UKEF: environmental and social principles applied

UK Export Finance (UKEF) is the United Kingdom's export credit agency, part of the Department for Business and Trade. Its primary mission is to support British exports by providing guarantees, insurance and direct financing to exporting companies and their foreign clients. It intervenes principally on large infrastructure, industrial equipment, energy and aerospace contracts.

UKEF's action is part of the multilateral framework of export credit agencies, regulated by the OECD Arrangement on Officially Supported Export Credits and by the OECD Common Approaches on the environment and export credits. This framework, adopted by OECD member countries, harmonises the E&S requirements of the world's main export credit agencies, avoiding distortions through a race to the bottom.

UKEF has, however, over the years tightened its own requirements beyond the OECD floor, particularly on climate issues. The decision taken in 2021 to stop supporting overseas fossil fuel extraction and infrastructure projects marked a significant turning point.

This article presents UKEF's general framework, the application of the OECD Common Approaches, specific climate commitments, the due diligence and monitoring process, and the practical implications for project sponsors.

The general framework and UKEF's mission

UKEF intervenes across three main product categories.

Guarantees and insurance for British exporters, which cover political and commercial risks associated with export contracts. This cover enables the exporter to obtain conventional bank financing more easily or to propose attractive payment terms to its foreign client.

Guarantees for foreign buyers, which cover banks lending to these buyers to finance the purchase of British goods or services. This mechanism enables the foreign buyer to mobilise financing at competitive rates, backed by the underlying British export.

Direct financing to foreign buyers, a more recent instrument that enables UKEF to lend directly, without going through an intermediary bank.

Commitment volumes vary from year to year, with peaks on large rail, aerospace and energy contracts. Intervention geographies cover developing and emerging countries, with a strong presence in the Middle East, Asia, Africa and Latin America.

Application of the OECD Common Approaches

The OECD Common Approaches on the environment and export credits, initially published in 2003 and regularly revised, frame the environmental and social assessment of publicly guaranteed transactions. UKEF applies them directly.

The guiding principle is the categorisation of transactions according to their environmental and social sensitivity.

Category A transactions correspond to projects with potentially significant environmental or social impact. They include in particular large infrastructure, energy projects, mining and extractive projects, heavy industrial projects, projects affecting sensitive areas. These transactions require a complete environmental and social assessment (equivalent to an ESIA), public disclosure of at least 30 days before approval, and active monitoring during the life of the guaranteed contract.

Category B transactions correspond to limited, site-specific, largely reversible impacts. They require a simplified review, without mandatory prior public disclosure.

Category C transactions correspond to minimal or no impacts. They are exempt from in-depth environmental and social review.

For Category A and B transactions, the reference standards for assessment are the IFC Performance Standards and the IFC Environmental, Health and Safety Guidelines. UKEF, like most modern export credit agencies, refers to these standards as a common technical framework.

UKEF's specific climate commitments

UKEF has distinguished itself from other export credit agencies through several strengthened climate commitments since 2021.

The cessation of support for overseas fossil fuels. Since 31 March 2021, UKEF no longer provides support for new fossil fuel exploration or extraction projects, nor for dedicated infrastructure (pipelines, gas terminals, expansion-related refineries, coal and gas thermal power stations). A few narrowly defined exceptions remain, but the scope remains limited.

UKEF's climate strategy. Published in 2022 and regularly updated, it sets objectives for aligning the portfolio with trajectories compatible with the Paris Agreement objectives. These objectives are quantified and published.

Climate assessment of significant transactions. For Category A projects and certain Category B projects, UKEF requires an assessment of the project's GHG emissions and an analysis of physical climate risks. This assessment, aligned with TCFD recommendations, is integrated into the transaction documentation.

Public reporting. UKEF publishes an annual report detailing the sectoral composition of its portfolio, estimated emissions, and progress towards alignment objectives.

These commitments place UKEF, among G7 export credit agencies, in the group of the most advanced on climate issues. For a project sponsor, this means that a project with high emissions or highly exposed to climate risks must be particularly robust in order to be supported.

The due diligence process

The due diligence of a UKEF transaction unfolds in several stages.

Initial categorisation. On first contact, UKEF examines the nature of the transaction and classes it in Category A, B or C according to the OECD Common Approaches.

Due diligence proper. For Category A transactions, it mobilises specialised external consultants, conducts field missions, and examines all environmental and social deliverables produced by the end client. The typical timeframe for a Category A due diligence is several months.

Public disclosure. For Category A transactions, the environmental and social dossier is published on the UKEF website for at least 30 days before approval. This disclosure opens a comment window that can influence the decision.

Approval. The final decision is taken by UKEF's authorities, after review of the dossier, comments received, and E&S team recommendations.

Contractual formalisation. E&S commitments are integrated into the conditions of the guarantee or financing. Reporting obligations, covenants and conditions precedent are specified.

Monitoring. During the life of the guaranteed contract, UKEF ensures monitoring through periodic reports, supervision missions, and independent audits according to the projects.

British specificities that matter

Several characteristics distinguish UKEF from other export credit agencies and condition the relationship.

Transparency. UKEF regularly publishes information on its transactions, portfolio and commitments. This transparency, high compared to the sector average, imposes a documentation discipline on clients.

Parliamentary sensitivity. UKEF is subject to active parliamentary scrutiny in the United Kingdom. Large transactions, particularly in sensitive sectors, may be subject to parliamentary questions. This dimension weighs on internal decisions.

Engagement with NGOs. UKEF maintains a structured dialogue with development and environmental NGOs. Their criticisms are taken seriously and can influence decisions on controversial transactions.

Pragmatic approach to co-financing. UKEF regularly participates in syndicated financing with other export credit agencies or lenders. In these configurations, it generally accepts harmonisation of E&S requirements under the leadership of the lead arranger.

Pitfalls for project sponsors

Five pitfalls recur in relations with UKEF.

Underestimating due diligence. Category A transactions mobilise several months of work. A sponsor who discovers the requirements belatedly finds itself having to produce deliverables urgently, with the associated quality risks.

Neglecting the climate dimension. UKEF rigorously examines climate commitments. A project that cannot demonstrate a credible trajectory on this dimension sees its dossier slowed down, or even refused.

Minimising public disclosure. The public disclosure period is not a formality. Attentive NGOs can produce substantiated comments that influence the decision. It is prudent to anticipate their potential criticisms in advance.

Confusing UKEF with a conventional lender. UKEF is not a DFI in the strict sense. Its mandate is to support British exports, not to finance development directly. This nuance of mandate can produce different expectations.

Ignoring coordination with the British exporter. The UKEF transaction is systematically backed by a British export contract. The quality of coordination between the exporter and the foreign buyer largely conditions the success of the dossier.

What UKEF verifies in particular.

• Categorisation according to the OECD Common Approaches and its justification.
• Alignment of the E&S assessment with applicable international standards (primarily IFC PS).
• The climate dimension of the project, with quantification of emissions and analysis of physical risks.
• Compliance with public disclosure obligations for Category A projects.
• The quality of the supervision arrangements proposed during the life of the guaranteed contract.
• Compliance with UKEF's climate commitments (absence of unauthorised fossil fuels).

UKEF is an export credit agency that combines a standardised international framework (OECD Common Approaches, IFC PS) and specific ambitious commitments, particularly on climate. This combination makes it a demanding but predictable counterpart.

For a project sponsor, the effective strategy consists of identifying very early whether the transaction falls within UKEF's scope, anticipating the requirements associated with the probable categorisation, and preparing a dossier that satisfies the applicable international standards with the rigour that UKEF expects. This preparation is proportionate to the stakes of transactions that can run into hundreds of millions of pounds sterling.

The general trend towards tightening export credit agency requirements makes detailed understanding of this framework all the more useful: what is today specific to UKEF will probably tomorrow be generalised across the entire sector.