EC report encourages climate-friendly investment

The report includes a number of green bonds related policy actions and has implications for the Capital Markets Union, Investment Plan for Europe and more.

The European Commission’s Directorate-General for Climate Action (DG CLIMA) launched the report ‘Shifting private finance towards climate friendly investments’ commissioned to the Climate Bonds Initiative, 2 degrees Investing, CDC Climat, Frankfurt School of Finance and Management’s UNEP Collaborating Centre for Climate & Sustainable Energy Finance, and Triple E Consulting.

The report provides European Union (EU) policymakers with an actionable toolbox for mobilising private finance for climate-friendly investments, focusing on tapping into the capital pools of institutional investors. The list of policy actions identified is exhaustive and includes a number of policy measures that will support the growth of the green bonds market.

Sean Kidney, CEO of the Climate Bonds Initiative and co-author of the report, said: ‘Every category in the basket of actions has something to offer to the proposals currently set out for the EU Capital Markets Union and Juncker’s Investment Plan for Europe placing the recommendations squarely on the mainstream financial policy agenda. This gives EU policymakers more than enough options to give a boost to sorely needed green infrastructure in the EU.’

He added: ‘The shorter-term policy options for the EU proposed in the report are all about making climate-friendly assets more attractive for institutional investors.’

Other action areas explored include the potential of policy risk insurance; the role of the EU in engaging the financial sector in the international climate negotiations and a set of medium- and longer-term policy options targeting investors’ decision-making framework. Action areas here include lengthening time horizons of institutional investors; explore the use of tax incentives on climate-friendly financial products (such as green bonds); improve governance of institutional investors, accounting and disclosure of financial institutions.

Green bonds are standard bonds with a green bonus feature. Their proceeds are "earmarked" for assets important to addressing climate change. The green bonds market tripled in size in 2014 reaching the issuance of $36.6 billion.

The report includes the following highlights for the green bonds agenda:

Increase the volume and acceptance of green bonds by issuance of and cornerstone investment in green bonds from the EIB, EBRD and others; integrate green bond support in technical support programmes such as the proposed Investment Hub under the Investment Plan. “Investing in Europe” workshops proposed under the Investment Plan should include sessions on green bond investment opportunities. The EC can convene EU covered bond regulators to explore the development of green covered bonds, and work with the European Banking Authority (EBA) to integrate issues related to green covered bonds in their next best practice guidelines.

Improve the risk-return profile of green bonds through credit enhancement initiatives. This includes making existing and proposed credit enhancement initiatives - such as the Investment Plan’s proposed European Fund for Strategic Investments (EFSI) and the Project Bond Initiative - prioritise green bonds. Renewable energy investments should be brought into the eligibility criteria for an extended Project Bond Initiative. Additionally, EU policymakers should explore setting up a separate Green Project Bond Initiative specifically designed for climate-friendly investments.

Supporting green securitisation. Support for ‘high-level securitisation’ in the context of the Capital Markets Union agenda should place a particular emphasis on green securitisation. This includes supporting the development of standards loan contracts for climate-friendly assets, supporting warehousing structures – such as the proposed Renewable Energy Platform for Institutional Investors (REPIN). Adding credit enhancement to the green asset-backed securities where required is another potential action point: a model to follow already exists for this in the SME Initiative.

Improve accounting & disclosure of financial products. For green bonds this means supporting the development of standards for green bonds. The Capital Markets Union green paper explicitly highlights that standardisation is a mechanism to kick-start markets.

On the 27th of April European Commission and the project partners will hold an event in Brussels to discuss the findings of the report.