Preface

1. The Government is grateful to the Environmental Audit Committee for this further report on ECGD and Sustainable Development. It welcomes the analysis undertaken by the Committee and the comments made in the report, which recognise the progress on sustainable development that has been made by ECGD. The Government also notes the written submissions made to the Committee by various interested parties.

2. It is disappointing that the Committee did not seek oral evidence from exporters or their industry representatives. The Government considers that the comments made and conclusions reached by the Committee, although informed by written submissions from ECGD's customers, could have been enhanced if the opportunity had been made available to them, in addition to ECGD and NGOs, to provide oral evidence directly to the Committee, given the importance of ECGD to their export business and their interest in sustainable development issues.

3. This Memorandum is the Government's Response to each of the conclusions and recommendations made by the Environmental Audit Committee, as detailed in its report. The Export Guarantees Advisory Council, which advises ECGD on the application of its Business Principles, has endorsed this Response.

4. By way of an introduction to its specific responses, the Government addresses common themes that underlie a number of the Committee's recommendations, namely: ECGD's role and the environmental standards to which it should operate, international leadership, and transparency.

Introduction

ECGD's role and standards

5. ECGD's statutory purpose is to facilitate the supply of goods and services by UK-based exporters; in fulfilling its role, it must also take account of wider Government aims, including those on sustainable development, human rights, good governance and trade. ECGD's published statement of Business Principles guides its operation in relation to these wider goals, and the Export Guarantee Advisory Council reports on the implementation of them in its Annual Report, which is included in ECGD's Annual Review and Resource Accounts that are publicly available.

6. With regard to sustainable development, the Government has established a number of broad objectives. It is the responsibility of other Government Departments, e.g. DEFRA (environment), DfID (development), FCO (human rights) that lead on these issues, to translate those objectives into specific policies. Where relevant, ECGD can advise other Government Departments on how such policies might impact on its responsibility for the delivery of export credit support to exporters.

7. The Government also seeks to influence the development of international standards, such as those of the World Bank Group, so that they reflect the UK's sustainable development objectives. DfID (and HMT) has responsibility for the UK's relationship with the World Bank Group.

8. It is not the role of ECGD to design sustainable development policies and standards in relation to those industrial sectors that seek its support for their export business. ECGD contributes to sustainable development by satisfying itself that the appropriate prevailing international standards are met in all material respects when it assesses projects for their potential environmental impacts, taking account of international export credit policy and practice.

INTERNATIONAL LEADERSHIP

9. One of the Government's objectives for ECGD is that it should promote an international framework that allows exporters to compete fairly i.e. to achieve a level playing field internationally in the provision of officially-backed export credits. The aim, therefore, is that the policies and practices, which are employed by official ECAs, should be agreed multilaterally. This is achieved through the UK's membership of the EU, OECD and the Berne Union. ECGD engages with other ECAs in these various fora to develop and design sound export credit policies and practices, including taking account of sustainable development policy and practices and the application of international environmental standards in respect of individual projects that the ECAs are asked to support. In all multilateral fora ECGD vigorously promotes the UK's environmental and sustainability goals through the rigorous application of international standards.

10. The international negotiations undertaken in the various ECA fora are, therefore, aimed at agreeing how policies and standards should be applied in the context of the provision of export credits. The ECAs do not determine the particular environmental standards themselves; international institutions, e.g. the World Bank Group, develop international environmental standards in regard to specific industrial sectors. The role of the ECAs is to assess the acceptability of the projects that they are asked to support against those standards in the context of the relevant multilaterally agreed export credit policies, e.g. the OECD Common Approaches on the Environment and Officially Supported Export Credits (the Common Approaches). In this context, it should be noted that many projects which ECGD is asked to support involve multi-sourcing from a number of different countries and require the involvement of a number of ECAs; this necessarily means that common standards must apply so that project sponsors understand what is required of them to obtain officially-backed export credit financing from wherever they choose to source the goods and services.

TRANSPARENCY

11. The Committee has recommended greater transparency about how sustainable development policies are taken into account by ECGD in order to help to allay perceptions held by the NGO community that ECGD may not be sufficiently rigorous in its application of environmental standards. Taking account of the work undertaken by ECGD's Advisory Council which reviews decisions that are made on the provision of support for individual projects in regard to the potential impact categorisation and standards applied, the Government is satisfied that ECGD takes its responsibilities seriously in regard to the application of policies and standards relating to sustainable development in respect of the transactions which it supports and in its day-to-day operations.

12. Last year, ECGD announced that it will publish details of the carbon emissions of the transactions which it has agreed to support: from 1 April 2008, those transactions that have been categorised by ECGD as having high potential environmental impacts; and, from 1 April 2009, those transactions categorised by ECGD as having medium potential environmental impacts. Moreover, ECGD provided more information in its Annual Report and Accounts for 2007-08 on the environmental status of the transactions which it had agreed to support during that financial year; it will continue to report this information in future.

13. The information disclosed by ECGD largely relates to those transactions which it has agreed to support. However, consistent with the Common Approaches, ECGD does disclose certain information about its involvement in those projects that have been deemed to have high potential environmental impacts before it takes decisions on whether its support should be made available. The Committee has proposed that more information should be made available for a wider number of transactions where ECGD support is being sought; that is, before decisions are made on whether or not ECGD should provide its support.

14. Acceptance of this recommendation would raise practical issues for ECGD, exporters and project sponsors in the handling of applications for ECGD support. It would add an administrative burden on ECGD and prolong the decision-making process. This could deter project sponsors placing business with the UK and thereby have a direct impact on the competitiveness of UK exporters if it were to be implemented unilaterally. Accordingly, the Government intends to pursue the acceptance of this recommendation on a multilateral basis. There will be an opportunity to do so when the OECD Common Approaches is next reviewed in 2010. As part of its negotiating strategy, ECGD will be charged with seeking greater transparency during the period that the ECAs undertake environmental and social due diligence of the projects they are being asked to support, in order to satisfy themselves that the projects meet international standards.

Government Response to individual Conclusions and Recommendations

1. The ECGD has made progress on supporting sustainable development that deserves to be recognised. The objectives introduced by the 1999 Mission and Status Review placed considerable demands on a small, specialised department, with a difficult role to play in balancing business and financial needs with wider government concerns. The mechanisms put in place following the review are a sound basis for further action on sustainable development. (Paragraph 5)

The Government agrees with this conclusion.

2. While the ECGD must balance the duty to raise its standards of sustainable development against its duty to support the competitiveness of UK industry, it has a unique capacity to influence and raise standards internationally. (Paragraph 7)

ECGD's statutory purpose is to facilitate exports. Its policy in regard to sustainable development is to apply the relevant international standards in its consideration of the projects which it is asked to support. Taking account of the Government's objective that ECGD should seek to promote fair competition by the adoption of consistent practices for assessing projects on a multilateral basis insofar as export credit policy and practice is concerned, ECGD seeks to play a full part in the international fora that address export credit issues, with the aim of establishing policies and practices that will improve the rigour and uniformity with which agreed environmental standards are applied in the provision of export credits. ECGD has been successful in leading and influencing policies towards the achievement of higher standards, such as the development of, and subsequent revisions to, the Common Approaches and the OECD agreements that address bribery and corruption. Productive Expenditure and the subsequent Sustainable Lending was also a UK initiative. ECGD will continue to push for higher involvement as opportunities arise in the future.

While ECGD's capacity to influence is limited by virtue of it being one member of a community of ECAs, it will continue to apply its energies to continuous improvement of policy and practice and the consistent application of standards. It will continue to push for improvements to be made to the Common Approaches when this is due for revision in 2010. For example, included in this response are specific issues on which ECGD will be seeking to lead in the negotiations for greater transparency, as described in paragraph 14 of the Introduction.

3. We conclude that a change to the ECGD's primary remit is not currently necessary, but continued scrutiny of further progress is important. The current remit provides an adequate basis for sustainable development to underpin its activities. The challenge for the ECGD is to demonstrate that sustainable development is given appropriate weight within its current remit, and that it does nothing that would actively undermine this principle. (Paragraph 10)

The Government agrees that there is no need for a change to ECGD's primary remit.

The Government is satisfied that sustainable development is given appropriate weight within ECGD's current remit, consistent with its statute and the Government's sustainable development objectives and the relevant policies that flow from these. The disclosure by ECGD of the transactions which it has supported and the role played by the Export Guarantees Advisory Council in advising on the application by ECGD of its Business Principles assist in demonstrating that sustainable development is appropriately taken in account in its decision-making.

4. The ECGD has a responsibility to support UK exporters. Any move by the Government to adopt policies that limited support to sectors such as defence, aerospace and fossil fuels, or to assess these sectors by different standards, would need to be carefully assessed. While these sectors remain within the ECGD's portfolio, the agency must take steps to improve the scrutiny of sustainable development in these areas. (Paragraph 14)

The Government has no plans to limit the support that ECGD may offer to any particular export sectors that would otherwise be eligible for ECGD support, or to change the standards that ECGD currently employs in making its assessments. It is the Government's expectation that ECGD will continue to scrutinise the potential environmental impacts of the projects which it is asked to support, on a basis which is consistent with ECGD's published Case Impact Analysis Process (CIAP) in order to satisfy itself that they will meet the relevant international standards in all material respects.

5. A large programme of support for sustainable and environmental industries would help the ECGD to revitalise its role while remaining within its current remit. Although it cannot compete directly with the private sector, the ECGD should establish a programme actively to promote its services to environmental industries and to other projects that could support sustainable development. (Paragraph 17)

During 2008, ECGD undertook a targeted campaign to raise the awareness of its services amongst those companies operating in the sustainable development arena. Through this campaign it became apparent that many sustainable and environmental industrial ventures are at an early stage in the development of their export activity and, therefore, have no immediate need for ECGD support. ECGD will continue to make its services known to this sector, working alongside other Government Departments, so that as it matures, and its export potential grows, ECGD is ready to offer support for those projects that represent an acceptable risk and comply with its Business Principles.

During 2009, ECGD will consider, in collaboration with other Government Departments, how its 'Renewables Initiative' announced in 2002 might be incorporated into a new Government initiative to coincide with the UNFCCC COP 15 and Kyoto Protocol COP/MOP 5 meeting in December 2009 in Copenhagen.

6. No offer of support should be made, whether actual or provisional, until the ECGD's Business Principles Unit has completed its assessment, and its recommendations have been duly considered. The Government must be prepared to provide the ECGD with whatever further resources are necessary for the Business Principles Unit to carry out its sustainable development assessment work swiftly, effectively, and consistently. (Paragraph 20)

ECGD will continue to monitor the workload of its Business Principles Unit to ensure that it has available to it the resources and expertise which are required to enable it to undertake its remit.

The Government considers that this recommendation does not take account of the practical problems which would arise if no indication of its potential support (albeit conditional) could be given before the assessment of the Business Principles Unit is available and, accordingly, does not accept this recommendation.

The assessment of the environmental impacts of a project can take some time; but the tendering timetables required by project sponsors can often mean that an exporter has to provide a bid, including the possible provision of export credit financing, before such an assessment has been completed. Given the costs of bidding, exporters would not be prepared to make bids unless they receive an indication of the possibility of the provision of ECGD's support, and any possible terms and conditions on which it may be made available. In regard to environmental impacts, the assurance that ECGD can give at that juncture necessarily has to be conditional on the project meeting international standards in all material respects in regard to environmental impacts, on a basis which is consistent with the Common Approaches and ECGD's policies.

7. The ECGD should disclose the precise standard used as the basis for environmental and sustainable development review in every high-impact case. This information should be published prominently alongside the project assessment information. (Paragraph 21)

From 1 April 2009, ECGD will publish details of the international standards against which high potential environmental projects have been assessed, along with a note of its reasons for its decisions.

8. We recommend that the ECGD commissions an independent study into how its environmental and sustainable development standards could be tightened, including an assessment of how UK Sustainable Development objectives could be effectively reflected in the ECGD's assessment standards. Such a study should be used to help the ECGD raise international standards. The ECGD should devise and publish a strategy, so that it can be properly scrutinised, and so that UK exporters and other Export Credit Agencies are aware of the ECGD's intentions. Where a standard can be raised without undue impact on the competitiveness of UK industry, the higher standard should be adopted and concomitant action from other Export Credit Agencies should be encouraged. (Paragraph 23)

As set out in the introduction to this Response, the Government does not accept that it is ECGD's role to interpret the UK's sustainable development objectives where these have yet to be developed into specific policies that ECGD could take into account when conducting its activities. Nor is it ECGD's role to develop international sustainable development standards. Accordingly, the Government can see no benefit in such an independent study.

9. Constructive engagement and the ability to exercise discretion are important and, when used appropriately, can help to improve project standards in general. But the failure effectively to communicate these decisions and the reasoning behind them leaves the ECGD open to criticism and suspicion. The disclosure of the reasoning behind these decisions, and the effects of the constructive engagement process, must be improved if the system is to inspire confidence. (Paragraph 26)

The Committee's recognition of the importance of constructive engagement and of ECGD's ability to exercise discretion is welcomed. Since it is ECGD's policy that projects should normally comply in all material respects with the relevant international standards in regard to environmental and social impacts, the purpose of constructive engagement is to make this requirement known to project sponsors, so that projects can be brought into compliance in order to obtain ECGD support. Henceforward, ECGD will disclose the international standards which have been applied to the assessment of high potential impact projects (see recommendation 7), together with a note of its reasons underpinning any ECGD decision to support these projects.

10. We welcome the recent decision of the ECGD to report the carbon dioxide impacts of high and medium impact projects. The information gathered under this exercise must be put to practical use by helping further to improve the standards of individual projects. This is an area where the ECGD should be leading from the front and setting an example for other Export Credit Agencies. The ECGD should also use the data to review the carbon footprint of its portfolio as a whole and to identify areas where further emissions reductions could be achieved without limiting the scope of its business. (Paragraph 28)

The Government welcomes the Committee's support for ECGD's decision to report carbon impacts. As described in its Sustainable Development Action Plan, ECGD implements the UK's sustainable development objectives by applying standards that have been agreed internationally in order not to compromise the level playing field objective set for ECGD by Ministers. ECGD's environmental due diligence seeks to establish whether a project meets the relevant international standards.

11. It is difficult to assess exactly how aircraft will be used. However, by excluding aerospace from the Case Impact Assessment Process too many important sustainable development impacts are left unconsidered. We reiterate the conclusion of our predecessor Committee that the ECGD should bring all aerospace-related applications within the Case Impact Assessment Process, in addition to ICAO assessment. Full assessment may be difficult, and may even be impossible on occasion, but it is crucial to assess civil aerospace under these criteria to demonstrate that these issues have at least been considered. In such cases the assessment process should be accompanied by a narrative explaining any difficulties in applying the process, and setting out how conclusions have been reached. (Paragraph 31)

In order to determine whether the environmental impacts of a transaction are acceptable, ECGD compares them to the relevant international standards; this is the case whether an application falls for consideration under ECGD's Case Impact Analysis Process, or otherwise. The international standards for aerospace transactions relate to noise and emissions, as established by the International Civil Aviation Organisation, the EU and the USA. ECGD accordingly applies these standards. A change to ECGD's process for scrutinising aerospace transactions would therefore not alter the standards applying to that sector.

As the Committee has acknowledged, it is difficult to assess how an aircraft will be used over its lifetime. Hence, an assessment of emissions at the time ECGD is considering its decision on the provision of support would lack merit. Nonetheless, in the light of the comments made by the Committee, ECGD will explore with airlines during 2009 the feasibility of them being willing and able to report periodically the emissions of the aircraft that benefit from its support so that there is evidence of the actual emissions over time. This would be consistent with the general principle proposed in 'The Greenhouse Gas Protocol—A Corporate Accounting and Reporting Standard' by the World Business Council for Sustainable Development and the World Resources Institute in 2004, that greenhouse gas emissions should be reported by those that own, have control over, or derive an economic profit from the activities they undertake.

12. We do not believe that the ECGD has struck the appropriate balance between protecting commercial confidentiality and ensuring due transparency. The ECGD provides support from public funds and exporters must therefore recognise that this facility should necessarily entail certain conditions to ensure adequate disclosure and scrutiny of funding decisions. In 2003, our predecessor Committee recommended that 'requests for confidentiality should be tested against rigorous criteria to ensure that only such information as might genuinely compromise clients' commercial activities is withheld. A high degree of disclosure should become a condition of ECGD support.' We reiterate this recommendation. (Paragraph 35)

The entitlement to confidentiality, either for individuals or entities, is set by the law of confidence, and the basis for balancing openness and confidentiality by government and public authorities is established through the Freedom of Information Act and the Environmental Information Regulations. ECGD operates within these frameworks.

Where possible, and bearing in mind the need to respect commercial confidentiality, ECGD publishes details of transactions supported. In its most recent Annual Review and Resource Accounts, ECGD listed 98% by value of business supported.

13. The ECGD needs to ensure that project information is disclosed at a stage in the assessment process where any challenge to the case could still be taken into account. The ECGD should make the disclosure of basic project information (name, involved parties, and a brief description) a pre-condition of its appraisal process, for all categories of project. As further assessments of the project's economic, social and environmental impacts are made, these too should be made publicly available. (Paragraph 36)

As stated in its Introduction to this Response, the Government is willing to consider this recommendation. However, for the reasons stated in the Introduction, the Government wishes ECGD to pursue this multilaterally through revisions to the Common Approaches.

14. By failing to disclose a wider range of information as a matter of course, the ECGD has directly contributed to the negative perception of its sustainable development policies. (Paragraph 38)

See responses to recommendations 7, 9, 13 and the Introduction.

15. Where decisions are taken that appear contrary to the information available in the public domain (for example in the classification of projects into impact categories) the ECGD should publish an explanation of their decision and provide further supporting material as necessary. This will increase confidence in the ECGD's procedures and make it easier for Parliament and interested parties properly to assess the ECGD's decisions. (Paragraph 39)

See responses to recommendations 7, 9 and 13 and the Introduction

16. Where the ECGD conditionally agrees to support a project that does not meet all of its standards, it should publish a document clearly setting out where the project falls short; why the ECGD remains prepared to support the project, and what actions the ECGD will take to ensure that the project is brought up to standard. The ECGD must then demonstrate that these standards have been achieved. (Paragraph 40)

It is ECGD policy that projects should normally comply in all material respects with the relevant international standards.

February 2009