Green finance in Europe: actors and challenges

Abstract

Addressing climate change through mitigation and adaptation measures requires changes in policies, technologies and consumption behaviours towards a low-emissions model of growth. These structural changes require appropriate financial solutions, in order to scale up financial flows that support sustainable growth. This paper focuses on the European dimension and considers the role of financial markets in the process of reducing greenhouse gas (GHG) emissions and promoting climate change mitigation and adaptation. Global green bond markets have grown rapidly in recent years. Based on issue- and issuer-specific data, we find that the global market activity for financing projects within the scope of a green bond issuance has accelerated during the last years, with the aggregate amount of bonds issued in the period 2019-21 almost tripling compared with the period 2014-18. Moreover, we show that European markets and issuers lead this development, while private sector entities are increasingly making use of green bond markets as a source of funding. On the other hand, funding from green bond markets has been directed to few sectors of the economy, underlining the need for some policy-related initiatives. The increase in green bond issuance has come during a period of easy financial conditions, which could further highlight the need for policy initiatives aimed at enhancing the provision of incentives to investors towards green financing in the present changing financial market landscape. The improvement of the credibility, comparability and transparency of ESG ratings and assessments of CRAs is important to support sound investment decision-making and risk management, including those of central banks, which are increasingly incorporating climate change issues in their operations.

Keywords: green bonds; green finance; ESG; credit ratings; greenwashing

JEL Classification: G10; G20; O16