EU steps up pace of green transition

As devastating heatwaves and forest fires rip through Europe, the European Union is stepping up its most ambitious initiative yet to battle climate change, which is their ultimate cause: next-generation green bonds (NGBs), which are being touted as a game changer for green finance worldwide.

The EU's Commissioner for Budget and Administration Johannes Hahn has been making the rounds of Asian capitals to kindle interest in this relatively new financial instrument.

NGBs are part of a broader "next generation" EU bond programme, under which the EU plans to raise around €800 billion (S$1.13 trillion) by the end of 2026, the biggest-ever borrowing programme in its history. "The aim is to enable EU member states' economies and societies to not only recover but become more resilient," Dr Hahn said in an exclusive interview with The Straits Times last week. "It's not only about investing but also making other complementary reforms to boost the competitiveness of Europe. There is a joint understanding among the 27 member states that only if all the member economies pick up more or less at the same time can the single market be strengthened."

Of the €800 billion, some will be spent on accelerating digitalisation, but at least 30 per cent, or around €250 billion, will be earmarked to support a "green transition". Comprising both loans and grants, the funds will be directed to help build the infrastructure, develop technologies and support projects to accelerate decarbonisation throughout the EU. "The disbursement of funds is conditional on meeting certain milestones and targets," Dr Hahn explained. "We only pay if these are fulfilled - not on the basis of assumptions, but actual deliveries."

There are clear definitions of what investments are "green" and sustainable, he said, based on recommendations by the International Capital Markets Association as well as second opinions. The EU has also developed its own reporting guidelines, and information on the projects that are supported is published and has been updated every week since March. By the end of the year, the information will be updated every day. "So you can see exactly in what areas the investments have taken place," said Dr Hahn. "Market players need to know that what they are investing in is really 'green'." Thus, he claims that NGBs are a game changer in that, besides providing the resources for the EU's green transition, they are transparent and credible and set international standards.

So far, the EU has issued around €28 billion worth of NGBs, including an issue of €12 billion in a single day in October, which was oversubscribed, which means that demand exceeded supply. "Recently, we had an issue that was oversubscribed by 10 times," Dr Hahn pointed out. "So there is huge interest." He added that the EU's green bonds also enjoy a premium, which he called a "greenium", of around two basis points compared with other green bond issues, which means that they can pay a lower yield.

Many other countries, including Singapore, are also interested in issuing green bonds. The Singapore Government plans to issue $35 billion worth of such bonds by 2030 to finance green infrastructure projects. The fact that Singapore is positioning itself as a regional hub for green bond issuance is "a very positive development", said Dr Hahn. "So we are, in a way, allies, and that is why I have chosen Singapore as my first destination in the region, because I know it's a fertile ground for these ideas."

While in Singapore, Dr Hahn met Deputy Prime Minister and Finance Minister Lawrence Wong, Monetary Authority of Singapore managing director Ravi Menon, Temasek CEO Dilhan Pillay and GIC CEO Lim Chow Kiat. After Singapore, he travelled to Kuala Lumpur, Jakarta and Bangkok.

So far, around half of all green bonds are denominated in euros, "which shows who is leading the process", he pointed out. "But what is positive is that there are more issuances in other currencies as well." The total issuance of green bonds worldwide amounts to around €1 trillion. "That sounds like a lot, but the issuance in the bond market overall is around €130 trillion," said Dr Hahn. "So there is still a lot of potential."

However, green bonds are taking off at a time when interest rates are rising, including in the euro zone. Last week, the European Central Bank raised interest rates for the first time in more than a decade, by 50 basis points. Rates around the world have also risen and are likely to go up further in the face of inflationary pressures. Rising interest rates depress bond prices, which can discourage issuance.

"Whenever you introduce something new, there's always a question mark around whether it's the right time," said Dr Hahn. "We need to be pragmatic and flexible about how fast we go ahead. But about the direction, there can't be any doubt. As (former UN secretary-general) Ban Ki Moon said: 'There is no plan B for this planet, because there is only one planet.'"

But while green bonds will play a vital role in financing the move to green infrastructure and more sustainable business practices in the medium to long term, the world has to grapple with shortages of mostly fossil-fuel-based energy in the short term. The challenge is especially acute in Europe, where many countries - including its largest economy, Germany - are heavily dependent on natural gas from Russia to meet their energy needs.

Recently, gas supplies were interrupted for two weeks because of maintenance problems related to the pipeline Nord Stream 1, which is the biggest gas link between Russia and Europe. Although supplies resumed last week, the flows are limited to around 40 per cent of the pipeline's capacity. Many analysts fear that supplies could continue to be interrupted periodically by Russia - especially during winter, when energy demand is high - under the pretext of maintenance problems, as a form of retaliation by Moscow against EU sanctions on Russia because of its invasion of Ukraine. Indeed, this week, Russia's energy giant Gazprom announced a further cut in gas supplies to 20 per cent of Nord Stream 1's capacity, citing technical problems.

Dr Hahn pointed out that Europe has done a lot to offset the potential loss of energy supplies from Russia. For instance, it has increased its imports of liquefied natural gas (LNG) by about 75 per cent since the outbreak of the war, including by tripling imports from the United States. It has created energy partnerships with Egypt, Israel, Algeria and Azerbaijan and obtained more oil from Norway. And it is exploring joint procurement of gas to reduce import costs, as well as increasing its storage capacity.

The EU is also planning to roll out measures to promote energy savings with a view to reducing energy consumption by at least 40 per cent by 2030, relative to 2007 projections. "For instance, it can make a big difference if you reduce the average temperature for heating by even one degree centigrade in the winter in public buildings and cool less in the summer," said Dr Hahn. "So we have done what a business leader would have to do, which is to diversify risks and increase risk sharing," he pointed out.

He acknowledged that there were challenges. For instance, different EU countries have different needs when it comes to energy infrastructure. Some have LNG terminals, while landlocked countries, like Dr Hahn's native Austria, have to depend more on pipelines. The energy mix also varies from country to country, with some still using coal, some more dependent on gas and oil, and others depending on nuclear energy. "I am nevertheless confident for this winter," he said.

Dr Hahn expects energy prices to remain elevated. "They may come down a bit, but they will definitely be higher than before the war." The high prices have triggered discussions in some of the EU's member states to put price caps on electricity bills. "Politicians are challenged to help people in these difficult times because in many countries electricity bills have doubled since last year," he pointed out. "But the most realistic approach is to provide targeted support to those who are in need," he said. "It doesn't make sense to subsidise high-income people. Also, capping prices won't encourage energy savings. This is also linked to our climate goals - looking beyond the current crisis, we need to motivate people to invest in energy savings."

Dr Hahn sees little danger of "sanctions fatigue" whereby EU citizens, hard-pressed by higher energy prices and inflation, would clamour for the punitive measures against Russia to be relaxed.

"Look at the solidarity of people on the issue of Ukraine," he pointed out. "We have received more than seven million refugees, which is far more than during the refugee wave in 2015. The readiness of people to even host refugees in their own homes is really unique and gives support to politicians taking the decisions.

"Sanctions have their justification; they're about respecting territorial sovereignty, which is not negotiable," he pointed out.

He believes the sanctions will be effective. "We know that the Russian people are used to suffering more than Europeans, but over time there will be an impact. Russia is finding it difficult to get spare parts for aeroplanes, has less access to electronic equipment and other technologies, and is excluded from the Swift payments messaging system. All this will have an impact in the medium and long term. Besides, once sanctions are in place, it's done and people accept it, including the business sector. The biggest challenge was to get the sanctions approved."