EIB makes climate finance mainstream as taxonomy unlocks standards

Climate finance and green bonds in particular have taken huge strides in recent years, with the EIB leading the way as the biggest capital markets issuer of the products. Green finance this year took another major legislative step forward, with the European Parliament approving the EU Taxonomy Regulation in June.

The EIB has been a key protagonist in the discussions that led to the taxonomy, and it celebrated the occasion by issuing a new Climate Awareness Bond while announcing the extension of the green funding programme to two new project areas that substantially contribute to climate change mitigation. It meant that lending in the project areas of research, development and deployment of low carbon technologies and to electric public transport can now be allocated from proceeds from the new CABs.

“The taxonomy is the first substantial attempt to define green finance and to lay down some really quite clear criteria that the market can use,” says Nancy Saich, the EIB’s chief climate change expert. “It doesn’t dictate that every green product has to use the taxonomy; what the EU is saying is for every green product being sold you have to say how much aligns with the taxonomy.”

Saich points out a huge part of the value of the taxonomy isn’t just its clear definitions and language for what is green and sustainable, such as climate goals. It is the insistence of the taxonomy that, to be called green, any project must not cause significant harm to any of the goals, and must meet minimum social safeguards.

“To call something green, you must make sure it is resilient, you must show that you understand the risks of climate change to the project, investment or company and you have a plan for dealing with them,” she says. “This is hugely powerful because it closes the door on saying something is green in one way, while undermining green in other ways.”

She gives the example of wind farms that might have been built in national parks without proper environmental assessments — for instance, biodiversity assessments — or without meeting the minimum social safeguards — for instance, where land has been appropriated without due process and consent from the people living there.

“This is the really important angle: those kinds of things cannot be called green any more. Investors that want green want to know not just that they are making a substantial improvement but also that no harm is being done to other things.”

The taxonomy that was agreed this year starts with a detailed dictionary and technical criteria for the two climate objectives, while work continues on the definitions under the environmental objectives. The EIB, however, has made sure that the documentation for its Sustainability Awareness Bonds, which it first issued in 2018, is also linked to the evolving EU legislation on sustainable finance and it has anticipated the adoption of the EU Green Bond Standard.

It’s another example of the EIB taking the lead, as it did in 2007 with the first Climate Awareness Bond. The structure used 13 years ago didn’t take off, but that didn’t stop the EIB returning with what has evolved into the today’s global standards.

“One should not be too shy,” says EIB president Werner Hoyer. “You need to have some courage and some good ideas. When we entered the market with the first green bonds ever in 2007, we wouldn’t have believed it would be so successful within just a few years.”

Being able to reassure investors that what they are buying is indeed going to be put to use for the stated purpose has been central to the success of the EIB’s green and sustainable funding programme, he says.

“For us as an institution, we depend on investor support, upon the trust of investors to give €60bn to €100bn every year in bond sales,” he says. “When they buy a green bond from us, they must know that what is painted green must contain green — and this is true for the other objectives which we are now pursuing with issuance, in pursuit of the Sustainable Development Goals of the United Nations.

“There will be ample opportunity among investors around the world to put some part of their assets — their wealth — into the objectives we are pursuing with the SDG, but they must be assured that the projects are economically viable and sustainable and that the money is going in the direction in which we have promised to bring it.”

A sign of the commitment to put climate at the centre of everything the bank does was the establishment early in 2020 of a new division in the operations department. Elina Kamenitzer, head of the climate office, explains why it was established.

“We have very strong technical expertise that has been cultivated over the years in the climate space, but in order to enable us to reach these ambitious goals we also needed to strengthen climate finance capacities in the front office business function,” she says.

The office has two main elements to its mandate: first, to enable strengthening of the operational green financing capacities of the EIB’s front office; and second, to facilitate the operationalisation of the EIB’s climate policy framework — in other words, to mainstream climate at the operational level.

“The expectation is not that climate is sort of a separate business line, but that climate will be embedded in everything we do,” she says. “Each and every banker has to have climate in mind when they are originating business and transacting. We are there to facilitate and enable the business development.”

Embedding climate and sustainability in the bank’s lending operations is, in a way, almost an outcome of the establishment of the green taxonomy and the bank’s issuance of Climate Awareness Bonds.

The original eligibilities for CABs were established in 2007, when the hot topic was the EU’s Energy Action Plan focused on renewable energy and energy efficiency. “That didn’t change for more than a decade, largely because of the absence of an objective institutional and official way to classify and measure contributions to sustainability,” says Aldo Romani, head of sustainable funding. “There are areas of controversy as to what is green and what is not, what is contributing and what is not. At the bank, this decision is not made in the finance directorate but in the projects directorate.

“This is the value of the taxonomy. It creates a shared compromise — a consensus that has an authority that no decision could that is made at the level of the individual intermediary, lender, issuer or investor.”

The taxonomy, then, ensures that the capital markets’ tail wags the front office dog.

“We are aligning our definitions and criteria for green with the EU taxonomy, which also implies some changes in what we count as climate, and what type of projects we are going to focus on in the green space, and how we are going to report and track our contributions,” says Kamenitzer.

Saich echoes this view, saying that for many organisations issuing green bonds, what starts out as a capital markets project ends up engaging the entire organisation. “That also happened with the taxonomy. It started with the capital markets but ended up engaging all the different parts of the financial system,” she says. “The fascinating thing about a green bond is it brings different parts of an organisation together and you bring together people on the financial side and on the technical side in a way that they never normally would.”

The taxonomy has other important roles to play — even in the economic recovery from the Covid pandemic. With firms delaying or abandoning investment plans amid uncertainty, anything that reduces that uncertainty is a positive.

“One of the major impediments to climate-related investment by firms is uncertainty on regulation and taxation,” says Debora Revoltella, EIB director, economics department. “Now, there is a lot to do around that, but the fact is that at the European level there is a common framework to set standards and provide incentives for firms,” she says. “The taxonomy that is being deployed gives clarity on what can be considered for climate change mitigation and adaptation and gives clarity on the kind of instrument that will be incentivised.”

She also points out that the fiscal stimulus being deployed at national and European levels will be used, in part, to invest in decarbonisation and transformation.

For vice-president Ambroise Fayolle, who oversees climate and development at the EIB, this kind of investment is crucial for reaching the bank’s climate targets.

“We have seen from studies and we know from experience that innovation has contributed significantly to meeting our climate objectives,” he says.

He points to the Northvolt battery factory that the EIB is financing in Sweden and the offshore windfarm park that it is financing in Portugal as examples.

“These are projects that have a huge innovation component, which is also a risky one, and this is the role of the EIB as the EU climate bank to finance them.

“We know that if we want to reach the 2050 target for climate neutrality there will be innovations that we don’t yet know, but we do know that they are going to be the types of project that will be extremely important for Europe to reach these targets and we need to finance them from a very early stage.”

The kind of finance it is involved in is typified by Breakthrough Energy Ventures-Europe, a fund for very early stage projects, which the EIB has set up with the Gates Foundation.

“We see that our competitors in China and in the US are spending more on research and development in climate than we are in Europe and that is a worry — and why this is a target and an ambition for the Bank,” he adds.