverage...Read on here 

Janna Webskowski joins C2FO
Janna Webskowski has joined working capital platform C2FO as director, supplier marketing, for Americas...Read on here 

RBC makes senior hire for Australian DCM team
RBC Capital Markets has appointed Andrew Brown to head up its corporate debt capital markets business in Sydney, Australia...Read on here

Borton moves to MonetaGo
Mark Borton has joined MonetaGo, a financial technology company, as managing director to head the company’s Australia and New Zealand operations from Sydney, a new role...Read on here