EXF0032

Additional written evidence submitted by Global Witness

Global Witness has prepared this additional submission for MPs to provide extra information ahead of the final evidence sessions of the UK Export Finance inquiry.

The written submission by UK Export Finance makes very little reference to climate change or the scientific consensus that we must keep fossil fuels in the ground to avoid catastrophic climate breakdown.

This is because the activities of UKEF related to fossil fuels cannot be justified when viewed through the lens of physical science. No reasonable justification has been provided for UKEF’s massive support for fossil fuels, as it cannot be justified under the UK’s international commitments.

In this short additional briefing, we have addressed some of the points made by UKEF to help MPs more effectively hold UKEF and Ministers to account.

We urge the committee to recommend that UKEF join the growing number of financial institutions around the world and take steps to phase out fossil fuel support as soon as possible.

Written submission by UK Export Finance

“(UKEF is) bound by the OECD Common Approaches for Officially Supported Export Credits (“The OECD Common Approaches”, and bound by the actions of other export credit agencies.”

UKEF are not ‘bound’ by these arrangements. They are signatories to the Common Approaches, but there is nothing stopping organisations that are signatories up to this agreement from going beyond the Common Approaches. For example, at the minute, the Common Approaches restrict coal power financing to more efficient coal power plants. But the French Government, in 2015 in the run-up to the COP21 summit in Paris, went further than this and ended all unabated coal support via their Export Credit Agency. In January 2019, the Canadian ECA, Export Development Canada, also ended all support for coal as part of their new climate change policy.[1] This shows that the OECD Common Approaches are not a barrier to UKEF taking more bold action, and are not an excuse for inaction on climate change.

The only way for the UK to be the ‘leader’ that it likes to claim it is, is to see these standards as a bare minimum and join others in going beyond them.

There is nothing preventing UKEF from going beyond the OECD Common Approaches standards. They should be viewed as a bare minimum – a floor, not a ceiling.

“UKEF’s provision of support is demand-driven”

UKEF is not a passive tool. They have agency and must be aware of their position as influencers, and that Government support shapes – and sometimes distorts - markets. Claiming that UKEF is purely demand-driven ignores that their remit is shaped by politicians.

Our evidence shows that the UK Government takes active steps to promote UKEF financing to particular companies (e.g. Philip Hammond invited a selection of firms including oil and gas firms to a roundtable in Buenos Aires to promote UKEF offers[2][3]). We see no evidence that UKEF or the Government has made the same kind of sustained efforts to promote renewable energy investment.

Therefore, UKEF is not merely a passive agency that can only respond to demand. Even if that was the case, clearly this approach is causing problems as their current portfolio of support runs counter to UK support for the Paris Agreement, and particularly the commitment under Article 2.1(c) to align financial flows with low carbon development.

Public finance has a key role in providing signals to private finance, and UKEF is providing the opposite signal to the rest of the UK Government.

UKEF is not legally able to discriminate between classes or types of exports, but will normally refuse support for projects that do not meet international environmental and social standards.”

By being signed up to the OECD Common Approaches on export credits, UKEF are already discriminating against certain types of exports – for example, the Common Approaches now stipulate that signed-up export credit agencies may not fund dirtier, more inefficient coal plants[4]. As mentioned previously, other ECAs have gone further than the Common Approaches.

Liam Fox suggested at an International Trade Committee meeting, when questioned about UK Export Finance, that he was ‘not in favour’ of UKEF supporting new coal plants, and referring to a specific project, he was ‘not willing to sign off’ a particular coal investment decision in South-East Asia.[5] This at least implies that the Secretary of State has power, if they so wanted, to change the investment criteria.

A legal opinion prepared by Leigh Day & Co and Blackstone Chambers (provided with this briefing) asserts that the Government already has the legal power to make exclusions and exceptions for export finance if it so wanted. It also notes that in several other areas, UKEF already operates a number of strict policies, including excluding many countries from export finance cover. UKEF also rightfully refuses to provide cover to projects using child labour, citing the UN Convention on the Rights of the Child. This is an evolution of UKEF’s previous position, where UKEF previous policy was that “there must be exceptional circumstances for (UKEF) to provide cover for projects which involve child labour.”[6]

These restrictions above have not been brought into legal question, and clearly they have evolved over time. If UKEF is willing to exclude projects based on ethical or social harm such as child labour, then it is surprising that they are not willing to exclude projects based on the most serious of ethical and social harm issues – that of climate change, which is causing untold harm across the globe.

Navraj Ghaleigh, an expert in climate law at the University of Edinburgh, testified that UKEF could address climate change within the terms of its current legal boundaries, laid down by the Export and Investment Guarantees Act 1991: “I don’t think you need to reset (the legal framework); I don’t think you need primary legislation. I think the 1991 Act is fine as it is. What you need is a new policy, which must be considered in the process of the variety of export finance products… what would be required would be to generate a climate change policy that requires UK Export Finance to measure and monitor the CO2 intensity of its lending portfolio; assess the risk of its climate-related investments; implement recommendations of the financial stability task force, which go back to what you were saying about stranded assets; and integrate climate change-related considerations into its lending practices.”

In short, UKEF is not legally powerless to take action on climate change – it is simply a matter of the will to do so.

“UKEF does not subsidise fossil fuels, or products and services in any other sector.”

Regardless of whether UKEF’s support for fossil fuels meets the UK Government’s definition of a subsidy (UKEF support does, however, meet the World Trade Organisation’s internationally-agreed definition of a subsidy[7]), there is no denying that UKEF’s support enables fossil fuel projects to go ahead by removing the risk from the private sector and sending signals to markets that the UK Government approves of fossil fuel project exports.

Talking points for MPs

Members of Parliament may want to ask UKEF and responsible ministers:

-          Why does UK Export Finance not have a climate change policy? (Although UKEF has an ‘Environmental, Social and Human Rights Policy,[8]’ it does not mention climate change at all. Climate change is not considered in any serious way when UKEF makes decisions to support projects. Many of UKEF’s OECD peers have much more comprehensive and serious climate change policies. For example, Export Development Canada revised their 16-page climate change policy in January 2019.[9] Canada’s export agency EDC now has a policy ending coal investment and committing to reduce its emissions.  Does UKEF have anything like that?

-          How did UKEF’s practices change when the Paris Agreement came into being, as an unincorporated treaty the UK Government has ratified? (The Paris Agreement was signed by the UK in April 2016. Lord Bourne of Aberystwyth, who signed on behalf of the UK as Parliamentary Under-Secretary of State for Climate Change, said on its signing, “This is an agreement like no other: today an unprecedented number of countries will sign, indeed have signed, the landmark deal that we made in Paris. A deal by which each and every one of us will take action to reduce the risks and impacts of dangerous climate change and…take action to mobilise all financial flows towards sustainable growth.”[10] Did UKEF take any steps at all to change its policy in its wake of this unprecedented treaty?)

-          UKEF is due to revise its Environmental, Social and Human Rights policies, as part of a normal cycle of review in 2019. What type of revision will this be and will it include some action on climate change? UKEF should not be allowed to claim that their regular review of their ESG policies is evidence of them reacting to the inquiry. They should be pushed to be specific about what they will include in this new policy.

-          How does UKEF currently take the Paris Agreement into account in its support practices? (How does Government policy on climate change impact on the day-to-day work of UKEF? How does climate change shape lending decisions?)

-          If you don’t believe that UKEF can’t turn down whole classes of exports, do you believe it’s legally possible for UKEF to design a climate policy that would screen out exports to high-carbon projects?

-          How are UKEF’s support for exports to expand or construct oil refineries in Bahrain and Oman in any way consistent with the Paris Agreement that the Government has signed up to?

-          Will UKEF pledge to create a climate change mitigation framework, aligned with the 1.5c goals of the Paris Agreement, with appropriate safeguards to guard against funding projects that are inconsistent with the Paris goals?

-          On public and private risks:  UKEF has a role in reducing risk for the private sector. Given that investments in fossils are causing climate change risks, is UK export finance to fossils actually creating more risks for the public and for global citizens i.e. externalizing those risks to the public both in the UK and abroad?

-          On upstream oil and gas:  Since existing fossil fuel reserves have enough emissions well beyond the Paris agreement, has UKEF done any assessment about the impact of risky investment in oil exploration on the UK public? The World Bank has a strong policy on upstream oil and gas, why has UKEF not adopted something similar?

-          Costs and benefits: Does UKEF use any shadow carbon pricing? Does UKEF use the UK Treasury’s ‘green book’ and weigh up economic benefits of fossil fuel investments against their costs on air pollution and climate impact risks?

-          Private sector and renewables:  What is UKEF doing to help UK companies take up the private sector opportunities of the low-carbon transition in emerging markets? Is UKEF doing enough to take account of the rapidly changing global market?

-          TCFD and climate risk disclosure: How are UKEF/DIT engaging with companies on climate risk? Are UKEF and DIT taking into account any of the recommendations of the Taskforce on Climate Related Disclosure led by Mark Carney at the Bank of England?  In Japan for example, the METI (Japan’s Ministry of Trade and Industry) has a study group on the TCFD. Does DIT have anything like that internally?

-          On coal: Given UKEF is no longer generally investing directly in coal plants – is UKEF taking any steps to update its guidelines given UK leadership of the Powering Past Coal Alliance?  Canada just categorically ended coal investment by its export credit agency.

-          Stranded asset risks. Is UKEF analysing potential of stranded assets by its investments? How is UKEF taking into account the economic and financial risks of fossil fuels investment, for example, given that that more than 40% of coal plants are losing money globally?

-          Social and environmental impact assessments: What metrics are used to analysis the environmental and social impacts of any energy-related project? Do these consider the Paris Agreement and external costs (i.e. on health, land-use, water) associated with fossil fuels? Are there thresholds that prevent a project from going ahead?

-          GHG accounting: DFID has adopted policies to mainstream climate mitigation across its whole development portfolio, this includes account for GHG emissions across their projects. Why hasn’t UKEF adopted the same policies? Does UKEF measure GHG emissions associated with its projects?

-          Cross-government alignment: The UK cannot call itself a climate leader until UKEF adopts policies aligned to the Paris Agreement. Other governmental departments such as the FCO, DFID and BEIS are adopting Paris Aligned policies. Why is UKEF deciding to hold contradictory policies on energy compared to its departmental peers? By supporting fossil fuels, how does UKEF justify undermining the public money spent on tackling climate change by its departmental peers?

-          Paris Alignment: What is UKEF doing to make sure it becomes Paris aligned, is it looking to adopt consistent climate policies to other governmental departments? If not, why?

-          Industry support: What is the ratio of UKEF’s support to fossil fuel and green related industries? Green industries have publicly stated that it is very difficult to export their expertise and technology (esp since subsidy cuts)? What steps is UKEF taking to ensure a level playing field and provide more support for green industries.

-          Cross subsidies: Are UKEF cross subsidising fossil fuel companies that are receiving subsidies elsewhere through other government policies? For example, BP/Shell receive tax breaks – do they also receive subsidies through UKEF? How are they ensuring that cross-subsidising are not happening?

-          Transparency: It is very difficult to track and monitor the projects of UKEF. Will UKEF be taking steps to improve transparency (from project generation, to implementation, to monitoring of impacts)?

March 2019