Triggering a critical mass of sustainable investment: How can Europe do it?

Written by Kirsten Dunlop, CEO, EIT Climate-KIC. Originally published in EurActiv

The European Commission’s HLEG Working Group on Sustainable Finance released its long-awaited final report on 31 January. More than two years after the Paris Agreement and implementation of the Sustainable Development Goals, Europe looks ready to put finance to task, leveraging its structural potential in helping a green economy bloom.

The report proposals – including a taxonomy to provide market clarity on what ‘sustainable’ is; clarification of investor duties in considering sustainability in investment decisions; improvement in disclosure; and an EU-wide label for green investment funds – have been broadly welcomed in banking and policymaking circles.

The proposals aim to get to the heart of finance and change behaviour by targeting the incentives that matter to investors like capital requirements and investment mandates. But will these proposals drive change in finance sufficient to meet the complexity of decarbonisation projects and the scale of transformations needed to stay on track with current climate targets and a 2ºC pathway?

Europe has done well at stimulating renewable energy infrastructure, and market opportunities that are vertical and aligned with traditional business perspectives seeking growth and return on investment. This model, however, does not incentivise financial flows to projects and actions vital to a low carbon development path, for example in retrofitting Europe’s building stock or integrated energy-mobility-dwelling models.

Unlike renewable energy, transport and deep retrofit require engagement with myriad stakeholders with an array of interests. Such a heterogeneous landscape may deter investments. The next wave of climate innovation will be based on the internet of things, including distributed ledgers and digital intelligence, resulting in the increased selling of services rather than products and greater transparency in value chains.

To encourage investment in such projects, public finance has a responsibility to explore how best to take the first loss risk and develop a track record to incentivise private sector investors to manage the associated risks.

Effective business models that manage to blend concessional finance with private finance and can address the demands of the multiple stakeholders involved are desperately needed.

So, how can traditional investment appetite be changed? The answer lies in diversity and in the introduction of a resilience and renewal logic to the strategic allocation of capital – capital directed at ‘hedging’ or rather ‘underwriting’ business model renewal in the face of disruptive change. Working with a spectrum of risk and opportunity appetites, a range of financial partners, sectoral specialisms and techniques and a portfolio approach designed to learn can help create an ecosystem of finance partners working in a more patient, considered and democratised way.

This ecosystem might include national banks, philanthropic funders, impact investors, local credit unions or crowdfunding mechanisms, convened together with mainstream finance players. Creating a platform for this financial co-creation of investment solutions could help trigger a breakthrough in the critical mass of sustainable investments across Europe.

One less discussed proposal in the HLEG report that supports this is a proposal to create ‘Sustainable Infrastructure Europe’. This capacity building hub would facilitate a transfer of lessons learned and insights from across the European, national and local level to help develop and implement projects as testbeds for change contract effectively with private sources of capital and give advice on how to reduce uncertainty in a patchwork of regulatory environments.

This is something that can be built on. To meet the EU’s broader environmental and sustainability goals, the bottlenecks constraining investment in sustainable infrastructure on both the demand and supply side must be addressed.

Some of these bottlenecks on the supply side will be generic to the targeted industrial activities, while others may be related to specific environments where activities occur. Different regions will have a varying institutional capacity to absorb finance.

As the report authors emphasise, access to capital is not so pressing as project development capacity. Many large-scale private funds are ready and willing to invest but are unable to identify attractive investment opportunities, not least because of poor enabling environments.

Such a body must be a platform where a diverse finance ecosystem can co-develop projects, share funding information, best practices and methodologies, and make vital connections between project demand and supply.

This will be crucial to the understanding of how to generate an enabling environment – institutional capacity, labour market skills, and policy frameworks – as well as providing the financial sector with better tools for assessing climate-related risks and for investing in strategic innovation options capable of generating renewal and economically viable transformation.

 

Climate-KIC’s Decision Metrics and Finance team works with our network of partners to develop the metrics and financial mechanisms to redirect and mobilise the finance needed to quickly scale up climate action.

Find out more

 
Location
Belgium
Articles you may be interested in
In The News
EIT Climate-KIC’s Open Accelerator: collaboration, not competition

It is no secret that to tackle climate change...

EIT Climate-KIC’s Open Accelerator: collaboration, not competition
In The News
New platform inspires sustainable Nordic wood construction

This week marks the launch of NoMuWood.com, an EIT...

New platform inspires sustainable Nordic wood construction
In The News
European Union launches Pact to support citizen-led climate action

On Wednesday 16 December, the European Commission is launching...

European Union launches Pact to support citizen-led climate action
In The News
“An avalanche of hope and energy”: The power of Paris

Our Climate Champions 2020: Melissa Capcha. Five years on...

“An avalanche of hope and energy”: The power of Paris
In The News
“Let’s find ways to take action within our abilities”

Our Climate Champions 2020: Gopal Kumar Mohoto. Five years...

“Let’s find ways to take action within our abilities”
In The News
“Climate change is outpacing us, there is no time for excuses”

Our Climate Champions 2020: Cristina Aleixendri Muñoz. Five years...

“Climate change is outpacing us, there is no time for excuses”
In The News
COP26 gives Scotland “a platform to showcase… what’s possible”

Our Climate Champions 2020: Kit England. Five years on...

COP26 gives Scotland “a platform to showcase… what’s possible”
In The News
COP26 might be postponed but “climate action cannot wait”

Our Climate Champions 2020: Melani Furlan. Five years on...

COP26 might be postponed but “climate action cannot wait”
In The News
A climate service for flood risk mapping in urban areas

The SaferPlaces project, supported by EIT Climate-KIC, has created...

A climate service for flood risk mapping in urban areas
In The News
Raising climate awareness through art in the Glasgow City Region

The Glasgow City Region uses arts as a means...

Raising climate awareness through art in the Glasgow City Region
In The News
Helping Europe achieve a circular economy transition

EIT Climate-KIC, EIT RawMaterials, EIT Digital, EIT Food, EIT...

Helping Europe achieve a circular economy transition
In The News
EIT Climate-KIC and EASME host WCEF event on circular economy

The World Circular Economy Forum brings together business leaders,...

EIT Climate-KIC and EASME host WCEF event on circular economy
In The News
Citizens across globe eager to contribute to a post-COVID recovery

Over 4,500 citizens from around the world will join...

Citizens across globe eager to contribute to a post-COVID recovery
In The News
Transformative climate action and COP26: Join our webinar

Are you working to deliver transformative change for a...

Transformative climate action and COP26: Join our webinar
In The News
Madrid, Amsterdam and Milan: Three cities putting citizen participation at the...

The Extinction Rebellion or Fridays for Future global actions...

Madrid, Amsterdam and Milan: Three cities putting citizen participation at the heart of climate action
In The News
EIT Climate-KIC selected to become a member of the European Circular Economy S...

EIT Climate-KIC circular economy expert, Cliona Howie, will join...

EIT Climate-KIC selected to become a member of the European Circular Economy Stakeholder Platform
In The News
Partnering with EIT Climate-KIC on the New Accelerator: Call for Expressions o...

We are looking for new and existing EIT Climate-KIC...

Partnering with EIT Climate-KIC on the New Accelerator: Call for Expressions of Interest
In The News
EIT Climate-KIC leads collective efforts to accelerate Madrid’s transition t...

A cross- KIC (Knowledge and Innovation Community) initiative is...

EIT Climate-KIC leads collective efforts to accelerate Madrid’s transition towards carbon neutrality
In The News
The Human Capital project is the EU educational sector’s answer to robots ta...

Supported by the European Institute of Technology (EIT) and...

The Human Capital project is the EU educational sector’s answer to robots taking over jobs—and AI has a role to play
In The News
New online magazine Branch explores the sustainability of the internet

This week saw the launch of Branch magazine, a...

New online magazine Branch explores the sustainability of the internet
In The News
Four EIT Climate-KIC innovators nominated for EIT Awards

Four EIT Climate-KIC innovators have been nominated to win...

Four EIT Climate-KIC innovators nominated for EIT Awards
In The News
EIT Climate-KIC selected to advise European Commission on sustainable finance

The newly created EU Platform on Sustainable Finance brings...

EIT Climate-KIC selected to advise European Commission on sustainable finance
In The News
bound4blue’s innovative wingsail technology gathers recognition across Europe

Cristina Aleixendri, Co-founder and COO of the Spanish start-up...

bound4blue’s innovative wingsail technology gathers recognition across Europe
In The News
EIT Climate-KIC and Glasgow City Region join forces, helping the region innova...

Home to one third of Scotland’s population and provider...

EIT Climate-KIC and Glasgow City Region join forces, helping the region innovate to become climate resilient
In The News
Cassetex from Bangladesh, Sosei from Uruguay and Carbon Craft Design from Indi...

More than 3,000 entrepreneurs from 56 countries participated in...

Cassetex from Bangladesh, Sosei from Uruguay and Carbon Craft Design from India win the seventh edition of ClimateLaunchpad
In The News
World’s biggest green business ideas competition now fully digital, free and...

The three-day Grand Global Final of the EIT Climate-KIC supported...

World’s biggest green business ideas competition now fully digital, free and accessible to all
In The News
Three cities building back better: Madrid, Milan and Amsterdam

EIT Climate-KIC will host a session at the 18th...

Three cities building back better: Madrid, Milan and Amsterdam
In The News
EIT Climate-KIC to work with Google on Impact Challenge

EIT Climate-KIC is delighted to announce that it will...

EIT Climate-KIC to work with Google on Impact Challenge
In The News
What role can finance play in the green recovery? EIT Climate-KIC and UNEP Fin...

EIT Climate-KIC, in partnership with the UNEP Finance Initiative,...

What role can finance play in the green recovery? EIT Climate-KIC and UNEP Finance Initiative ask leading thinkers to weigh in
In The News
EIT Climate-KIC supports European green recovery with €4 million for start-u...

EIT Climate-KIC is investing €4 million in nine climate...

EIT Climate-KIC supports European green recovery with €4 million for start-ups affected by COVID-19