EU Green Agenda Needs More Than Private Funding
Funding gaps in the European Commission’s 2024-29 plan will require financial input from both the public and private sectors.
The re-appointment of Ursula von der Leyen as President of the European Commission has reassured investors that a steady hand will remain on the wheel to steer the EU’s green transition, but funding-related concerns remain around the delivery of her five-year strategy.
Following the confirmation of Roberta Metsola for a second term as President of the European Parliament in June, von der Leyen also secured an absolute majority – with over 400 MEPs in favour – largely thanks to her alliance with social democrats and liberals to front the bloc’s rightward swing.
While von der Leyen had introduced a raft of ambitious climate and sustainable finance legislation – enshrined in the Green Deal – in her first term, her agenda for 2024-29 is more pragmatic, tying competitiveness with sustainability-related ambitions.
The fulfilment of these goals, however, currently largely hinges on capital input from the private sector.
“It is often forgotten [by EU leaders] that private money comes on the condition that the yield and return are sufficient to cover the risk,” Thierry Philipponnat, Chief Economist at NGO Finance Watch, told ESG Investor. “Projects need to be bankable and profitable to attract private capital.”
One of the measures put forward by von der Leyen – the completion of the Capital Markets Union (CMU) – will likely only meet a third of the bloc’s investment needs, according to a new Finance Watch report. Climate-related impacts alone will require the EU to invest between 4-9% of GDP for climate mitigation measures, and 1.1-1.3% for adaptation if global warming exceeds 3°C by the end of the century.
Yet, there are inherent limitations to capital markets’ financing of climate change mitigation and adaptation projects, Finance Watch stressed. Tools such as the capital asset pricing model, risk premiums and the risk-free rate often undervalue longer-term sustainability-focused equity and debt investments.
As an example of a less enticing climate-related investment opportunity for the private sector, Philipponnat pointed to the need to build sea walls to protect coastlines from rising sea levels.
“Although such infrastructure is indispensable to society, it’s not going to generate returns or cash flows to attract private capital,” he said. “This means only public capital can take care of it.”
Existing sustainable finance frameworks – such as the Sustainable Finance Disclosure Regulation (SFDR) and the Corporate Sustainability Reporting Directive (CSRD) – do help to provide clarity and steer more private capital toward sustainable activities but they do not remove the need for projects to be profitable before any sustainability criteria are applied.
“Saying that private capital can fund non-profitable projects is a fantasy,” Philipponnat continued. “If political leaders maintain that narrative, we’re headed for a dead end. The EU has to face this reality.”
Finance Watch has called on both the commission and parliament to recognise the significant risk of under-investment in the EU’s climate mitigation and adaptation measures – as well as to take steps to quantify the likely maximum contribution of capital markets and corresponding investment shortfall.
Pragmatic approach
In a speech at parliament last week, von der Leyen reiterated her commitment to the targets of the European Green Deal “with pragmatism, technology-neutrality and innovation”. This was a particularly important statement in the context of watered down climate goals across Germany, Italy and France.
“The EU has been a trailblazer in the development of [sustainable finance] standards,” said Elise Attal, Head of EU Policy at the UN-convened Principles for Responsible Investment (PRI). “At a global level, it will be important for investors to see that Europe can maintain a strong climate voice and that ambition won’t be diluted.”
Von der Leyen’s increased pragmatism is also an important balancing act in the eyes of sustainability-focused investors, while continuing to ensure support across all EU parties.
“When you look at the US with its Inflation Reduction Act, von der Leyen’s strong economic competitiveness focus makes more sense,” Attal added. “The EU doesn’t want to get left behind – to ensure that, [the bloc] needs to maintain and grow its green industries and technologies.”
But pragmatism does not have to mean diminished climate ambition. As well as enshrining a 90% emissions reduction by 2040 target within the European Climate Law, von der Leyen has proposed the establishment of a Clean Industrial Deal and European Competitiveness Fund to better leverage private and public investment.
In March, the PRI published its 2030 EU Policy Roadmap to foster support for institutional investors – calling on lawmakers to develop sector-specific measures, robust corporate transition plans, and an extended EU Taxonomy. The PRI also asked for further development and clarification of fiduciary duty.
“The EU should also look to finetune and improve the existing sustainable finance framework and [shore it up] where there are gaps to ensure overall usability,” added Attal, pointing to ongoing work reviewing the SFDR as an example.
“The main unanswered question is where the money is going to come from,” she added. “Von der Leyen has made several commitments, but there are no concrete figures tied to these announcements, such as for the European Competitiveness Fund. Will it be fresh, new money? Or is it going to be money repackaged from previous funds?”
More details on funding are expected to emerge in the commission’s work programme, which will be published early next year.
As for more immediate next steps, von der Leyen will now constitute the College of Commissioners based on the 27 EU member states, with candidates due to undergo public hearings in September – after which MEPs will vote to confirm the final composition.
Last month, EU leaders also elected António Costa as President of the European Council, which has also set its strategic agenda for 2024-29.
With the picture of EU leadership now almost fully established for the next five years, establishing measures to bolster public investment alongside private should be paramount for lawmakers, Philipponnat insisted.
“The EU could consider changing the current fiscal rules, raise money at the EU-level or monetise the deficits,” he said. “We recognise that none of these solutions are on the table today and none of them are politically realistic as we speak. Yet, there is no choice but to act: if there is a fourth solution, we would love for [lawmakers] to tell us what it is.”
The post EU Green Agenda Needs More Than Private Funding appeared first on ESG Investor.