Sustainability, The European Green Deal and its impact on investing

These days we are all about sustainability and leading an environmentally friendly life:  we drive in electric cars, we wear sustainable fashion, we eat organic food, … But what about our money? Is our money as green, sustainable or ecofriendly as our car, clothes and cuisine?

How does the European Green Deal fit into this picture?

The Green Deal is the EU’s response to the ongoing climate crisis. With the help of this roadmap (proposals to limit global warming and ensure a substantial reduction in carbon emission) Europe is striving to become the first climate neutral continent by 2050.

How will this Green Deal boost sustainable finance?

The European Green Deal emphasizes the need to direct financial and capital flows to greener investments. The Sustainable Europe Investment Plan (the plan to finance the Green Deal) announced the establishment of an EU green bond standard (EUGBS). These green bonds play an important role in financing assets needed for low-carbon transition. The new standard should encourage market participants to issue and invest in EU green bonds and improve the effectiveness, transparency, comparability and credibility of the ‘green’ market.

Green bonds?

The difference between regular bonds and green bonds is that the issuer of a green bond commits to spend the money raised on projects that are beneficial for the environment (renewable energy, energy efficiency solutions, sustainable vehicles, etc). The issuer will announce publicly the projects the company is investing in. This is a win-win situation: the investors know that their investment is making a positive contribution to the environment and get reassurance that the company they are investing in is taking climate change seriously. The issuer can show to investors what is being done to tackle climate change, which could lead to a reputational boost. This could lead us to a more sustainable climate friendly economy.

Green bonds also differ from sustainability-linked bonds in the sense that sustainability-linked bonds are related to the overall environmental performance of a company. They come with specific targets (KPI’s) related to the money raised by the company. If the KPI’s are met, the interest on their debt will be lower. A great incentive for companies to go green.

Are these bonds actually green? What about greenwashing?

Indeed, many different definitions exist about what is ‘green’. A company could make a sustainability claim without evidence or overstate their positive environmental effects. The rapid growth of issuances in green bonds increased the demand for standardization to prevent or stop greenwashing. Comes in the above mentioned EUGBS. The standard contains a set of rules for the issuer to follow to get the label of EU green bond. The most important rule is to allocate the money raised to projects aligned with the EU taxonomy (list of economic activities considered to be green or sustainable). Bonds with the label of EU green bonds are being audited by an external reviewer that is supervised by and registered with the ESMA (European Securities and Markets Authority). It is a voluntary label, so any issuer of bonds can issue green bonds and get the EUGBS label as long as they play by the EU rules.

The European Council has adopted the EU Green Bonds Regulation on 23 October 2023 and it is expected to take effect at the end of 2024 following publication in the EU’s Official Journal.

Thus, green bonds are an effective way for private and institutional investors to support the transition to a climate neutral economy. These products are clearly growing in popularity and point the way to a greener future for finance. Despite a turbulent year on the financial markets in 2022, issuance of green bonds in Europe grew by 10%.

Today Europe has a leadership position in sustainable finance. To maintain this position the EU needs dedicated tools such as the EUGBS to guide bond investors into high quality green investments. By investing in these products, each of us can contribute to a sustainable, climate neutral, environmental friendly economy and if all goes well make some ‘green’ money too.

An article by, Evy Slaets – Manager at DynaFin.