Europe’s capital markets are falling short of the $215tn needed to hit 2050 net zero targets, according to a report European business think tank Themis Foresight and Nord/LB.
While money is available, the bloc’s markets are being held back from raising and allocating it for a number of underlying and persistent reasons, including low-risk appetite from investors for clean energy projects and a capital allocation model that is ineffective at unlocking and moving critical funds towards renewables.
The report found though there is enough capital available to finance the energy transition, allocation remains the main problem.
The net zero transition in Europe is currently being largely managed by banks.
However, a bank-centric approach is inefficient and ineffective for moving sufficient capital at the necessary speed.
Asset managers, banks and also governments must play a more important role in financing the energy transition.
Fragmentation of European capital markets limits the system’s ability to raise and allocate capital for green investments.
The bloc’s member states and the EU itself are the main beneficiaries of climate investments and are in the best position to use their leverage as guarantors.
Minimising the risk of investments in Europe and in developing markets is a major challenge for net zero financing.
Swift and far-reaching reforms and incentives are needed to unlock additional finance to meet Europe’s renewables goals, stated the report, including Completing the EU’s flagship Capital Markets Union (CMU), creating a new capital allocation model and diversifying the investor base and de-risking green investments.
According to the report, regulations play an important role, however, the fundamental ability of the capital markets to mobilise capital is crucial.
It is in this regard that the European capital market is not nearly as efficient as it should be.
“The attitude of the European Commission and the German government towards green investments shows a tendency to allocate expensive capital to less productive assets,” stated the report.
“While this approach is well-intentioned, it is by no means an effective strategy for achieving a substantial net zero effect,” it added.
To achieve a greater climate impact, the political decision-makers in the EU and Germany should consider prioritising productive investments (including abroad).
In specific terms, this means concentrating on innovative technologies, infrastructure for low carbon industries and projects with a high potential for economic output and environmental benefits.
Redistributing capital from low to high-productivity green assets could speed up the EU’s progress in net zero transformation and simultaneously boost economic growth.
This would be a sustainable and effective long-term approach to the climate transition, highlighted the report.