Paris-alignment paves route to EIB’s climate bank transformation
Two years into a critical decade for the fight to cap global warming at 1.5 °Celsius, the European Investment Bank (EIB) is transforming into something the world has never had but now desperately needs - a multilateral climate bank. This groundbreaking shift is bringing the EIB’s entire balance sheet in line with the Paris Accords, influencing not only its own lending and borrowing but also the behavior of its counterparties.
The EIB’s approach to climate has long stood out both in terms of sophistication and ambition. As a borrower, the bank is a veteran issuer of green and sustainable bonds in benchmark size. As an investor, climate financing has steadily become an ever larger proportion of its business. In 2020 – the year the EIB launched its Climate Bank Roadmap (CBR) – green financing already accounted for 40% of total lending, according to Elina Kamenitzer, director for operations support at the EIB and, until recently, head of the bank’s climate office in the operations directorate.
“We are not at the beginning of the journey,” she says. “What we are doing is picking up speed and growing in scope.”
One of the CBR’s key tenets was to ensure that from the start of 2021 all new EIB financing activities are to be Paris-aligned: supportive of a pathway toward a net-zero economy, consistent with efforts to limit global warming to 1.5 °Celsius and resilient to climate change risks. Looking at its operations through this fresh lens, the bank found that many of the projects it finances comply with the Paris principles.
“This is the case for investments in education, low-carbon transport or biodiversity for example,” says Kamenitzer. “But there are other areas where we have to accept that we can’t reconcile investments with the Paris goals.”
Airport infrastructure is one such case. Despite the burgeoning hype around hydrogen and race to develop alternative low carbon fuels as a potential low-emission solution, the aviation industry currently lacks a viable decarbonisation pathway.
As a result, the EIB is refraining to support airport capacity expansion although continues to finance projects contributing to greening of airports or improving safety and security. The approach to high-emitting industries like steel, cement and ceramics has also been revised.
“We’re no longer engaging in projects that would contribute to the aggravation of the stranded asset problems or those relying on traditional fossil fuel based technologies,” says Kamenitzer. “The EIB is committed to support these sectors to decarbonise and transition to a low carbon future”.
ArcelorMittal is one example of the EIB’s engagement with the steel sector under the new CBR. In 2020, the firm borrowed €75m to fund groundbreaking demonstration projects that will capture and convert waste gases into ethanol, and waste wood into bio coal. In September 2021, EIB lent the firm €280m for R&D in order to hit an emissions reduction target of 35% by 2030 and net-zero by 2050.
We’re no longer engaging in projects that would contribute to the aggravation of the stranded asset problems or those relying on traditional fossil fuel based technologies. The EIB is committed to support these sectors to decarbonise and transition to a low carbon future
Similarly, the EIB will continue supporting building construction, but focus on projects with rigorous energy efficiency standards in line with the EU Taxonomy criteria. Road infrastructure will still qualify for EIB financing as it will be vital for the growing numbers of EV and alternative fuel vehicles of the future. The bank is also applying more rigorous economic tests to such investments, including the use of a revised shadow carbon pricing framework consistent with a net-zero 2050 target.
Engagement rather than exclusion
This determined but nuanced approach is manifest in the bank’s new Paris-aligned criteria for counterparties or 'PATH' framework, which it announced during COP26. The first principle that underpins the approach is one of dialogue and support.
“We want to engage rather than exclude,” says Kamenitzer. “On the other hand, we don’t want to be subject to greenwashing claims. We want to develop a framework that brings these elements together in a balanced fashion.”
Counterparties in high-emitting sectors will not be dropped out of hand, but in this critical decade the EIB wants to see clear and plausible decarbonisation strategies. These would include medium-term emission reduction goals (i.e. with a 5-10 year horizon) and some consideration of long-term plans for sustainability (out to 2050).
“We recognize industry specific challenges and trust that our counterparties are able to set appropriate emission reduction targets. We, however, expect these targets to be met and made public,” says Kamenitzer. “We’ll also expect relevant high-emitting counterparties, that have no decarbonisation plans in place and have not set emission reduction targets, to do so.”
These new strictures have not been developed in a vacuum. Within the EU at least, the shift towards increasing climate reporting and compliance is clear. But few entities have been able to convert the requirements of Paris into concrete action in the way that the EIB has. By leading the way when it comes to translating regulations into reality, the bank is helping prepare the continent’s companies for a new climate-compliant reality.
“We need to support clients in the transition, and that means providing them not only with financing but also advice,” says Peter Munro, head of investor relations at the EIB. “That advice may cover how to align with new regulations and prepare for that alignment.”
When it comes to the financial sector, for example, the EIB does not expect banks to publish decarbonisation plans but does expect them to report in line with the Task Force on Climate-Related Financial Disclosures (TCFD). By being ahead of the curve in imposing climate-related standards and criteria, the bank is in a position to support lenders in preparing for a world in which climate stress tests and reports become ever more ubiquitous.
This support – whether for a corporate looking to build a decarbonisation plan or a bank struggling to assess its exposure to climate change – is likely to be even more necessary outside of the EU. Not every country’s firms face the same regulatory pressure or have access to relevant assistance.
We need to support clients in the transition, and that means providing them not only with financing but also advice. That advice may cover how to align with new regulations and prepare for that alignment.
“For example, we have advisory projects for banks that have lesser in-house resources,” says Munro, adding that these are banks to which the EIB provides funding for on-lending to SMEs. “There’s a carve-out for SME’s in the EU’s Taxonomy for green lending, so we’re looking at how to address some of the gaps.”
Many European firms in high-emitting sectors like heavy industry or energy are already putting ambitious decarbonisation plans in place. But at the end of the day, Kamenitzer says the EIB has to recognise that there are sectors that are engaged in activities that today are simply not compatible with the Paris goals.
Oil and gas is a prime example. There may be room for the bank to engage with oil and gas firms as counterparties if such firms ramp up investment in highly innovative green technologies.
“But the EIB has a bottom line. We have said that we will not engage with oil and gas beyond those highly innovative investments, if the firm has not recognised peak oil and is still pursuing investment in areas like arctic drilling or unconventional oil exploration,” says Kamenitzer.
Paris alignment is a crucial step in the EIB’s transformation to a fully fledged climate bank, but it is not the only climate goal the bank has set for itself. In November, the bank announced a new plan that aims to triple its support to adaptation investment – 15% of total climate lending by 2025 – helping those countries and regions most vulnerable to the effects of climate change.
All of this falls under the EIB’s ambitious target of supporting €1trn in investment for climate and the environmental sustainability by 2030. By that point, the EIB is expected to have mainstreamed climate across all its operations. This is all part of being the EU Climate Bank.