Access to finance facilitating support for the Green Deal
The European Green Deal involves nothing less than a radical transformation of the economy and will require fundamental changes in many sectors including energy, transport, building design, and agriculture. Success will also depend heavily on scientific and technical innovation. All this requires huge investment. We estimate that Europe needs about €350 billion of extra investment annually to achieve our 2030 emissions target.
Periods of great change are also periods of great opportunity. Innovators who can devise solutions to our most pressing problems could grow into the great corporate champions of the new economy. The recovery from the COVID-19 pandemic also provides a unique opportunity to transform our economies and place them firmly on a path to low-carbon and climate-resilient development.
Around the world, investment in the energy transition is booming.
According to BloombergNEF, global investment in decarbonisation technologies across all sectors reached $500 billion last year, twice as much as in 2010. Clearly, more and more companies are sensing the opportunity and investing accordingly. But still more investment is needed. Here’s how to get the money flowing.
Tackling barriers to investment
The EIB Investment Survey shows that, although the proportion of companies investing to address climate change is significantly higher in the European Union than in the United States, EU firms consistently report higher barriers to climate investment than their US counterparts. Why? The reasons most cited by EU firms are uncertainty over regulations and taxation and the lack or unavailability of the appropriate skills and capacity on the labour market.
The public sector can help to lower these barriers. This July, the European Commission put forward a new sustainable finance strategy to make the EU’s financial system more sustainable and inclusive. Its principal aim is to help improve the flow of money towards financing the transition to a sustainable economy. By enabling investors to re-orient investments towards more sustainable technologies and businesses, the measures included in the strategy, notably to enhance transparency, accountability, and risk management and disclosure practices, will be instrumental in reaching the EU’s climate and environmental targets.
As the EU’s climate bank, the European Investment Bank is active in supporting the emergence of a global sustainable finance sector through its active participation as a Member of the EU Sustainable Finance Platform and its involvement as an observer/partner in several forums, including the International Platform on Sustainable Finance and the Network on Greening the Financial System.
Notably, we will align our tracking methodology for climate action and environmental sustainability finance with the framework defined by the EU Taxonomy Regulation, as this develops over time. To further integrate climate change, environmental and social considerations into our financing activities, we will enhance and develop additional risk management tools to assess physical, transition and systemic risks at project, portfolio and counterparty levels. The EIB Group will also seek to generate the data necessary to track progress in meeting its commitments through further development of climate and environment impact measurement and reporting systems, including to allow for reporting on the climate impact of intermediated financing.
In addition, the European Investment Bank is committed to energising investment in the priorities identified by the European Green Deal. By 2025, 50% of our annual lending volume will be devoted to climate action and environmental sustainability, up from 40% in 2020. By the end of the decade, we aim to support at least €1 trillion of investment in these priorities. Our approach is set out in detail in our Climate Bank Roadmap, which we published last year and which aims at mainstreaming climate action and environmental sustainability into everything we do. In broad terms, we aim to maximise our impact by building on our strengths in certain sectors; targeting specific investment gaps that we have identified; reassessing our risk appetite and capacity; and stepping up our advisory services.
The European Investment Bank has a strong track record in supporting large investments in low-carbon transport and in the decarbonisation of power generation. Projects in these areas typically require large volumes of long-term, low-cost capital, things in which the European Investment Bank enjoys a comparative advantage.
Target-based financing, where loan repayment terms are linked to the attainment of measurable targets such as a reduction in CO2 emissions, as in our recent deal with Enel, is a new tool with potential.
To address strategic investment gaps in areas such as battery supply chains, new renewable energy technologies or carbon capture and storage, for example, the European Investment Bank will consider the potential for new financing products, as well as increasing its volume of higher-risk, capital-intensive funding. By doing so, we can support the development of promising early-stage technologies and catalyse additional funding from other sources.
Blended financing structures, in combination with public grants, are another powerful tool to attract private capital with which the European Investment Bank has had great success. The European Fund for Strategic Investments (EFSI), which ran between 2015 and 2020, exceeded its target of mobilizing €500 billion in investment. It also enabled the European Investment Bank to expand its activity to more risky – but also more innovative – portfolios by as much is 30%. EFSI’s successor, the InvestEU Fund, will work in much the same way, with the European Investment Bank managing 75% of its €26.2 billion guarantee from the EU budget.
Increasing our investment in equity funds and our use of innovation finance tools and venture debt are other ways in which we can help new companies and early stage technologies to make the leap from demonstration to commercialization.
The EIB Group’s advisory services also have an important role to play in addressing uncertainty as a barrier to investment. Through JASPERS (Joint Assistance to Support Projects in European Regions), for example, the European Investment Bank provides independent expert advice and capacity building support to public authorities and final beneficiaries on how to plan, develop and implement high quality large investment projects to be co-financed by European funds, as well as programmes and sector strategies that deliver EU policy objectives. And through URBIS, a dedicated urban investment advisory platform, we provide advisory support to urban authorities to facilitate, accelerate and unlock urban investment projects, programmes and platforms.
Advisory services at the project preparation stage can also help to improve the positive impact of projects on climate and the environment and, along with venture or equity-type financing, promote innovation by helping young, innovative companies to develop.
For example, through InnovFin advisory, we help research and innovation projects and innovative companies secure the finance needed to reach their potential. The European Investment Bank’s current advisory portfolio includes nearly 1 000 assignments spanning everything from sustainable transport, energy efficient housing and floating windfarms.
Another key objective of our advisory services that we wish to strengthen is market development. By targeting key sectors and identifying their specific investment needs and gaps, the EIB Group can help to channel financing towards technologies and projects that make a real difference.
The green bond market has the potential to mobilise and direct significant private capital to investments in climate and environmental sustainability. The European Investment Bank pioneered these instruments in 2007 and has worked to develop the market since, issuing more than €33 billion in Climate Awareness Bonds to date. Adhering to the EU Taxonomy for sustainable activities, our green loans are expanding the range of activities eligible for funding with green bonds beyond the energy sector. We are also developing new green bond products that could be used by clients as a substitute for loans. This would extend our existing bond purchasing initiatives and allow us to help develop the market as a buyer, as well as an issuer.
More than just a transition—a just transition
The radical restructuring of our economy to achieve carbon neutrality will create many opportunities and bring many additional benefits, such as lower air pollution and greater energy security. However, businesses, regions and workers reliant on CO2-emitting activities will face hardship, as these are sacrificed in the name of the common good. It is vital and just that we should create new careers and new opportunities for these people, businesses and regions.
It is also important to recognise that a just transition must involve a number of different areas including a shift to new sources of energy; environmental rehabilitation (e.g. the decontamination of mines); a socioeconomic transition (attracting new industries, creating new jobs, training and reskilling); and an infrastructure transition (e.g. boosting physical, network and digital connectivity).
A just transition is a core component of the European Green Deal. Given our historic and statutory mission of fostering cohesion, the European Investment Bank will play an important role here, too, through the Public Sector Loan Facility. Part of the Green Deal’s Just Transition Mechanism, the Public Sector Loan Facility targets public entities, enhancing the affordability of projects that support a just transition—but do not generate sufficient revenue. The Facility consists of a combination of grants from the EU budget and loans provided by the European Investment Bank. Overall, the European Commission expects the facility to mobilise between €18 billion and €20 billion of public investment over the next seven years.
By mobilising investment in this manner, we will mobilise society behind the green transition.