A new report gives European policymakers the tools to steer private finance towards climate-friendly investment.
The European Commission’s report released in Brussels on Wednesday defines “climate-friendly investments” as those aligned with the EU’s transition to a low-carbon economy that limits global warming to 2°C.
The report says the current share of climate-friendly assets in EU institutional investors’ portfolios is “tiny” – between one and two per cent.
But, it says, the current investment rate is far lower than projected climate-related investment needs.
“In the EU alone, the annual climate investment needs to 2020 are estimated to 200 billion euros, significantly more than the 120 billion that was invested in 2011/2012,” the report states.
“Globally, the needs are even larger, with annual investment needs of 780 billion.”
The report says the climate investment challenge overlaps with the larger infrastructure investment challenge, and that the world’s economies would benefit from better marrying the two.
“The majority of low-carbon and climate resilience investments can be seen as infrastructure investments with the added requirement that they also have to be climate-friendly,” it states.
Energy efficiency in buildings is given special mention.
“Climate-friendly buildings with lower energy profiles that save everyone money need to be constructed and retrofits completed… It’s worth noting that the payback period for the average energy efficiency investment is usually no more than three to five years – this is a highly investible sector that simply needs a massive educational and regulatory kick along to make sure emissions are cut quickly.”
The report states there is untapped potential in terms of capital from institutional investors that can help close gaps in climate-friendly investment.
The list of policy actions recommended is exhaustive and includes a number of measures to support the growth of the green bonds market, which tripled in size in 2014, reaching a worth of $36.6 billion.
Climate Bonds Initiative chief executive and co-author of the report Sean Kidney said the new policy recommendations were now part of the EU’s mainstream financial policy agenda.
“This gives EU policymakers more than enough options to give a boost to sorely needed green infrastructure in the EU,” Mr Kidney said.
Highlights of the report’s green bonds agenda include increasing the volume and acceptance of green bonds, improving the risk-return profile of green bonds through credit enhancement and improving disclosure of financial products.
Other recommendations include policy risk insurance, the role of the EU in engaging the financial sector in international climate negotiations and longer-term policy options targeting investors’ decision-making.
The European Commission will hold an event in Brussels on 27 April to discuss the report’s findings.
- See the full report.