Investors across the world are growing increasingly wary of financing fossil fuels—and for good reason. In an era of climate protest, carbon neutrality pledges and cheap renewable energy, oil refineries and gas fields look like risky bets. Over the last 10 years, divestment campaigners have successfully convinced a number of high-profile pension funds and university endowments to pull their money out of polluting industries. However, the movement hasn’t managed to fully shine its spotlight into every corner of the finance sector.
Until recently, export credit agencies (ECAs)—government-backed entities that fund domestic firms’ exports and overseas expansion—had sunk serious sums of money into fossil fuels without facing much backlash. Figures compiled by the research and advocacy group Oil Change International show that the world’s ECAs provided over $40bn annually to support fossil fuel projects between 2016 and 2018—compared to $2.9bn for clean energy.
UK Export Finance (UKEF), the country’s export credit institution, was no outlier among its peers. Last year, a report from Parliament’s Environmental Audit Committee revealed that 96 per cent (£2.5bn) of UKEF’s of energy investments between 2013 and 2017 went to polluting projects. Of this total, £2.4bn was funneled into fossil fuel projects in low and middle-income countries.
Cutting off support
With scrutiny increasing, Boris Johnson’s government has indicated that it will soon ban UKEF from offering loans and financial guarantees to polluting projects overseas. It’s a move that could encourage other lenders to clean up their acts and invest in the oncoming energy transition.While an official announcement is still pending, the new rules reportedly stipulate that UKEF must stop offering financial support to fossil fuel extraction or oil refining projects from next year. This isn’t purely a symbolic decision designed to prove that the UK—the first major economy to commit to a net zero emissions target—is serious about climate action. If the legislation is free of loopholes, it will divert several billion pounds of public money away from extractive industries and, ideally, towards renewable alternatives. Most importantly, it will signal to the private sector that the end of the oil age is fast approaching.
Private finance remains the lifeblood of new exploration and production activities. Since the 2015 Paris Agreement, the world's largest investment banks have provided more than $700bn for fossil fuel projects. But public entities like ECAs effectively tell private financiers which projects and industries are likely to be stable in the long term. If governments start publicly aligning their investments with their climate policies, commercial banks will begin to follow suit.
“If UKEF says it’s going to fund an oil refinery in Bahrain, which it did in 2018, then the government is saying to the private sector that this is an investment that it finds acceptable,” says Adam McGibbon, a senior campaigner at the NGO Global Witness. “That is hugely harmful because it leverages a lot more private sector investment, as well. Even if UKEF is a small percentage of overall oil and gas investment in a given year, it doesn’t really matter. They have an outsized role because they're in the public sector and they send signals to the market.”
A bittersweet victory
The ban is a victory for the campaigners who have spent years investigating the agency's funding record—and the politicians who have taken up their cause. According to Bronwen Tucker, an analyst with Oil Change International, ECAs only continued to operate under the radar because their opaque record-keeping practices made it difficult to hold them accountable. Once information about funding flows was discovered and made public, an outcry was sure to follow.“Campaigners and organisers have only been able to focus on so many targets,” Tucker explains. “There are certain places where they have gotten more attention, especially when efforts are tied to opposing specific projects. But in a lot of ways, it’s easier to fight against a pipeline that would go through people’s homes than it is to fight against a shadowy government institution that people haven’t heard of.”
In UKEF’s case, last year’s report by the Environmental Audit Committee garnered its fair share of media coverage, prompting NGOs and journalists to probe further still. In January, a joint investigation by Newsnight and Greenpeace’s Unearthed revealed that UKEF has helped to finance oil and gas projects which, when complete, will emit 69 million tonnes of greenhouse gases a year. The agency found itself in hot water again in July when it was discovered that it was helping to fund a massive new gas extraction project in Mozambique, along with seven other ECAs.
UKEF’s fossil moratorium is something of a bittersweet victory for the climate movement. The fact that the agency's money will no longer finance overseas oil and gas developments is undoubtedly positive—though it doesn’t change the fact that its existing fossil investments will be producing and polluting for decades to come. And there are still a few remaining avenues that would allow the UK to keep investing in fossil fuels overseas. “The UK has got shares in quite a lot of multilateral development banks, so it is going to have to use its influence in those situations to try and push for fossil-free lending policies now,” McGibbon says. Progress has been made, but there is still a daunting amount to do to keep planetary warming within manageable bounds.
No time to delay
According to the UN Environment Programme, the world is currently on track to produce about 120 per cent more fossil fuels in 2030 than would be consistent with limiting warming to 1.5 degrees Celsius. Changing this trajectory will require nothing less than a total reorientation of the global economy. There is a growing danger that a chaotic and unmanaged flight of capital away from fossil fuels will create economic chaos for communities that depend on income from oil and gas. Here is where strategic investments by ECAs could be mobilised for global good.“Governments need to step in and make sure that people aren’t just left to deal with economic shocks on their own” Tucker says. “Public finance institutions could be the architects of a just transition and the key to making sure that we're able to move to a green economy. Instead, they're being used to do the opposite.”
ECAs like UKEF have spent decades facilitating a new strain of colonialism: one that sees wealthy countries extract resources and profit from the global south without consideration for the social and environmental impacts. Now they must prove there’s a different way forward.
