Europe needs around EUR 180 bln in extra yearly investment to meet the EU 2030 targets on climate change. According to the European Investment Bank estimates, the global yearly deficit of sustainable investments in transport infrastructure, energy and resource management has reached EUR270bln, while the Organisation for Economic Cooperation and Development (OECD) estimated that environmental investments worth US$6.9tn a year are required to keep the increase in global average temperature up to 1.5°C by 2030, writes Viorel Ionescu, Senior Consultant, Climate Change and Sustainability, EY Romania.
The European Investment Bank (EIB) unveiled its strategy on fighting against climate change on 14 November 2019. Andrew McDowell, EIB Vice-President in charge of energy, underlines that: “Carbon emissions from the global energy industry reached a new record high in 2018. We must act urgently to counter this trend. EIB’s ambitious energy lending policy adopted today is a crucial milestone in the fight against global warming. Future financing will accelerate clean energy innovation, energy efficiency and renewables. EIB will stop financing fossil fuel energy projects, including gas, starting 2022.”
With this strategy, the EIB Group aims to provide EUR 1 tn in funding for investments in sustainable projects by 2030. EIB shall also increase the share of its financing dedicated to climate action and environmental sustainability to reach 50% of its operations in 2025 and from then on.
By ratifying the Paris Agreement on climate change (in 2015), the signatory countries committed to change the financing mechanisms aiming at supporting transition to a sustainable economy, with low carbon emissions and adapted to the new challenges involving higher consumption and decreasing resources.
EU assumes the leading role
Europe has assumed the role and ambition to be a leader in the fight against climate change, with United States withdrawing from the Paris Agreement, as President Jean-Claude Juncker reiterated this resolution in his 2017 State of the Union Address.
EU has committed to reach extremely ambitious targets by 2030:
- Reduce greenhouse gas emissions by 40% compared to 1990 levels;
- At least 27% of all energy consumed in the entire EU coming from renewable energy sources;
- Improve energy efficiency by at least 30% compared to the current business model;
- Spend at least 20% of the EU budget on material actions related to climate change.
Given that such changes cannot be supported by the public sector alone, but also require raising large volumes of private capital, the European Union is looking into ways to integrate sustainability considerations in its new financial policies.
The private finance sector plays a key role in reaching these targets by directing investments towards sustainable business models and technologies, but also by developing a circular, low-carbon economy. On the other hand, it is not yet clear to investors what a sustainable investment involves, which shall add to the shortage of investments to that effect.
Today, the environmental and climate change risks are not always properly considered by the financial sector. As the extreme weather disasters rise in numbers, insurance companies need to prepare for incurring higher cost. Banks shall also be exposed to greater loss due to lower rates of return seen by the companies vulnerable to climate change or those that are highly dependent on non-renewable natural resources.
Between 2000 and 2016, the global annual number of extreme weather disasters increased by 46%, while between 2007 and 2016, economic losses from extreme weather disasters rose by 86% (EUR117bln in 2016).
This trend is cause for concern, as almost 50% of the Eurozone banks’ risk exposure is directly or indirectly linked to risks generated by climate change.
A global approach to sustainable finance: the central theme for the European Commission (EC) high-level conference
EC’s second high-level conference on sustainable finance took place in March 2019. Its goal was to encourage a global approach to green finance and represented an opportunity to discuss specific ways to channel private capital towards sustainable projects. The event gathered presidents of the European institutions, ministers from European and third countries, Governors of central banks, chairs of international organisations, as well as leaders of financial institutions and multinational companies.
During the event, Valdis Dombrovskis, Vice-President of the Directorate-General for Financial Stability, Financial Services and Capital Markets Union, stated: “We should put our money into projects that are compatible with our targets for a zero-carbon economy. This is important for the environment and the economy, but also for financial stability. The proposals presented today show that the European Union is committed to ensuring that our investments go in the right direction. They are about harnessing the vast power of capital markets in the fight against climate change and promoting sustainability.”
The first legislative proposals at EU level
In May 2018, the EC presented a package of measures implementing several key actions. This package includes:
- A proposal for the establishment of a classification system (“taxonomy”) laying down the criteria for sustainable economic activities and “green” investments to facilitate investments in sustainable assets. The taxonomy shall be gradually integrated into the EU laws, providing greater legal security.
- A proposal for a regulation on disclosures relating to sustainable investments and sustainability risks and amending Directive (EU) 2016/2341. This regulation will introduce disclosure obligations on how institutional investors and asset managers integrate environmental, social and governance (ESG) factors into their risk management processes. More precisely, asset managers and institutional investors that offer products or services marketed as sustainable shall have to disclose the way in which they achieve their sustainability targets;
- A proposal to amend the Benchmark Regulation. The proposed amendment will create a new category of benchmarks for low-carbon and positive carbon impact emissions, providing investors with better information on the carbon footprint of their investments;
- Establishing EU labels for green financial products. This will help investors easily identify products that comply with green or low-carbon criteria;
- Introducing a “green supporting factor” in the EU prudential rules for banks and insurance companies. This means incorporating climate risks into banks’ risk management policies and supporting financial institutions that contribute to funding sustainable projects
All these amendments and proposals shall help investors identify sustainable investments, placing environmental, social and governance risks at the core of the process.
The gradual implementation of this decision-making process at EU level started in 2018 with the submission of three legislative proposals with the European Parliament and Council, which shall vote on the proposals in the later half of 2019, while adoption and implementation are expected to take place starting 2021-2022.