The European Union is poised to create 225 billion euros of green debt by sharply increasing the number of available green bonds to support clean energy growth.
Andrew Karolyi is a professor of finance and economics at the Cornell University SC Johnson College of Business and an expert on investments and international markets. Karolyi has spearheaded the development of a new field to study the intersection of finance and climate change called finance sustainability. He says the biggest concern with the EU’s push for green finance is the level of investor interest, particularly in the current pandemic environment.
“Europe has been at the forefront of green bond issuance since the European Investment Bank launched the idea back in 2007. European issuers span the continent and with a variety of debt formats, currencies and tenors. So, it is not surprising that the EU will be the lead with a new 200 plus billion euro push of sovereign green debt.
“The overarching concern is not about the EU’s ambition or the need for green financing, but rather about whether there is the broad-based investor appetite to jump in, and in the current pandemic environment. Research shows that green bonds have continued to command a premium price, or lower yield, relative to otherwise equivalent instruments. No doubt a major increase in supply initiated by the EU may risk pushing down the premium and especially in the now heavily debt-laden crisis period.”
John Tobin is professor of practice at the Cornell University SC Johnson College of Business and an expert on environmental and energy economics. He says the EU’s clean energy financing plan has a strong likelihood of success, but that EU members should not neglect to support improvements in land use and agricultural practices.
“The EU’s plan represents a quantum leap for the sovereign green bond market, which is nascent compared to the broader green bond market for corporates, financials, and development banks, and which stood at about $260 billion in issuances in 2019. Despite the rapid growth in green bond issuances in recent years, unmet demand for low-risk green assets from institutional investors is huge. Political commitment by the EU to prioritize green projects in their COVID-19 recovery plans, and broad public support in EU countries for sustainable solutions, give the plan a strong likelihood of success despite the high level of ambition.
“But EU members should avoid the temptation to invest all the proceeds in alternative energy, green real estate, and public transportation projects, which capture the lion’s share of green bond proceeds, and support urgently-needed improvements in land use and agricultural practices that effectively mitigate biodiversity loss and climate change.”