Striking a balance: BU and ICC convene workshop to boost sustainability in export finance

On 27 and 28 February a joint workshop on sustainability organised by the Berne Union and the International Chamber of Commerce (ICC) brought together a multidisciplinary group of practitioners from across the export finance industry. Across the two days participants discussed practical implementations of sustainability in export finance across policy, strategy, technical analysis and delivery.

The 100 workshop participants from 24 countries included an even mix of practitioners across ESG, business origination and underwriting. Some 60 firms including ECAs, banks, exporters, EPC contractors, the Berne Union, ICC, LMA and OECD were represented.

The meeting was hosted in London by global law firm Norton Rose Fulbright and follows previous cooperation between the Berne Union and the ICC around sustainability in a series of workshops which took place in 2018 and 2019.

Paul Heaney, secretary general of the Berne Union, said “This workshop served to affirm the growth of sustainable lending activity in the market as well as the critical relevance of sustainability for the future development of the industry”.

Chris Mitman, chair of the ICC Export Sustainability Working Group, said “The workshop underscored the importance of pragmatic and simplified implementation with more focus needed on impact outcomes to balance the current risk-based approach”.

David Milligan, partner at Norton Rose Fulbright, said “Open communication and the exchange of ideas are essential to achieving real progress. It was wonderful to see so many senior stakeholders take the time to come together for a practical workshop to discuss how to best tackle some of these global challenges and enact meaningful change.”

Key takeaways from the workshop

Sustainability is a strategically and commercially important issue for the export finance industry and this has only increased in recent years.

In a survey of workshop participants, more than 90% of respondents indicated that the sustainability agenda is ‘very’ or ‘strategically’ important in their organisation’s business strategy. Despite recent shifts in the global political environment, the mood among participants was overwhelmingly optimistic, noting the significant progress in recent years in both policy and the shift towards transactions delivering positive sustainable impact.  The reality of competing socioeconomic priorities requires a pragmatic approach which can effectively align all interests and export finance is well placed to do this by supporting the commercial viability of sustainable technologies and infrastructure.

The share of sustainable transactions is increasing and appetite for further growth is strong, with specialised products and programmes from ECAs in demand.

Analysis of export finance deal flow from TXF Intelligence shows a significant increase to $43 billion in green and socially sustainable transactions in 2024 – 30% of total volumes. This compares to $23 billion (16%) in 2018.  Volumes look set to continue growing with the majority of participants indicating they are actively seeking to grow the share of sustainable transactions in their portfolio. Hard quantitative targets among banks in particular are driving competition for suitable projects particularly in the renewables space.

The OECD modernisation has improved the industry’s capacity to support more sustainable transactions, with extended tenors – both generally and under the CCSU specifically – delivering the most significant impact.

Around 30% of survey respondents reported that they have already been able to apply the new OECD rules to support sustainable transactions with another 50% expecting to do so soon.

Underlying business has shifted as a result of sustainability. The industry needs to adapt its thinking as a consequence.

The majority of ‘green’ transactions – renewable energy and green transportation, in particular – have been in high-income countries, with implications for origination and pipeline development. This has also led ECAs to introduce new and more flexible products targeting green business, including untied and domestic export support.

To be effective, the industry must adopt a nuanced and inclusive approach to transition in emerging markets. EDMEs face huge challenges achieving finance for transition and imposing unrealistic standards and requirements is only detrimental to broader sustainable development objectives.

Support for new sectors, unproven technology and socially sustainable projects can be challenging.

Although the industry sees great opportunity in supporting sustainable technologies (84% of survey responses), both banks and ECAs flagged challenges for their risk appetite and pricing tolerance, as well as resource capacity for assessing technical performance of sophisticated emerging technologies. For ECAs resource prioritisation is key and capacity to stretch support in these cases is connected to overall strategy of both organisation and guardian authorities.

In contrast to green, projects with social impact are more concentrated in EMDEs and typically structured as sovereign debt rather than project finance. Pressure on sovereign balance sheets, exacerbated by the COVID-19 pandemic has resulted in a suppressed flow of social deal flow since 2020, albeit with some indication this is picking up again in 2024. A lack of clear and harmonised standards around what may be classified as a socially sustainable transaction is a further impediment to challenging greater support to this sector although a number of existing frameworks could be considered for adoption to compliment the LMA definitions.

Increasingly demanding environmental and social due diligence (E&S) burdens require a pragmatic approach which recognise the different roles and capabilities of the various stakeholders.

Stringent E&S requirements are challenging for exporters and EPCs, consuming significant resources, and increasing both project costs and time to close. Sovereign-sponsored projects are often more challenging, both in terms of technical capacity and cost issues but this is where much EDME social infrastructure is also largely developed. Capitalising on the unique strengths of different counterparties – and recognising their limitations, pressures and red lines at an early stage – is essential to align interests and effectively distribute both risks and E&S burden, and will ultimately ensure faster, smoother and more reliable completion of sustainable projects.

Realistic and appropriate classifications of transactions as well as budget caps for classifications B and C were also discussed. Exporters should remain at the centre of the process, with suitable feedback-loops to educate on the rationale of E&S approaches and adjust where necessary. Investing in face-to-face meetings early in the project and keeping clients informed about any change to relevant standards is vital.

It is recognised that banks close transactions and therefore important that they are equipped to be not only a mediator but project leader. A bank which has in place a strong and effective E&S team which can absorb more of the due diligence burden was acknowledged as an attractive advantage by exporters.

For ECAs, prioritisation of resources towards projects within their wider strategic focus is important. Although increasingly versatile in their support with a greater array of more flexible products, ECAs are also under increasing pressure with mandate creep extending beyond export support to everything from correction of global supply chain shifts, implementation of industrial policy, private sector mobilisation, defence and national security – while sustainability remains strategically important, increasing resource allocation to E&S needs to be balanced and ultimately justified in the context of numerous competing priorities.

Development finance institutions have an essential enabling function through both capacity building and risk appetite. An originate to distribute model is an innovative way to absorb excess risk during the construction period before using guarantees to transfer to the private sector and free up additional capacity.

The industry should work to shift the focus and emphasis of communication from fear to opportunity, and from risk to impact.

There is sometimes a tension between the risks of E&S due diligence and the assessment of a project’s impact. Instead, the industry should aim to take a holistic approach. It is possible to clearly communicate how E&S risk translates to credit risk, as well as how it can often be a useful tool for enhancing positive impact.

It is important to harness the commercial profit motive of banks to help drive execution and to develop better incentives for growing sustainable business. More data on the relative credit performance of sustainable transactions would support this. With E&S now taking an earlier and stronger role in origination, education is required within organisations so that underwriters and executives can more quickly perceive deal viability through the lens of E&S.

In client communications, making the connection as well as clearly differentiating between E&S risk and impact labelling is important. There is also work to be done in better communicating the positive impact of export credits, establishing a recognised ‘brand’ which helps improve understanding of both the products and the industry’s approach to sustainability.

Continuing a broad and inclusive dialogue across the industry is the most effective way to improve partnership, alignment and impact.

In the pre-meeting survey, participants indicated that ‘improved knowledge sharing’ is the most effective way to enhance sustainability efforts across the industry. Although 24 different countries were represented in the workshop, the group acknowledges its heavily European composition and is determined to reach out to the widest pool of perspectives for future engagement.

Additionally, the group agrees that technical input from a wider group of development finance institutions would also be helpful. Participants representing the early-career professionals serve as a reminder that positive impact is an important motivator for those who will develop the industry in future.

Head to TXF's sustainable deals dashboard to find out more about the progress of green and social dealmaking in export finance.