European Investment Bank: Financing the climate transition
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European Investment Bank: Financing the climate transition

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Sustainable finance has come a long way — but not far enough. Two European Investment Bank climate finance experts discuss why capital markets are not yet turning the tide against climate change, and why rigorous guidance on transition finance is so badly needed.

Nancy Saich, chief climate change expert at the European Investment Bank, is unequivocal about the contribution she hopes this week’s World Bank/IMF meetings will make to the battle against climate change: “I hope people listen to the scientists and realise how urgently we need to act, rather than talk about what they’ll be doing in a few decades’ time. The message is: urgency, urgency, urgency.”

Saich’s impatience is understandable. According to estimates from the Climate Bonds Initiative, issuance of green bonds has now reached $2.3tr. It sounds an impressive number. But $2.3tr is modest in the context of a global bond market which was valued at about $133tr at the end of 2022.

Besides, the green capital market has not succeeded in stopping the impact of climate change. “It’s great news that so much finance is flowing through the green bond market,” says Saich. “But carbon dioxide emissions are still rising, which means that the global warming situation is getting worse. There’s still not enough investment flowing into the technologies we need, such as renewables and low carbon transport.”

Saich says the private sector has interpreted the commitment enshrined in the Paris Agreement to “make finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development” as a commitment to reaching net zero by 2040, 2050 or even 2060. That is not fast enough.

“The future of the climate will be determined by what we do this decade,” she says. “As well as decarbonising dramatically, we need to invest in climate resilience. We’re still not working towards these goals with sufficient ambition.”

Stop the harm

Eila Kreivi, chief sustainable finance advisor at the EIB, points out that sustainable finance does not just occur through green bonds. But she shares Saich’s scepticism about the progress being made in the “iceberg” of financing, below the “tip” represented by the green bond market. She says no part of the financial markets is yet coming close to fulfilling the Paris commitment.

Increasing the flow of green investment is just one aspect of the problem. All the mainstream financing “should all be at least not doing any harm to this transition, to the Paris goal.”

Institutions claiming to be net zero if they finance “100 units of carbon emissions increase at the same time [as financing] 100 units of carbon emissions decrease” was “not going to work,” she said.

As a UN expert group had argued at COP 27, Kreivi said, “if you want to be net zero by 2050, well then stop financing new fossil fuel investments already now. We just have to stop this.”

One way of channelling funding into more effective areas would be via a stronger and more coordinated commitment to transition finance.

Kreivi says there are some encouraging signs that this is gathering momentum, pointing to Japan’s plans to issue transition bonds and recent discussions at the Green Bond Principles organisation.

Many attempts to raise transition five or six years ago were “a little bit misleading”, she says, as they represented only incremental improvements, like “drilling oil with solar power panels”.

Now, she said, borrowers “are required to tell a convincing story — how does this issue help your transition? And you have to explain what that transition is.”

But she adds that if this market is to gain more traction worldwide, it will need clearer guidance from regulators and legislators about the true meaning of a sufficiently ambitious transition.

All round honesty

“Transition has to represent a change which is fully compatible with the climate and environmental goals,” says Saich. “This means we need to be honest about the things which aren’t sufficiently ambitious. But we also need to be honest about the type of activities that can’t transition without putting people’s livelihoods and jobs at risk.”

Saich says that ensuring this just transition is a reality rather than a slogan will call for productive partnerships between the public and private sectors. This may require government intervention in some industries.

In the automotive sector, the leading car manufacturers are all making progress in transitioning towards electric vehicles. But companies in their supply chains may find it less easy to transition quickly. Vulnerable companies and employees will probably require assistance from the public sector. The EIB is committed to supporting this process by proactively identifying the

regions and industries most at risk from transition and financing initiatives supporting education and job creation.

In fairness to investors and lenders, assessing which sectors and projects are appropriate candidates for sustainable finance is not always straightforward. Take natural gas, regarded by some as a clean alternative to coal or oil. It is, however, a fossil fuel which generates huge carbon emissions.

“We repeatedly hear that we should be using gas rather than coal in the power industry,” says Kreivi. “That’s rather like telling me I can lose weight by only eating half a pizza or half a chocolate cake.”

Saich describes the idea that gas is a valid transition option for power generation as a myth. “We know how to produce electricity in a way that’s low emission,” she says. “But there is still a place for gas in other industries, such as using it as a source of heating buildings, where efficient gas boilers are an important part of the transition dynamic.”