• Client: EC - DG Climate
  • Implementation period: 2014 - 2015 (Completed)
  • Geographic coverage: European Union, Global

The current share of climate-friendly assets in the portfolios of EU institutional investors is tiny (at best between 1-2%) – What policy tools can help shift more private investment towards climate-friendly assets?

In April 2015 the European Commission has published the final report of this project on ‘Shifting Private Finance towards Climate Friendly Investments – Policy options for mobilising institutional investors’ capital for climate-friendly investment’. The report gives European policymakers the tools to steer private finance towards climate-friendly investment. The report defines “climate-friendly investments” as those aligned with the EU’s transition to a low-carbon economy that limits global warming to 2°C.

Key findings of the research can be summarised as follows:

  1. The authors estimate the share of climate-friendly assets in the portfolios of EU institutional investors is tiny – at best it is between 1-2%. A lack of common definitions for climate-friendly assets and a lack of available data makes it difficult to estimate and track climate-friendly assets. But it is clear that the order of magnitude of climate-friendly investment is too low compared to the size of the climate-related investment needs: in the EU alone, the annual climate investment needs to 2020 are estimated to EUR200bn, significantly more than the EUR120bn that was invested in this area in 2011/2012. There is a lot of untapped potential in terms of capital from institutional investors that can contribute to closing these investment gaps.
  2. Policies to directly increase return on investment, such as feed-in-tariffs and a carbon price, are the main driver of climate friendly investment, but policy actions in the financial sector can complement these and significantly contribute to shifting capital to climate friendly investment by addressing barriers that currently exist. Two categories of barriers to investment were identified: (1) Barriers that are external to institutional investors’ decision-making framework, e.g. availability and volume of climate-related investment products, less favourable risk/return profile, high transaction costs; (2) Barriers arising from institutional investors’ decision-making framework, e.g. mismatching time horizon of decision-making, lack of integration of climate in fiduciary duty and engagement practices, lack of relevant climate-related risk and performance methodologies.
  3. There is a role for policymakers to speed up market enablers. The report’s recommendations for the for the shorter term include actions for the European Commission to improve the risk-return profile of climate friendly assets through credit enhancement initiatives and supporting green securitisation, actions for increasing the volume and acceptance of climate-friendly financial products, an action to explore the potential of introducing a policy risk insurance and actions for standardising accounting and disclosure of companies and financial products. Recommendations for the medium to longer term target investors’ decision-making framework, for example: actions to lengthen the time horizons of institutional investors, actions exploring the use of tax incentives for climate-friendly financial products, and including climate performance metrics and carbon risk assessment in the IORP II Directive.