SustainaWeekly - The cost and financing of Europe’s transition
In this edition of the SustainaWeekly we start by looking into the investment needs for Europe’s energy transition and how this might be financed. Investment in both energy supply and demand should more than double compared to the previous decade. The European Commission has estimated that only around a fifth of the gap will be financed by bonds. Our own estimates suggest that this may end up being closer to a third. We go on to examine the credentials of ESG funds, and are surprised to find that the proportion of their ESG bond holdings is relatively low. We go on to analyse how long on average companies take to allocate proceeds of green and/or sustainability bonds. Finally, we look at price trends for transition commodities, and argue that despite the sharp rises, the rise in carbon prices helps to keep low-carbon technologies more economically viable.
Economics Theme
The additional annual investment need for Europe to achieve its goal of a 55% GHG reduction in 2030 amounts to about 2% of the EU’s GDP. Bank loans will likely remain dominant in financing, but bonds are becoming increasingly important. Bond issuance trends suggest that green investment is stepping up but there is a way to go.
Strategy Theme
We assessed the portfolio share of ESG bonds in ESG funds. Our analysis indicates that within Fixed Income funds, only 7% of the securities from light green bond investors correspond to ESG bonds. For dark green funds, this share is relatively higher, at 39%. This implies the need for caution in assuming the credentials of these funds is strong.
ESG Bonds
By taking a sample of companies, we analysed how long on average companies take to allocate proceeds of green and/or sustainability bonds. Our analysis shows that some sectors seem to struggle to allocate proceeds. Monitoring of allocation of proceeds by investors can be a clear tool against greenwashing.
Company and Sector news
The raw material costs for making low-carbon technologies have increased significantly. Since 2021, however, the CO2 price has risen more sharply than the price of transition commodities. A higher price for CO2 keeps low-carbon technologies more economically viable and therefore interesting for many companies.
ESG in figures
In a regular section of our weekly, we present a chart book on some of the key indicators for ESG financing and the energy transition.