We will all agree that we need to work in order to improve people’s health and lives, protect our nature and wildlife, and ensure a healthy planet for generations to come.
This is what the European Green Deal is about: a set of policy initiatives by the European Commission with the goal to make Europe climate neutral by 2050. Climate neutrality means that harmful emissions would be balanced by processes that remove harmful gases from the atmosphere.
What has all this got to do with the economy? Some of the main objectives of the European Green Deal are indeed about boosting the economy through green technology and establishing sustainable industries and manufacturing processes while reducing pollution.
As the European Union ramps up momentum on the green deal proposals and its objectives, one subject will remain pivotal for the success of this initiative; financing the investment required in sustainable projects.
Green bonds and sustainable financing are becoming topical across Europe. As the name suggests, green bonds are regular bonds, or loans made to large organisations.
These are usually listed on a stock exchange and issued by governments or private companies. The difference from conventional bonds lies in the fact that their proceeds are intended to finance environmentally sustainable projects.
So they are able to bring together investors who want to commit money towards ethical investments and entities who are interested in environmental and sustainable goals.
Last month, for example, the German government raised €6.5 billion in its first-ever issue of green bonds. Investors offered to lend five times that amount and as more than €33 billion were pledged. Pricing was very much in-line with other German bonds of the same maturity. Concretely, investors were happy to lock-in a negative return for the next 10 years, as long as they could participate in this issuance.
We need to direct policies towards easing the flow of private capital towards green projects
This strong investment appetite is encouraging. Green bond global issuance exceeded $250 billion in 2019, a staggering 51 per cent increase over the same figures the year before. Europe alone accounted for almost half of this issuance, but demand also increased substantially in the US and Asia. This concept is not as new as it might seem in Malta. Although no fully-fledged green bonds have ever been issued, we had listed companies that successfully implemented green projects relating to renewable energy.
The real estate industry itself, being the largest sector on the local bond market, has the potential to be a catalyst in this area. Contrary to what many might think, green projects are not alien to this industry. Independent property certification such as LEED (Leadership in Energy and Environmental Design) and BREEAM (Building Research Establishment Environmental Assessment Method) provide a practical measure of the environmental impact of development projects. What might come as a surprise to many is that these projects are already being part-financed through specific traditional investment vehicles on the Maltese exchange.
Green bonds will however step up the game as mandatory and external verification of these projects would significantly reduce the risk of ‘greenwashing’, that is, when green values and green marketing are deceptively used to persuade the public that an organization’s products, aims and policies are environmentally friendly. Mandatory verification will ensure that money goes to projects with a measurable, positive environmental or social impact.
To complement the green deal’s objectives, we need to start thinking of real tools that can help the transfer of capital towards green ventures. As policy-makers, we need to reduce the gap between willing providers of green capital and corporate entities that can deliver and implement such projects. One way of doing this is by providing tax credits on the interest paid on green bonds. This will make such bonds more attractive for potential investors, without increasing cost for the issuers. In addition to this, allowing for faster depreciation of green assets would effectively reduce the tax bill for the company.
The external verification process should be robust to ensure adequate compliance with the green bond framework. However, Maltese companies need to be assisted in this process as the cost involved could significantly reduce the attractiveness of green bonds for our small and medium-sized enterprises. There is a lot of interest in the subject. Personal encounters with entities such as the Gozo Business Chamber, the Malta Chamber of Commerce, and various private entities around the islands have brought to light the high interest in green investment.
The government’s commitment to reaching carbon neutrality targets is a strong reason to actively look for ways to reduce the constraints of issuing green investments. We need to direct policies towards easing the flow of private capital towards green projects, while tilting the balance towards green, rather than conventional investments vehicles.
Miriam Dalli is a Labour MP and Steve Ellul is chair of the Economic Policy Forum of the Labour Party’s 100 IDEA.