UK Export Finance Contents

1Introduction and Background

UK Export Finance

1.UK Export Finance (UKEF) is the operating name of the Exports Credits Guarantee Department, the UK’s export credit agency (ECA). Its mission is “to ensure that no viable UK export fails for lack of finance or insurance, while operating at no net cost to the taxpayer.”2 UKEF works with around 70 private credit insurers and lenders to help UK companies access export finance, which UKEF defines as “the particular class of loans, insurance policies or bank guarantees that enable international trade to take place as easily and securely as possible.”3 Although ECAs support a relatively small proportion of national exports (typically between 0% and 3% among OECD ECAs) their help can be critical in making those exports happen. UKEF supports 0.3% of the UK’s national exports.4

2.To fulfil its role, UKEF fills gaps in the private sector’s provision of finance and insurance, in particular becoming “involved in transactions where there are risks which the commercial market will not accept without ECA support.”5 This may include risks derived from the length of the financing period, commercial market capacity, the jurisdiction in which the project is to be undertaken or the credit quality of the recipient of the finance. UKEF aims to “complement not compete with the private sector.”6 Borrowers pay commercial rates of interest as well as a risk premium, which allows UKEF to meet its objective of operating at no net cost to the taxpayer.7 UKEF “price for [the] risk” that it covers and returned £500 million to the Treasury in the last five years.8

3.UKEF reports to the Secretary of State for International Trade and is strategically and operationally aligned with the Department for International Trade (DIT). However, in terms of its legal status it is not an agency of DIT but has been a separate government department since it was first established under an Act of Parliament in 1919.9 The Secretary of State for International Trade is advised on UKEF’s operations by the Export Guarantees Advisory Council (EGAC), an Expert Committee.10 This includes advice on the environmental, social and human rights (ESHR) impacts of the projects UKEF supports.

4.UKEF derives its powers from the Export and Investment Guarantee Act 1991 (EIGA). It also operates under the OECD Arrangement on Officially Supported Export Credits, a “gentleman’s agreement” which aims to foster a level playing field in the use of export credits to encourage competition among exporters based on the quality and prices of goods and services exported, rather than on the most favourable officially supported export credits.11 UKEF’s ESHR policies are subject to the OECD Council Recommendation on Common Approaches for Officially Supported Export Credits and Environmental and Social Due Diligence (the Common Approaches) and, since 2016, the Equator Principles.12

5.The EIGA provides that UKEF may only exercise its powers under the EIGA with the consent of the Treasury.13 Under this consent, UKEF has a total capacity to support UK exports of £50 billion, and this is made available to support businesses of all sizes and in all sectors.14 At present, UKEF’s liabilities under these insurances, guarantees and loans are predominantly contingent, and amount to around £31 billion.1516 Under the EIGA, claims, calls or loans on UKEF’s insurances, guarantees and loans are met out of the funds voted by Parliament or charged on the Consolidated Fund.

6.UKEF has received criticism for the proportion of its support for the energy sector which goes to fossil fuel projects. Between 2013/14 and 2017/18, 21% of UKEF’s support (£2.6 billion) was for the energy sector. Of this, 96% went to fossil fuel projects.17 UKEF has emphasised that its support is “demand driven,” and that “the volume and proportion of UKEF’s support for UK exports in specific sectors is to some extent a reflection of prevailing private sector liquidity and risk appetite.”18

Box 1: Example of UKEF’s support: ENKA UK

In August 2017, UKEF announced its support for ENKA UK and General Electric to deliver “two critical power projects in Iraq.”19 GE was the engineering, procurement and construction (EPC) contractor for the projects and ENKA UK the main subcontractor.20 ENKA said the projects provided “great opportunities for UK exporters of goods and services to participate in these transformational projects in Iraq.”21

ENKA UK received £88 million (maximum liability) initial stage financing from UKEF in supplier credit and letter of credit guarantees, to support ENKA UK’s participation in two power plant construction in Iraq, with the Iraqi Ministry of Electricity.22 ENKA UK was UKEF’s largest liability for an energy project, and its ninth largest liability overall, in 2017/18.23 ENKA UK has received $620 million (approximately £490 million) in support from UKEF for phase two of the projects.24

ENKA UK is a subsidiary of a Turkish company parent company (ENKA İnşaat ve Sanayi A.Ş.), which is the largest construction firm in Turkey.25 ENKA UK filed as a UK company in December 2016.26 ENKA UK did not had a physical office, staff or operations in the UK, but told the Committee that in February 2019 they started proceedings to open a procurement office in Birmingham with 12 staff.27 UKEF’s support for ENKA UK was based instead on UKEF’s public policy that they will support projects with a minimum 20% UK content, supporting UK providers of goods and services.28 In the case of ENKA UK, UKEF’s CEO Louis Taylor told us that around $250 million (40%) would be committed to UK content out of $620 million financing for phase two of the projects.29

The combined predicted GHG emissions from the two power plants is 6.88 megatons (6.88 billion kg) CO₂ equivalent each year, assuming that the plants run solely on natural gas as the primary fuel.30 However, both have light distillate oil and heavy fuel oil as secondary fuels, which have much higher emissions profiles.31 ENKA UK told the Committee UKEF that with UKEF’s involvement, they upgraded the plant turbines and changed the planned primary fuel for the power plant from heavy fuel and crude oil to natural gas.32

Source: Various, see footnotes

Our inquiry

7.In December 2018, we launched in inquiry into UK Export Finance, investigating the scale and impact of UKEF’s support for fossil fuel energy projects overseas. We received 34 written responses to the inquiry and are grateful to those who took the time to contribute. We held four hearings, the first with leading academics to explore the actions required from the UK Government to meet the Paris Agreement’s 1.5°C and 2°C warming targets from a scientific and legal perspective. The second examined key themes raised by campaign groups and finance specialists on the nature and consequences of UKEF’s support for fossil fuel energy projects overseas. The third considered evidence from businesses and the Export Guarantees Advisory Council on UKEF’s application process and environmental considerations, before hearing evidence from the Chief Executive of UKEF and Ministers from the Department for International Trade and the Department for Business, Energy and Industrial Strategy. The fourth heard evidence from a company building two power plant projects in Iraq, supported by UKEF.

Background: Emissions, climate change and international agreements

Paris Agreement

8.The Paris Agreement on Climate Change is the first legally binding global climate deal. It was developed as part of the United Nations Framework Convention on Climate Change (UNFCCC), and was signed in 2015 by 196 national governments, who pledged to:

[Hold] the increase in the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels, recognizing that this would significantly reduce the risks and impacts of climate change.33

The signatories also committed to:

[Make] finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.34

Sustainable Development Goals

9.In September 2015, the UK was one of 193 UN member states that adopted the United Nations’ 2030 Agenda for Sustainable Development (the Agenda), committing to working “tirelessly for the full implementation of this Agenda by 2030.”35 The Agenda consists of 17 Sustainable Development Goals (SDGs), broken down into 169 targets. The SDGs are “universal,” applying to the entire world “developed and developing countries alike.”36 The Agenda includes a pledge that the targets should be “met for all nations and people and for all segments of society” and promises to “endeavour to reach the furthest behind first.”37

10.Several of the SDGs and underlying targets relate to emissions, energy and climate change, including:

a)SDG 7: Affordable and clean energy - Ensure access to affordable, reliable, sustainable and modern energy for all;

i)Target 7.2: By 2030, increase substantially the share of renewable energy in the global energy mix;

ii)Target 7.A: By 2030, enhance international cooperation to facilitate access to clean energy research and technology, including renewable energy, energy efficiency and advanced and cleaner fossil-fuel technology, and promote investment in energy infrastructure and clean energy technology.

b)SDG 9: Industry, innovation and infrastructure - Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation;

i)Target 9.4: By 2030, upgrade infrastructure and retrofit industries to make them sustainable, with increased resource-use efficiency and greater adoption of clean and environmentally sound technologies and industrial processes, with all countries taking action in accordance with their respective capabilities.

c)SDG 12: Ensure sustainable consumption and production patterns;

i)Target 12.c: Rationalize inefficient fossil fuel subsidies that encourage wasteful consumption by removing market distortions.

d)SDG 13: Climate action - Take urgent action to combat climate change and its impacts by regulating emissions and promoting developments in renewable energy.

i)Target 13.2: Integrate climate change measures into national policies, strategies and planning.38

Consequences of global heating

11.Scientists have emphasised that no specific temperature target should be considered a safe limit.39 In 2018, the Intergovernmental Panel on Climate Change (IPCC) published its Special Report into Global Warming of 1.5°C, looking at the impacts of global heating of 1.5°C above pre-industrial levels, and related global greenhouse gas (GHG) emissions pathways. Given the 1°C of warming that has already taken place since pre-industrial times, the civil society organisation Both ENDS pointed out that the IPCC report:

Confirms that the world is already seeing the impacts of global warming through more extreme weather, rising sea levels and diminishing Arctic sea ice, among other changes.40

12.Similarly, the Overseas Development Institute highlight that:

Increasing climate variability and climate change are resulting in a higher frequency of extreme weather events and placing additional stress on livelihoods, both of which affect the world’s poorest and the resources and systems on which they depend.41

13.While much of the focus on global heating centres around the consequences of aggregate CO₂ emissions, there are other consequences of fossil fuel generation and use. Fuel combustion from motor vehicles, heat and power generation and industrial facilities, release dangerous air pollutants to the atmosphere.42 The World Health Organisation estimates that 4.2 million premature deaths every year are caused by ambient (outdoor) air pollution, caused mainly by human activity, but a recent study in the European Heart Journal found that the actual number of premature deaths could be twice as high, with 8.8 million deaths worldwide, 800,000 in Europe and 64,000 in the UK.43

14.Most of these deaths are from heart disease, stroke, chronic obstructive pulmonary disease, lung cancer and acute respiratory infections in children.44 While nine out of ten people live in areas that do not meet WHO air standards, people living in low and middle-income countries disproportionately bear the burden of outdoor air pollution, with 91% of the deaths occurring in those countries.45

Consequences of failing to meet the 1.5°C and 2°C targets

15.Prior to the Paris Agreement, climate negotiations had focused on a 2°C target. However, interest in a 1.5°C target increased from 2008, driven by small island states’ concerns about risks from sea level rise at 2°C.46 The IPCC 2018 Special Report results from members state requesting the IPCC to strengthen scientific evidence on the implications and impacts of limiting warming to 1.5°C rather than 2°C.47

16.The IPCC report confirmed that “climate related risks for natural human systems are higher for global heating of 1.5°C than at present, but lower than at 2°C (high confidence).”48 It also highlighted that “these risks depend on the magnitude and rate of warming, geographic location, levels of development and vulnerability, and on the choices and implementation of adaptation and mitigation options.”49 Therefore, while global emissions will contribute to climate change, the impacts of climate change will vary regionally. So far, warming has been greater over land than over oceans, and has been greatest in Arctic regions.50

17.WWF highlight some of the IPCC’s expected impacts of warming at 1.5°C and 2°C levels:

At 2 degrees the risks from drought, floods, tropical cyclones, sea level rise, species loss and extinctions are all much higher than at 1.5 degrees. For example, by the end of the century a 2 degrees rise means an extra 10cm rise in sea level rise puts an additional 10 million people at risk compared to 1.5 degrees. Even at 1.5 degrees the ranges of many marine species will shift and there is significant damage to marine ecosystems and coastal resources, coral reefs, for example, are projected to decline by a further 70–90% at 1.5 degrees and be lost entirely at 2 degrees.51

18.The IPCC report also warned that risks are higher if average warming overshoots 1.5°C before returning to that level:

Future climate-related risks depend on the rate, peak and duration of warming. In the aggregate, they are larger if global warming exceeds 1.5°C before returning to that level by 2100 than if global warming gradually stabilizes at 1.5°C, especially if the peak temperature is high (e.g., about 2°C) (high confidence). Some impacts may be long-lasting or irreversible, such as the loss of some ecosystems.52

19.Further details on the expected consequences of increasing global temperatures can be found in Appendix 1.

Greenhouse Gases

20.The Parliamentary Office of Science and Technology Postnote, Limiting Global Warming to 1.5°C, explains the role of greenhouse gases (GHGs) in the 1°C of global heating seen since pre-industrial times, and the current global temperature rise of 0.2°C per decade:

21.The Postnote summarises the relative role which the GHGs play in the rise in global temperature:

Long-term temperature rise is primarily dependent on the cumulative amount of CO₂ emitted by human activity since pre-industrial times (as well as some long-lived non-CO₂ GHGs such as nitrous oxide). High annual SLCP emissions increase the rate of warming in coming decades, which makes limiting warming to 1.5°C more challenging.54

The Intergovernmental Panel on Climate Change 2018 report

22.The Intergovernmental Panel on Climate Change (IPCC) 2018 report calculates that to limit global heating to 1.5°C, global net human CO₂ emissions must decline by about 45% from 2010 levels by 2030, reaching net zero by 2050.55 To limit global heating to below 2°C, emissions must decline by about 25% by 2030, and reach net zero around 2070.56

23.The IPCC report says that to keep global heating to 1.5°C with no or limited overshoot:

Would require rapid and far-reaching transitions in energy, land, urban and infrastructure (including transport and buildings), and industrial systems (high confidence). These systems transitions are unprecedented in terms of scale, but not necessarily in terms of speed, and imply deep emissions reductions in all sectors, a wide portfolio of mitigation options and a significant upscaling of investments in those options (medium confidence).57

24.To reach these goals, social and technological changes will be required in relation to:

a)Energy systems (demand reduction and reduction in energy from fossil fuel sources);

b)Lifestyle and behaviour (for example, reducing demand for high-CO₂ transport and meat);

c)Difficult to decarbonise sectors (for example, agriculture, industry and some transport); and

d)CO₂ removal using Greenhouse Gas Removal (GGR) (Carbon Capture and Storage and land use changes e.g. afforestation).58

25.The Parliamentary Office of Science and Technology highlights that “a 1.5°C target can be met using a combination of the above and GGR. Pathways involving greater lifestyle change rely less on GGR.”59

Net zero emissions

26.POST explains the concept of “Net” global emissions of GHGs in the context of carbon dioxide (CO₂):

Net zero occurs when human CO₂ emissions are equal to the amount removed from the atmosphere by GGR [Greenhouse Gas Removal].60

27.Methods of GGR include enhancing natural land sinks and transferring CO₂ to geological storage.61 Increasing tree cover and improving forest management, increasing the amount of carbon stored in soil and ocean sediments and restoring peatlands have all been suggested as GGR approaches involving enhancing natural land sinks.62

Committee on Climate Change 2019 report

28.In May 2019, the Committee on Climate Change (CCC) recommended a new GHG emissions target for the UK of net-zero by 2050 (with net-zero GHG by 2045 for Scotland and a 95% reduction from 1990 levels by 2050 for Wales).63 It judged that this was “necessary, feasible and cost-effective,” and would “respond to the latest climate science and fully meet the UK’s obligations under the Paris Agreement.”64 The report acknowledged that this would require that “policy is ramped up significantly,” but set out that the benefits of this would include improved quality of life, lower risks from climate change and industrial opportunities.65 It detailed the potential advantages to the UK from taking early action:

With appropriate policy and support there could be an industrial boost to the UK from being one of the early movers in some key sectors (e.g. specialised supporting services like finance and engineering for low-carbon technologies, carbon capture and storage), with potential benefits for exports, productivity and employment. The shift in resources from imported fossil fuels to UK investment could also stimulate further economic activity.66

29.The report notes that the UK has “taken a leading role in the growth of green finance internationally,” highlighting the creation of the UK’s Green Investment Bank (the first of its kind) in 2012, and the UK Government’s endorsement of the recommendations from the Task Force on Climate Related Financial Disclosures (TCFD) in 2017. However, the report specifically highlights UK Export Finance as an area that “needs further progress.”67 It states that in the UK:

Export finance is not aligned with climate goals, and often supports high-carbon investments.68

2 Gov.UK, UK Export Finance: About Us, [date accessed 29/04/2019]

3 Ibid.

4 UK Export Finance (EXF0009)

5 Ibid.

6 Gov.UK, UK Export Finance: About Us, [date accessed 29/04/2019]

7 Export Guarantees Advisory Council (EXF0023)

8 Louis Taylor, Q317

9 UK Export Finance (EXF0009)

10 Export Guarantees Advisory Council (EXF0023)

11 OECD, Arrangement on Officially Supported Export Credits, (July 2018, updated January 2018), p.10

12 Export Guarantees Advisory Council (EXF0023)

14 UK Export Finance (EXF0009)

15 Ibid.

17 Calculated based on written evidence by UK Export Finance (EXF0028)

18 UK Export Finance (EXF0009)

19 UK Export Finance Press release on, UKEF helps GE and ENKA UK secure contract to support Iraq’s energy security, (9 August 2017), [accessed 13/03/2019]

20 Ibid.

21 Ibid.

22 UK Export Finance, Business supported 2017 to 2018, (20 June 2018)

23 Ibid.

24 Louis Taylor, Q216

25 Companies House, ENKA UK Construction Limited: Incorporation, (December 2016) [accessed 13/03/2019]

26 Ibid.

27 Yavuz Akturk, Q329

28 Louis Taylor, Qq217–218

29 Louis Taylor, Q216

30 GE, Republic of Iraq Ministry of Electricity and ENKA UK, Samawa Combined Cycle Gas Turbine Power Plant Project, Environmental and Social Impact Assessment (ESIA) report, (September 2018), p.170; GE, Republic of Iraq Ministry of Electricity and ENKA UK, Dhi-Qar Combined Cycle Gas Turbine Power Plant Project, Environmental and Social Impact Assessment (ESIA) report, (September 2018), p.167

31 Ibid.

32 Kagan Yalcin, Q383

33 United Nations, Paris Agreement, (2015), Article 2.1.a

34 Ibid.

35 United Nations, Transforming our world: the 2030 Agenda for Sustainable Development, A/RES/70/1, (2015) para 2

36 Ibid., para 5

37 Ibid., para 4

39 Knutti, R., et al, “A Scientific Critique of the Two-Degree Climate Change Target”, Natural Geoscience, Vol.9, (2016) pp.13–18

40 Both ENDS (EXF0005)

41 Overseas Development Institute (EXF0004)

42 World Health Organisation, Air Pollution: Ambient air pollution: Pollutants, (2018) [30 January 2019]

43 World Health Organisation, Air Pollution, (2018) [accessed 30 January 2019]; Lelieveld, J. et al. (2019) Cardiovascular disease burden from ambient air pollution in Europe reassessed using novel hazard ratio functions, European Heart Journal, 40 (20), pp.1590–1596; The Guardian (12 March 2019) Air pollution deaths are double previous estimates, finds research; The Independent (12 March 2019) Air pollution responsible for more deaths than smoking, study says

44 World Health Organisation, Air Pollution: Ambient air pollution: Health impacts, 2018 [30 January 2019]

45 World Health Organisation, Ambient (outdoor) air quality and health, 2018 [accessed 30 January 2019]

46 Parliamentary Office of Science and Technology, Postnote 594: Limiting Global Warming to 1.5°C, (2019), p.2

47 Ibid.

48 IPCC, Special Report, 2018

49 Ibid.

50 Parliamentary Office of Science and Technology, Postnote 594: Limiting Global Warming to 1.5°C, (2019), p.1

51 WWF (EXF0007)

52 IPCC, Special Report, p.7

53 Parliamentary Office of Science and Technology, Postnote 594: Limiting Global Warming to 1.5°C, (2019), pp.1–2

54 Ibid., p.2

55 IPCC, Special report, p.14

56 Ibid.

57 Ibid., p.17

58 Parliamentary Office of Science and Technology, Postnote 594: Limiting Global Warming to 1.5°C, p.2

59 Ibid.

60 Ibidem.

61 Parliamentary Office of Science and Technology, Postnote 549: Greenhouse Gas Removal, (February 2017), p.1

62 Ibid., p.2

64 Ibidem.

65 Ibid., p.8, p.11, p.30

66 Ibid., p.30

67 Ibid., p.118

68 Ibidem.

Published: 10 June 2019