Financial reforms could unleash €170bn for EU sustainability

Insurance companies and pension fund managers can play key roles in the growth of renewable energy in Europe. But few are major players in wind at present.

Sure, there are famous names: Allianz Capital Partners, Aviva Investors and Munich Re are insurers with records in wind; and pension fund managers BlackRock, JP Morgan, PensionDanmark and PKA are too. For instance, Denmark’s PFA and PKA last year invested in Ørsted's 659MW Walney Extension in a $2bn deal.

But when we look at lists of Europe’s largest insurers and pension fund managers, it is clear that these are still the pioneers. We also see hundreds of institutions in Europe that shy away from wind and other renewables in favour of more traditional investments.

Is this about to change? A report last month by the European Union said that the absence of these firms was due to the lack of a sustainable financial system in Europe. It also defined some guidelines to create a common market in the region, which would aim to regulate investment in renewables projects. It hopes that more regulation means more security – and more investment.

In the report, ‘Financing a Sustainable European Economy’, the EU’s High-Level Expert Group said that, to achieve the EU's sustainability targets, investment of €170bn would be needed annually up until 2030.

To unleash that, it made recommendations that it said would help investors, customers and renewable energy developers.

Here’s a quick summary of the proposals.

First, the report said there should be a “common sustainable taxonomy” that would act as a guide for investors about the different opportunities they have to invest their cash sustainably.

As part of this, the report said there should be a regulated market for green bonds and green investment funds; and a ‘European green bond standard’ would be needed to ensure that proceeds from green bonds are genuinely used for green projects. This would be a clear benefit for the wind industry, as there can be little doubt over the green credentials of wind farms.

The report also argued that environmental, social and governance factors should regularly be included by asset managers into their financial analysis, and adopted throughout the whole investment value chain, in order to encourage investments in renewables. This would result in more transparency from financial institutions about how they factor sustainability into their investment decisions.

However, the authors were less sure about to put it into practice.

For example, the European Commission in December said that it could lower capital requirements for banks that decided to invest in environmentally-friendly projects, like wind farms. But the report argued that these incentives would be counterproductive and attract “less prudent lenders”. If green investments become a way to lower capital requirements, the new sustainable financial system could create the next bubble, instead of promoting an organic growth of the system.

The recommendations are only a first step to create a regulated and sustainable financial system in Europe, which, if realised, would definitely bolster investments in renewable energy projects, including wind farms.

However, we feel something is missing. While we agree with the group about the need to avoid attracting bad lenders, a stricter system of rules would be needed to make the proposals more effective. For example, once a sustainable taxonomy has been defined, the EU could require European investors to invest a minimum part of their portfolio in those projects.

We remain confident though that investing in renewables projects, including wind farms, makes business sense, and a regulated sustainable financial market could be the definitive push to attract even sceptical investors into the sector.