What is sustainable finance? Sustainable finance includes environmental, social and governance considerations in investment decisions. The ‘godmother of green bonds’ explains how it will speed up the green transition

What is sustainable finance?

Sustainable finance is about including environmental, social and governance considerations in investment decisions. It leads, in the long-term, to more investment in sustainable projects and activities. It plays a key role in delivering on the objectives of the European Green Deal, which aims to boost the green transition. This means moving towards a green economy through sustainable technology, industry and transport.

Why should people keep sustainability in mind even when dealing with the issues of expensive food and the energy crisis?

While being worried only about imminent issues is understandable, we should be concerned about our future. Concerns like the lack of medicine, food, and energy will only get worse, unless we deal with the green transition. We live in an interconnected world. Climate change is already hitting the developing world particularly hard, affecting global food security and migration patterns. It’s also affecting Europe too, with the growing number of devastating floods and fires.

Therefore, the green transition should be the first, not the last thing on our mind. 

It’s important not to confuse short-term fixes with longer term solutions or to mistake the cause of our problems with their solutions. The loss of Russian gas isn’t the fundamental problem, it’s our dependence on it.  Decarbonisation is not only indispensable to the climate and environment crisis, but also the only way to ensure safe, affordable, and secure energy for Europe and the world. For Europe, it would also strengthen resilience by limiting the scope for energy-price shocks to the economy and by neutralising its vulnerability to Russia’s energy blackmail.

How did the pandemic and the war in Ukraine affect sustainable finance?

The pandemic cast sustainable financing in a different light. Until then financial markets had been more focused on green issuance and climate change.

During the pandemic, social finance saw an increase with the growing of healthcare, the introduction of remote schooling, the shift of the job market, and the threat to businesses. The amount of social financing has been lower again as the pandemic started to fade off.

The war in Ukraine puts the whole discussion about energy into a very different light and underlines the urgency of the energy transition. The energy crisis made very clear that we need to find new sources of energy and they should be clean.

Energy transition is challenging for a land-locked country like the Czech Republic, where offshore wind isn’t really an option and land is limited. On a smaller scale, one could, for example, install solar panels on artificial lakes without a leisure use or to build them on parking lots, which also serves to protect the cars against extreme heat. We also have to look into energy savings, battery storage capacity, and better grids to optimise peaks and low-demand periods. Every little thing helps.

There’s a lot of work to be done and we must work on more fronts simultaneously.

What are the benefits of sustainable finance at a time of economic and energy crisis?

Sustainable finance is a tool. Someone has to decide to build something first and then sustainable financing can be used as a tool to finance the investment. Sustainable financing will help people connect to investors and flag their strategy. It can also help with pricing and to gain access to financing, a process we need to make much easier and fast.

Having the European Investment Bank as a part of your financing tells the other partners that the financing is environmentally good, something our partners are looking for right now. They seek the confirmation that the financing is sustainable, which in the case of our financing follows quite clear criteria. As the EU climate bank, we can borrow from the financial markets at a lower cost than commercial banks. As a result, we can provide long-term financing on favourable terms.

Another strength of the European Investment Bank is that we employ engineers, biologists and social development specialists who can judge which projects and technologies are promising, including from an environmental and social perspective.

The scale of the investment required far exceeds what governments and public authorities should provide. The private sector and capital markets need to play a key role, and the Bank can improve the situation not only on the energy markets, but in all market sectors that we actively support.

How do we make clear to people who don’t see sustainability as an essential issue that this is an important topic?

Even if green transition isn’t the first thing on people’s minds, it’s paramount. All the scarcity issues with food, medicine and energy are interlinked, and dependent on biodiversity, environment and the climate.

This is an important topic, even for those who don’t like it. Ignoring the green transition’s urgency and the need for sustainability is like when your house is on fire, but you’re worried about the water bill if you extinguish it.

People also tend to forget that there is another part of it, this creates job opportunities. In Finland, we have plenty of wind power, and we’re expanding it further. Foreign direct investment from steel companies, for example, comes in because they want to set up production in Finland so that they can call their product “green steel,” as it would produced with green energy. It’s an investment that creates growth and new jobs.

What other benefits do people in the European Union get who decide to try to be more sustainable?

First, and it’s important to highlight, we have a diversified palette of sustainable products, targeting different needs but also to facilitate access to finance and improve funding conditions. So, the first benefit lies in the advantageous and flexible financing conditions that the European Investment Bank can provide.

Second, the clients have access to credit lines in which they can draw on the funding as they need – in tranches or even use up the loan all at once. Each tranche can have different parameters, depending on the present unique requirements of each client – tailored to their needs.

Third, we have a strong climate expertise that we can share with our clients to support their green transition. We can provide green loans relying on our standard technical due diligence, advise on green financing and invest in green bond issuances. Our recognised green standards make us a trusted partner in climate finance.

Finally, the European Investment Bank Group has its own resources to advise the client on the technical side of the financed projects, such as the green checker tool for financial intermediaries, the Joint Assistance to Support Projects in European Regions,  and InvestEU.

Are any new EU regulations aimed at sustainable finance planned for the medium and long term?

One big policy question at the moment is the impact of and action of the Inflation Reduction Act in the United States.

In terms of EU regulations, most aim for better disclosure and prevent green washing. It’s about establishing transparency. When we talk about green investment, we mean that this investment has a substantial contribution to climate action – such as substantial energy savings, biodiversity, circular economy. If we call something green, it needs to satisfy certain criteria. If it doesn’t, we shouldn’t call it green.

In terms of other sustainability measures, the Bank supports the RePowerEU Plan to further reduce  Europe’s dependence on gas.

This interview was first published in the Czech newspaper Echo24.