The Organisation for Economic Co-operation and Development (OECD) has revised its ‘gentlemen’s agreement’ on export credits, allowing the UK and other members to offer favourable terms for green transactions.
- The new Arrangement will make it easier for businesses involved in green goods or services to expand their international presence.
- Participating countries include the UK, the EU, the US and Australia; alongside Canada, Norway, Switzerland, New Zealand, Turkey, Japan and Korea.
- Shifting the focus of export credit will have a significant influence over the direction of capital flows.
The OECD has updated its Arrangement on Officially Supported Export Credits, allowing participants to offer greater incentives for projects that could help in the fight against climate change. A wider range of projects will now be included, with more generous terms and conditions.
“The modernisation package agreed by Participants to the Arrangement on Officially Supported Export Credits is a great milestone to help increase the impact of trade and finance flows on securing our climate objectives,” said Mathias Cormann, secretary-general of the OECD.
A gentlemen’s agreement on export credits
Export credits are provided by dedicated national agencies as a means of supporting their country’s exporters in competing for sales overseas. Though they come in various forms, from direct credits to insurance on conventional loans, they are essentially a type of borrowing. Domestic companies are given credit to carry out their operation, contributing to the country’s economy before paying back their dues in accordance with certain conditions.
Since 1963, the OECD has governed the use of export credits to ensure that they are fairly awarded. In 1978, 11 of its members reached a ‘gentlemen’s agreement’ to follow the same set of guidelines. By standardising the terms and conditions that each participant was able to offer, they hoped to encourage competition based on quality and pricing rather than on the ease of exporting.
Participants included the UK, the EU, the US and Australia; joined by Canada, Norway, Switzerland, New Zealand, Turkey, Japan and Korea. Over the years, their Arrangement has been updated a number of times. Now, it has been amended once again to encourage sustainable trade.
Latest update to encourage sustainable trade
In previous versions, the Arrangement has allowed favourable terms to be given for projects that could help in the fight against climate change. Under its latest rendition, this sector has been expanded to include activities such as carbon capture, low-carbon transport or the production of sustainable energy.
Projects that fall into this newly expanded category could be offered repayment terms of up to 22 years, a notable extension from the previous 18-year limit. For those in receipt of these terms, agencies will now be allowed to assign a lower premium rate to insurance coverage of export deals. Finally, the new Arrangement will allow for more flexible repayment schedules.
According to a participants’ statement, the new Arrangement will help to incentivise sustainable trade in the face of global economic constraints. Their efforts will be further supported by a simplification of the document’s text and the strengthening of its reviewal procedures.
Having come into force on 15 July 2023, the Arrangement’s success will now depend on its use by participant credit agencies. As the initiator of the original discussion, the EU is likely to take full advantage of the resulting changes. UK Export Finance has also confirmed its support.
A realignment of capital flows
Given its role in facilitating international trade, export finance has an enormous degree of influence over the direction of global capital flows. Historically, however, his power has not always been put to good use.
From 2013 to 2016, G20 countries provided around $36 billion in public finance for overseas coal projects. Over the same period, renewable energy developments received just $25 billion. Between 2016 and 2018, fossil fuel projects received around $31.6 billion per year in the form of export credits from G20 nations.
Gradually, however, this trend is beginning to change. In 2022, for example, the Dutch Government announced that it would restrict the export finance that was awarded to fossil fuels. At the same time, it began to offer more attractive insurance for businesses involved in alternative sources of energy.
Within the same month, UK Export Finance began offering deferred repayment schedules for projects in countries that are hit by climate-related disasters. This would allow the country in question to focus on its recovery, rather than scrambling to pay back its dues.
This shift in the focus of export finance is mutually beneficial. For the countries receiving new goods or services, it may help them to increase their resilience to the impacts of climate change or adapt to conditions already unfolding.
At the same time, the countries exporting their business stand to capitalise on the growing demand for sustainable solutions. Their exposure to risk will be greatly reduced, as their investments will prioritise the emergent sectors that are likely to maintain their value long into the future.
On either side of the bargain, export credit can help the countries involved to achieve their climate targets. For example, recipient countries could expand their adoption of renewable energy while exporters can mobilise capital in line with their commitments on climate finance.
With this in mind, we can hope that the OECD’s new Arrangement is simply the latest development in what ought to grow into a dominant movement. Its latest incentives will encourage the trade of climate solutions while limiting the appeal of environmentally unfriendly business.
SGV Take
Climate change is a global problem that cannot be resolved within the boundaries of any single country alone. By lowering the boundaries to trade that is aligned with net zero goals, we can help to ensure that new technologies and ideas are adopted at scale.
The influence of export finance is not restricted to the value of credit provided. Friendlier terms could mobilise capital from other sources, as investors may be persuaded by the increased likelihood that a project will proceed or that a company will enter additional markets.
As novel solutions begin to propagate all over the world, economies of scale will lower the costs of pricy solutions. Ultimately, the realignment of export finance can only be described as a win-win-win situation.
