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Supranational banks' new ESG goals may boost private investment in green finance

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The European Investment Bank, the world's largest multilateral development bank, intends for over 50% of its total annual financing by 2025 to be green or climate action-related.
Source: EIB

Multilateral development banks in Europe have new criteria and higher medium-term targets for green and sustainable investments, which is likely to have a knock-on effect on the wider market and draw more private capital to green finance.

Supranational institutions, including the European Investment Bank, or EIB, and the European Bank for Reconstruction and Development, or EBRD, have announced plans to align their financing activities to the climate goals set out in the Paris Agreement on climate change and reflect the new EU taxonomy on climate-friendly investments in their project finance selection criteria.

In addition to its planned €1 trillion of green spending through 2030, the EIB intends to increase the share of its green or climate action-related financing to over 50% of total annual financing by 2025. The EBRD has set the same target as part of its new Green Economy Transition approach for 2021-2025, up from 40% of total annual financing, or about €10 billion to €11 billion per annum, Isabelle Laurent, deputy treasurer and head of funding at the EBRD, said in an interview.

Given the weight these organizations carry in capital markets and policy making, their changing mandates will influence industry standards and the actions of investors and the private sector globally, Alvise Lennkh, executive director at Scope Ratings, said in an interview.

Europe leads the way

In many ways, the climate- and sustainability-related issuance of European supranational institutions has set the benchmark for the wider market since the EIB launched the world's first green bond in 2007, Scope Ratings said in its European Supranationals Outlook 2021 report Feb. 16. Between 2015 and 2020, the annual green bond issuance of supranational institutions in Europe exceeded that of all other regions combined, the report said.

Europe accounted for the bulk of global green bond issuance in 2020, surpassing $1 trillion for the first time, according to Climate Bond Initiative data. As many as 40% of green bonds in 2020 were denominated in euros, compared to 35% in U.S. dollars and 8% in Chinese yuan, the data shows.

The EIB had the highest total annual financing (€63.3 billion) and total climate finance commitments (€19.3 billion) in 2019 among all global multilateral development banks, surpassing even the World Bank, data by the EIB, the EBRD and the Islamic Development Bank show. Climate finance accounted for 31% of the EIB's total financing operations in 2019, and increased to 37%, or €24.2 billion, in 2020.

The EIB never finances projects on its own, and that means its evolving financing criteria will prompt other investors, banks and companies to reassess their own guidelines, Lennkh said. It typically covers up to 50% of the costs associated with the investments it supports, according to Elina Kamenitzer, head of the climate office in the EIB's operations department.

"So we need the others [in the market] to be motivated. And we hope that, with our financial support, risk-sharing capacity and the technical knowledge about how to assess and track investment results, we will be able to attract more private investors, give them comfort and show them that green makes business sense," Kamenitzer said in an interview.

Defining 'green'

Nobody in the capital markets doubts the importance of green finance, but the definition of "green" is still in the making, Aldo Romani, head of sustainability funding at the EIB, said in an interview. "There has been an enormous amount of labeling and misuse of this labeling, and it is still very difficult for investors ... to assess how sustainably, in fact, their funds are used," he said.

Especially in times of "free money" like the present, the issue is not really the provision of capital but the identification of where that capital should be best deployed, Romani said.

"Guidance aimed at helping the market understand how to measure alignment and consistency of projects with the long-term transition goals of the issuer, and their credibility, is becoming increasingly important," the EBRD's Laurent said. There is a difference between green bonds in the highest-emitting sectors focused on transition and those of so-called "pure plays," such as renewable energy companies, she said.

According to Romani, the EIB is well positioned to act as a "test case" within the EU taxonomy framework. Europe is trying to establish a level playing field and a direct link between capital market funds and investment in the real economy. The EIB is able to provide thought leadership that is not just theoretical but rooted in business practice, Romani said.

Both the EIB's climate awareness and sustainability awareness bond programs allocate only actual new disbursements that take place after the issuance date. "This is a major source of additional information, because investors can monitor what the gradual development of projects and market conditions allow in terms of actual pace of disbursement to the sustainability objectives of the EU," Romani said.