Where to flow or not to flow to? The G7 should set the tone on export and development finance

Internationally active public finance institutions and development finance institutions often assume a trailblazer role in sustainable finance by financing ascending technological solutions and bearing the cost of de-risking less attractive yet much-needed investments. However, large volumes of public finance continue to flow towards the fossil fuel industry, while support for clean energy sources continues to lack a much-needed increase. In order to keep global warming within the confines of 1.5°C, public investments and direct financial flows need to have climate change considerations and the Paris Agreement at their core, promote transformative technologies and forward climate action.

The need for a profound change to exit fossil fuel finance has been recognized in the last few years. In 2021, Germany has been both founder of the Export Finance for Future coalition and a signatory of the Glasgow ambition statement on Clean Energy Transition. Yet, South Korea is part of neither, making it one of the largest providers of public fossil fuel finance not to be part of the coalition and statement, alongside Japan and China.

Both Korean and German development finance institutions and export credit agencies – KFW Group and Euler Hermes in Germany, KDB, KEXIM and K-SURE in Korea – display certain similarities in their institutional set up. They can play a vital role in raising ambitions among their counterparts and encourage more countries to join the global momentum on exiting fossil fuel finance. Moreover, anecdotal evidence suggests that Korean institutions consider German institutions as relevant peers to compare with.

This paper explores the alignment of German and Korean development finance institutions with the Paris Agreement, by analyzing their climate and sector strategies against the IEA’s Net Zero by 2050 scenario and pointing out space for improvement. Recommendations include aligning their strategies with a 1.5°C compatible pathway, providing more transparency on investment decisions, and including civil society and experts in the reviewing processes for their strategies.

With key G7 Ministerial Meetings in May and the Leaders’ Summit in June just around the corner, Germany should capitalize on its G7 Presidency. It should also further strengthen its existing commitment to exiting international fossil fuel financing, while also rallying like-minded countries to do the same. Being absent from the Glasgow Statement on Clean Energy Transition, Japan should be the primary focus. Past announcements have shown that first moves in the region can trigger others like in this case Korea and China to join in. Considering the newest IPCC findings and urgent need to act on climate now, more than ever, the financial activities of public finance institutions should be put high on the agenda.