Green Finance in Europe — Strategy, Regulation and Instruments (pdf)

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Green Finance in Europe — Strategy, Regulation and Instruments

Forum DOI: 10.1007/s10272-021-1011-8 End of previous Forum article Volker Brühl Green Finance in Europe – Strategy, Regulation and Instruments The publication of the 6th assessment report by the Intergovernmental Panel on Climate Change (IPCC, 2021) on 9 August was another wake-up call for policymakers around the world that there is an urgent need for action to ﬁght climate change. The report delivers once more the scientiﬁc evidence that global warming of the atmosphere, oceans and land is caused, to a large extent, by human activities. The observed acceleration of climate change increases the pressure to implement greenhouse gas (GHG) reduction measures on a global scale. A green transformation of nearly all parts of our economy is necessary, including but not limited to energy production and consumption, mobility, manufacturing and agriculture. The enormous investment volume required is very hard to quantify due to the global, multisectoral nature of the problem and the lack of reliable data. Nevertheless, estimates of the investments required to achieve the low-carbon transition range from US $1.6 trillion to US $3.8 trillion annually between 2016 and 2050, for supply-side energy system investments alone (IPCC, 2018, 154). Although climate ﬁnance Volker Brühl, Center Frankfurt, Germany. for Financial Studies, ZBW – Leibniz Information Centre for Economics has reached record levels, funding still falls far short of what is needed under a 1.5°C scenario (Buchner et al., 2019). Of the global climate ﬁnance volume of US $579 billion (two-year average 2017/2018), about US $326 billion was provided by the private sector and US $253 billion by the public sector. In light of this, the ﬁnancial sector plays an important role for a successful sustainable transformation of the global economy. The European Green Deal stipulates that the EU will become climate-neutral by 2050 (European Commission, 2019). The intended transformation of the EU will require enormous investments from both the public and the private sector. The EU estimates that approximately €350 billion of additional investment is required in the energy system alone each year up to 2030 in order to meet the 55% emission reduction target (European Commission, 2021b). To ﬁnance the Green Deal, the EU Commission has announced that a total of €1 trillion will be invested in the green transformation of the European economy. The funds will be generated, inter alia, under the 2021-2027 Multiannual Fi© The Author(s) 2021. Open Access: This article is distributed under the terms of the Creative Commons Attribution 4.0 International License (https://creativecommons.org/licenses/by/4.0/). Open Access funding provided by ZBW – Leibniz Information Centre for Economics. 323 Forum Figure 1 The interaction between climate protection and green ﬁnance in the EU Climate action – real economy UN Agenda 2030 (17 sustainable development goals) Green finance – financial sector Paris Agreement 2015 European Green Deal Investment Plan at least €1 trillion European Green Deal EU Sustainable Finance Fit-for-55 HLEG/TEG EU climate law European Action Plan SF EU climate investments Public sector investments Private sector investments Disclosure Regulations* Taxonomy Regulation Green Bond Standard FinMarket Regulation Low Carbon Benchmarks ESG investment products Notes: SF = Sustainable Finance, HLEG = High-level Expert Group, TEG = Technical Expert Group, *Sustainable Finance Disclosure Regulation, NonFinancial Disclosure Regulation, Corporate Sustainability Reporting Directive. Source: Author‘s own illustration. nancial Framework (MFF) and Next Generation EU fund with a total volume of €750 billion. Although this is a large sum, a huge gap of at least €2.5 trillion remains to be ﬁnanced predominantly by the private sector, for which appropriate regulatory framework conditions and incentives are needed to further promote environmental, social, governance (ESG) investments. This article illustrates the interdependence between the various climate protection programmes and the sustainable ﬁnance activities established so far in the European Union. Key regulatory initiatives such as the Taxonomy Regulation as well as disclosure frameworks and other aspects of ﬁnancial market regulation are explained in the context of the European Sustainable Finance Strategy. Finally, some missing elements that could help to further mobilise capital to ﬁnance the European Green Deal are discussed. The EU’s Sustainable Finance Strategy In light of the critical role of the ﬁnancial sector for providing sufﬁcient capital, sustainable ﬁnance is receiving more attention in both academic research and the ﬁnancial sector. Leading asset managers and investment ﬁrms offer ESG ﬁnancial products that claim to take sustainability factors into account throughout the entire investment process. However, while they are often used interchangeably, one needs 324 to differentiate precisely between sustainable ﬁnance and green ﬁnance or climate ﬁnance. Sustainable ﬁnance refers to the process of taking ESG considerations into account when making investment decisions in the ﬁnancial sector. Environmental considerations might include climate change mitigation and adaptation as well as the preservation of biodiversity, pollution prevention and the circular economy (European Commission, 2021e; Berrou et al., 2019). Within the context of sustainability, there are manifold ways of deﬁning green ﬁnance (European Commission, 2017). For the purpose of this paper, we deﬁne green ﬁnance as the ﬁnancing of investments that provide environmental beneﬁts such as reductions in air, water and land pollution, reductions in GHG emissions, improved energy efﬁciency and mitigation of and adaptation to climate change. This deﬁnition is in line with the Taxonomy Regulation and the targets of the European Green Deal and is also close to the deﬁnition provided by the G20 Green Finance Study Group (2016), as we understand green ﬁnance as a subset of sustainable ﬁnance. In that context, climate ﬁnance refers to the ﬁnancing of public and private investments that seek to support mitigation of and adaptation to climate change and can therefore be considered as a subset of green ﬁnance (Hong et al., 2020). Intereconomics 2021 | 6 Forum Figure 2 Cornerstones of the Taxonomy Regulation Environmental objectives Criteria for environmentally sustainable activities Climate change mitigation Contribution to at least one environmental objective, enabling and transitional activities Climate change adaptation Protection of water and marine resources Transition to circular economy + No significant harm to any other environmental objective (DNSH) + Compliance with technical screening criteria (Delegated Acts) Pollution prevention and control + Protection of biodiversity and ecosystems Fulfillment of certain safeguards (e.g. OECD Guidelines) Implementation of the Taxonomy ( (...truncated)