The Green Deal is the EU 'climate neutral by 2050' strategy with an ambitious interim target for 2030 of reducing greenhouse gas emissions by 55%. It's ambition however, lies not just in the breadth of economic sectors captured in the strategy, although it conceives of an impressive array of initiatives for a multitude of sectors ranging from the large emitters of energy, waste management and transport to textiles, buildings and food, but in how it is to be financed.
Financing the Green Deal
To fund the transition to net zero emissions, the EU needs investment of around €330bn every year by 2030. To achieve this target, the European Green Deal Investment Plan was launched in January 2020 with the central aim of mobilising at least €1tn in sustainable investments over the next decade. The EU budget is set to play a significant role in reaching these targets, with €503bn being invested over the next 7 years in a range of climate and environmental projects from small individual household energy renovations to large scale installations of EV charging networks.
However, public money alone is not enough to finance the Green Deal. Private capital markets are needed to bridge the gap in funding and the EU has launched a wide-ranging and highly impactful programme to re-orient private investment in support of its Green Deal with a target investment of €279bn.
The use of private investment to fund public projects, while novel is not unheard of and, according to the head of the European Central Bank, parallels can be drawn between the private market financing of the Green Deal and the great mobilisation of US capital markets in the late 19th century to fund building of the railroad network in the form of railroad bonds. The creation of a green capital markets union, like the US railroads, is expected to yield significant benefits not just through its support of EU climate neutral objectives but also in the de-risking of the EU economy and building resilience in the face of severe climate change and environmental degradation challenges. According to Christine Lagarde "While banks can and should provide a good share of this funding, capital markets can provide innovative tools to close the investment gap. Capital markets are better suited to financing projects with a defined purpose, directly linking investors to the impact they intend to achieve. And they are also better at drawing retail investors towards supporting transformative activities."
Impact of Green Deal on public and private sector investment
The Green Deal will finance a host of diverse projects from the modernisation of public heating infrastructure, to supporting the installation of solar panels in private homes and making industrial companies more energy efficient to modernising public electricity supply in EU Member States.
Aside from the direct, and indeed multiple indirect impacts of the Green Deal on public investment however, the private investment sector is also set to be transformed by the EU climate-neutral targets. Green capital markets are already well advanced; the EU is the location of choice for green bond issuance, with around 60% of all green senior unsecured bonds issued globally in 2020 originating in the EU and the market is seeing rapid growth – since 2015, the outstanding volume of green bonds issued in the EU has grown almost eight-fold and in 2020 around half of the green bonds issued worldwide were in euro.
However, it is not just debt in the green finance mix; environmental, social and corporate governance (ESG) investing is also concentrated in the EU with assets under management of investment funds with ESG mandates tripling since 2015. Equity capital markets are key as in the EU's view they typically lead to more green innovation and a faster reduction in carbon emissions. This is where the EU framework for ESG disclosures comes into play. A broad, cross-sector initiative enshrined in legislation, the ESG disclosures framework mandates detailed and challenging analysis of the impact of capital market players on the environment and social issues. It centres around the EU standard for green activities set down in an EU Taxonomy which facilitates both the critical assessment of investments and disclosure against a 'gold standard' for sustainable activities. The framework is already well advanced and its growth and reach over the next five years is set to monumentally transform private capital markets as the EU strongly incentivises the radical adjustment away from unsustainable investment practices towards investing in support of the EU climate targets.
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