Could climate become the catalyst of greater multilateral cooperation?

The momentum to tackle climate change is building across international finance and is now widely recognised as an economic as well as environmental imperative. Is this the issue that will drive progress on cooperation between different spheres and silos?

Climate change is now widely recognised as one of the most (if not the most) important challenges facing the world today

There has been a rapid acceleration of concrete action to tackle this at all levels of society in the past few years. Not only has the global response to climate change quickened, but it has also become both broader and deeper too. The world’s biggest economies have set ambitious targets towards net zero carbon emissions which are both measurable and measured, with benchmarks leading up to the 2050 deadline set by the Paris Agreement.

Climate policy is now clearly understood as a tool for delivering not only environmental goals, but also economic ones too. This is especially pertinent when so many countries are contemplating how to rebuild their economies in the wake of the COVID-19 pandemic.

For public sector policy institutions – including ECAs – there is a huge opportunity in the post-pandemic reconstruction to harness increasingly broad mandates and to deliver positive impact on both economic and climate goals simultaneously.

For the private sector, the need to stay ahead of the curve of an evolving economy is driving change at pace.

The export credit insurance industry is reorienting itself towards a new paradigm

We can see this reorientation already in the types of transactions being financed, with a notable increase in investment and support for projects targeting emissions reduction in both clean and renewable energy and also in systems to deliver a more efficient and more innovative circular economy. We can also see a shift in the understanding of climate risks and the role these often now play in impact assessment and, increasingly, in eligibility and credit decisions.

Some countries have explicitly moved to eliminate public finance of fossil fuel industries, and in the case of the Export Finance for the Future (E3F) group of seven national governments, this has been directly recognised in the mandate of their ECAs.

Variously, ECAs are benchmarking and incentivising climate positive business, ramping up support for renewable energy and transition finance, cutting support for the most carbon intensive industries and committing to net zero targets. Just a handful of examples are published in this very newsletter, featuring case studies from Atradius, Bpifrance, EDC, ICIEC, NEXI, SINOSURE and UKEF.

Every country, industry and institution has a unique starting point and operates within its own set of pre-existing constraints

Not every industry has an equally straightforward path to decarbonisation. And this applies equally at the level of national economies and financial institutions.

Financiers of trade are both investors in and also backers of the real economy which delivers energy, transport, agriculture and essential infrastructure. Because of this all parts of our industry face at least some conflicting priorities between considerations of climate and – for example – trade, employment, energy access, or social welfare.

In this reality, setting and meeting climate objectives is not straightforward.

Emissions reduction targets for 2030, or to 2050 appear startlingly near for businesses whose lending or underwriting tenor is measured in periods of three, five, 10 or even 20 years

Managing change at the portfolio level can be complex and slow and presents a range of risks from physical climate to reputation. Developing a climate positive pipeline quickly filters into all areas of business from underwriting, risk assessment, product development, origination and even client communications.

Managing our own institutions’ impact requires us to also manage the impact of our clients. This means identifying and planning a transition which takes account of the unique constraints of each industry and each economy. It requires proactive engagement and a collaborative approach from all the different layers of public and private sector finance.

This does not mean that we all need to be completely aligned or that we must all do exactly the same things in exactly the same way, but it does mean that to progress we should aim to develop common understandings and to ensure that there is the possibility of mutual translation between our various frameworks.

Radical change of the sort required to meet the objectives of the Paris Agreement cannot happen without joined-up awareness and collective action

The huge investment of expertise, energy and innovation we are currently seeing directed towards the challenge of climate change within our industry is very encouraging. However, there are numerous practical and policy issues which make real progress difficult. It will take widespread, concrete and coordinated changes to achieve the 2050 target of the Paris Agreement.

While the need for greater alignment in how we understand, approach and benchmark climate is broadly accepted, the present consensus is that any realisation of this will be partial at best, and likely split on a regional/regulatory basis. Competing standards make it difficult to align approaches, and if not supported within a suitable regulatory framework climate incentivisation falls into direct conflict with the concept of a level playing field. See Katharine Morton’s article for analysis of how the issue of incentives challenges ECAs’ climate ambitions.

The risk is that joined up climate action can easily be frustrated by the same challenges facing any multilateral initiative: competing systems, ideologies, regulation and a complex mix of commercial and political interests. The hope is that this is an issue which unites us so powerfully as to become a catalyst for progress in cooperative issues across the board.

“We need to work together to build a resilient global economy capable of withstanding the next worldwide crisis...that crisis is already here. It’s called climate change.”

Michael Bloomberg, from the introduction to the BloombergNEF Climate Policy Factbook:

Climate is a strategic priority for the Berne Union as much as for our Members

Our approach is to leverage what we already do to enable sharing of information, highlight expertise and enable cooperation between Berne Union Members and partner stakeholders from across international finance.

At our Climate Cooperation workshop in June, participants from ECAs, Eximbanks, DFIs, MDBs, commercial finance and insurance explored a selection of shared challenges around: the development of common green standards; how we can integrate climate into business processes; and how we can mitigate the risks inherent in financing new climate technology, or scaling up proven tech in new markets.

We will publish a summary of the outcomes of these discussions as a ‘Catalogue of Approaches to Climate’, later in the Autumn, and will continue to explore practical strategies for tackling these and other issues by maintaining the dialogue between Berne Union Members and other important stakeholders in trade, development and innovation finance. To keep informed about these initiatives, please sign-up here with your email.

The Berne Union will continue contributing to the climate challenge by helping our Members and others connect, share data and insight and direct the collective impetus to guide each of them on their individual climate journey.

Thanks to all of the authors within and without the Berne Union who have contributed to this special Summer Edition of our BUlletin newsletter – I hope you enjoy the read!