Towards a greener Europe: financing the low-carbon transition

The shift to a carbon-neutral economy requires expensive measures. How will the EU support its green transition and avoid greenwashing?

At the moment when I am writing this article, we still have 6 years, 250 days and roughly 13 hours left to achieve zero emissions and avoid a rise by more than 1.5°C in global temperatures. This level of warming is considered to be the “point of no return” as it represents our last chance to prevent and mitigate the worst risks related to climate change. However, according to the Intergovernmental Panel on Climate Change (IPCC), “some vulnerable regions, including small islands and Least Developed Countries, are projected to experience high multiple interrelated climate risks” even if we do meet the 1.5°C objective.

Planning the transition: the European Green Deal

The European Union (EU) has committed to the environmental and sustainability cause by implementing the UN’s 2030 Agenda for Sustainable Development and signing the Paris climate agreement in 2015. The former sets 17 Sustainable Development Goals (SDGs) that aim to achieve a more sustainable development within 13 climate action goals, and goal 13 (climate action) urges Member States to reduce global carbon emission and limit global warming to 1.5°C. This goal follows up on the Paris Agreement, an international treaty on climate change that was signed by 196 Parties on the 12th of December 2015 (the EU formally ratified it on the 5th October 2016). The Treaty aims to limit global warming below 2°C above pre-industrial levels, preferably to at most 1.5°C. On a financial level, the Paris agreement encourages States to redirect financial flows towards low-carbon and climate-resilient activities.

Frans Timmermans, Executive Vice President of the European Commission for the European Green Deal and European Commissioner for Climate Action since 2019

Choosing investments: the EU Taxonomy

On 12 July 2020, the Taxonomy Regulation entered into force in the European legislation. It was the world’s first-ever “green list”, which is a classification system for sustainable economic activities. A couple of months later, on the 21st of April 2021, the Commission presented the so-called “April Package”, comprehending the EU Taxonomy Climate Delegated Act, the Corporate Sustainability Reporting Directive (CSRD) and six amending Delegated Acts.

Making investments: green bonds and the Green Bond Standard

There are specific debt instruments used to finance projects that have positive environmental or climate effects: green bonds. This kind of bond is not exclusively issued by green companies. As a matter of fact, any company which desires to invest in green activities can resort to this instrument. Although economically speaking, green bonds are notmore convenient than regular bonds (yields are generally compensated for financial costs such as issuing costs), they can be used as signals for a company’s actual commitment to the environmental cause. Moreover, the issuance of green bonds enhances corporate visibility, diversifies the investor base and strengthens stakeholder relations. In any case, it has been proven that green bonds have a more positive impact on the environment than regular bonds: the average reduction of carbon emissions is assessed at 4%, and it increases to 8% in the case of new sustainable investment projects.

Is it enough?

You have come to the conclusion of this article, so let’s take another look at the Climate Clock: 6 years, 248 days and roughly 12 hours left. It is clear that time is running out, and our doomsday is nearer than ever. The European Green Deal is challenging for both European institutions and market participants. However, it will not be sufficient if the EU stands alone and there is not a vigorous and global joint effort in favour of the climate cause. Luckily, the EU advocates the green economic transition and actively promotes cooperative initiatives in international fora. Will we be able to meet the climate and environmental objectives? Or are we ready to live in a dystopian future?

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