New EU Green Financing Strategy Avoids Decision on Nuclear and Gas

With a renewed sustainable finance strategy introducing a new green bond standard and support for smaller companies, the EU hopes to provide the financial market guidelines needed to achieve the bloc’s ambitious climate targets.

With the new ‘gold standard’ for green bonds announced by the European Commission, EU members could mobilise hundreds of billions of euros in private capital to finance green projects and help bolster the EU’s bid to become the leading market for sustainable investments. However, the new strategy also represents a “missed opportunity” to resolve controversial key issues about green finance, particularly with regard to the future role of nuclear and gas power in Europe’s energy mix, sustainable finance market watchers have said.

The EU is trying to shore up its ambition to become the world’s leading market for climate-friendly investments with a revised sustainable financing strategy and a new green bond standard, as observers criticise the new strategy as a missed opportunity to make progress on unresolved issues over future nuclear and natural gas financing.

The strategy presented on 6 July outlines how funds can be raised in the context of the European Green Deal in a way that maximises the application of sustainable investment principles and minimises negative effects on climate, social norms and other areas. “The reason we are doing this is simple: because we need money,” an EU official told a news conference about launching the strategy.

According to the Commission, the EU would need an additional €350 billion a year to fund Green Deal-related activities and prepare the continent for its goal of achieving full climate neutrality by mid-century, with a large share of the funds having to come from private investors.

EU Commissioner Mairead McGuiness stressed that the financial sector would have to play a key role in ensuring that the EU can live up to its ambitions stated in the Green Deal. “We need sustained efforts to ensure more money flows into a sustainable economy” and “create a more inclusive society,” he said. Ultimately, this could only work in international cooperation, for which tools such as EU green bonds would offer a “gold standard” that lays the foundation for a global approach. The Commission also specified its future disclosure requirements on the degree of sustainability of the activities of financial and non-financial companies in line with the EU sustainable finance taxonomy.

While the commissioner said the strategy would set out “an ambitious roadmap,” observers of the green finance market were less convinced of its effectiveness. Ingmar Jürgens, a member of the Sustainable Finance Research Platform, a cooperation between five research institutions co-funded by the German government, slammed the Commission’s proposal as “vague and hesitant”. While it had made good progress in initiating and promoting sustainable financial activities in general in recent years, the latest announcement would ultimately have been a missed opportunity to resolve key conflicts and enunciate clear principles. “It could be argued that the Commission has lost the courage to take the necessary steps to get the financial sector to contribute to the Green Deal.”

Green bonds and assistance to SMEs

The strategy is part of a wider effort by the EU and its members in recent years to align the economy with emissions reduction targets. Most notably, the Green Deal offers a range of coordinated activities to improve the environmental footprint of the continent’s energy, housing, industry, mobility and food sectors through targeted investments that are also supposed to function as catalysts for economic growth. At the same time, around a third of the EU’s coronavirus recovery fund, worth around €800 billion, is linked to environmental targets to avoid environmental damage during the recovery expected to follow the pandemic-induced fall.

Since the launch of the first segment of the strategy in mid-2020, several developments have imposed the need for a renewal. These include the economic impact of the coronavirus pandemic and the advent of a new US administration that seems determined to take a much more active role in greening the global financial system than its predecessor. The Commission argued that the renewal would allow for better integration of small and medium-sized enterprises (SMEs), which in particular in Germany have expressed concern that new and stricter rules on financing could overburden their limited capacities.

The publication of the strategy was preceded by an urgent warning issued by the European Central Bank and the European Systemic Risk Board (ESRB) on the impact of climate change on the stability of the European financial system. The institutions said global economic growth could contract by a fifth by the end of the century if global warming mitigation proves insufficient or ineffective.

The key principles of the revised strategy include provisions to improve access to transitional finance, in particular for SMEs and individual consumers. It also underpins efforts to increase the stability of the EU financial system with regard to the physical consequences of global warming, such as droughts or floods, and other sustainability risks, while enhancing the contribution of the financial sector to curbing climate change. The new strategy also doubles the ambition to maintain a leading role in green finance globally and ensure the creation of international networks and bodies capable of comprehensively implementing sustainability principles in the sector.

The EU’s new green bond standard would help meet growing customer demand for the financial asset which, in turn, is much needed to initiate investments in modernising energy infrastructure, housing stock and transport systems, while at the same time ensuring that greenwashing of investments is avoided. “Green bond issuers will have a robust tool at their disposal to demonstrate that they are funding green projects aligned with the EU taxonomy,” the Commission said. “The bonds would also be open to investors from outside the EU,” he added.

The role of nuclear power and gas remains unclear

However, the renewal did not address key unresolved questions about Europe’s green finance strategy, namely whether it should also include the financing of nuclear energy and natural gas projects. In fact, the latest proposal would mean a “dilution” of previous agreements, as it regresses on the principle of reducing the role of nuclear power and natural gas in Europe’s energy transition, said researcher Ingmar Jürgens.

Opinions on the permanent or temporary suitability of technologies for decarbonisation efforts differ substantially between the EU’s two largest member states, France and Germany. Germany and other states more skeptical about nuclear power’s role in Europe’s attempt to become climate neutral warned against including the technology until shortly before the strategy’s launch, citing concerns about reactor safety and the unresolved issue of nuclear waste storage. At the same time, Germany and other countries had insisted that natural gas remains a viable option for Europe’s energy transition.

Jürgens said that, in fact, the technology would be necessary to ensure an adequate energy supply in the short term. But Germany’s insistence on including natural gas projects in its green financing plans would be “irritating,” given the country’s stated ambition to become a leader in green finance. “There’s a missed opportunity here to show that you’re serious,” he argued. Similarly, a report on the use of nuclear energy by the Joint Research Centre (JRC) consulted by the Commission to decide on the subsequent use of nuclear energy would have ignored scientific principles and instead would have included ‘almost amusing’ passages equating the storage of nuclear waste with that of CO2, Jürgens said.

The researcher also criticized that few provisions were made to ensure that the state does its fair share by making its own investment decisions more transparent and sustainable, even though the global bond market is dominated by public issuers. “It is unacceptable that only companies are supposed to comply while EU member states get a free pass.”

Magdalena Senn of the NGO Finanzwende (financial transition) criticized the strategy as a “weak blow” that could block harmful investments for decades. The Commission would “not live up to its ambition,” Senn said, arguing that lobbyists had successfully intervened to ensure that controversial investment activities can get a green label.

German energy industry group BDEW said the Commission was right to classify some technologies as transitional tools on the road to climate neutrality. “This includes gas power plants and infrastructure to enable parallel phase-out of nuclear and coal power” in Germany, argued BDEW director Kerstin Andreae. “The energy transition can only succeed if we manage to ensure security of supply throughout the transformation process,” he said.

Source: The Energy Newspaper