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Climate change and the financial sector - New trends in the financial sector

Everywhere the climate is

By Taylor Jonathan - Vice President, European Investment Bank (EIB)

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Placing 67 wind turbines, each 90 metres tall, in the raging North Sea is tricky. Turning waste wood into electricity isn’t exactly child’s play, either. But try raising billions of euros to do these things from investors who typically don’t take big risks. Now that requires some innovative thinking. With the help of an equity stake from the European Investment Bank (EIB), Copenhagen Infrastructure Partners did just that. The Danish renewable energy infrastructure fund manager raised EUR 2 billion with a smart structure that brought in pension funds and other investors typically too conservative for the sector. The EIB used the guarantee provided by the European Fund for Strategic Investments (EFSI) to participate in the project. After all, with EFSI the EIB aims to draw private investors into areas where they might be reluctant to tread. We want them to be involved in climate action just as strongly as we are.

Climate is, by definition, everywhere. So it is with the EIB’s climate action work. Wherever you look in the EUR 84.5 billion operations we did last year alone, you find climate action—and we’re determined to do more. The Bank commits to climate action loans that amount to at least 25% of total lending. In 2015 the EIB lent a record EUR 20.6 billion for climate action (26.8% of all lending), in every one of the 28 EU member states, and in projects from Nicaragua to Nepal. We also committed to increase climate action lending to 35% of what we do in developing countries by 2020. These are ambitious targets. To meet them we invest in small projects and build massive frameworks for climate action.

Take the Global Energy Efficiency and Renewable Energy Fund (Geeref). The fund started with a big chunk of public money—EUR 112 million from Norway, Germany and the EU—which it used to entice EUR 110 million from private investors. It focuses on funds whose managers are often new or without much track record. These funds in turn invest in small and medium-sized projects across emerging markets. The result: for every euro Geeref puts into a Philippines hydro project or a geothermal power plant in Ethiopia, about EUR 50 ultimately is invested. It takes a lot of investment experience and attention to detail to do the work of Geeref—and an eye for future innovations.

We invest in small projects and build massive frameworks for climate action.

Let’s call that the micro level. Now for the macro. The EIB started the market for Green Bonds in 2007 and has issued almost EUR 13 billion such bonds. The USD 40 billion raised in 2015 in the Green Bond market has to be allocated to climate action and environmentally sustainable projects. The market’s challenge has been the measurement and reporting of impact. Different Green Bond issuers calculate different impact numbers for the same project. Investors have no certainty that the tonne of carbon dioxide they believed their money would keep from being emitted isn’t really a half tonne or even two tonnes. Last year the EIB coordinated a group of 11 international financial institutions which released guidelines for the harmonized reporting of the impact of projects associated with Green Bonds. Thanks to this working group, a first authoritative market reference for Green Bond impact reporting harmonization was put in place. The guidelines aim to enhance transparency and accountability in the Green Bond market allowing it to mature and catalyse more funding to climate action.

Whether it’s by building the foundations of a true global market for Green Bonds or by crowding investors into a Ugandan hydropower project, the EIB delivers practical results that help capital markets support UN climate change plans.