Climate Change seen as an Opportunity

Recent years have seen an outpouring of well-founded alarms about the damages caused by climate change.

We need to build on these alarms so as to turn climate change from a threat to an opportunity.

Rebooting the economy.

The global policy response to the Covid-19 crisis presents an excellent opportunity to adopt a coordinated approach to tackling climate change - to re-design a more inclusive, sustainable and carbon neutral development pathway, aligned with the UN Agenda, the Sustainable Development Goals , the Paris Agreement and our duty towards the next generations. Climate policies toward net zero emissions, climate adaptation and resilient infrastructures can all be pursued as the world recovers from the pandemic, in a way that supports economic growth, employment and income equality. Over the next years, the world will invest heavily to recover from the fallout of COVID-19. Along these lines, the Next Generation EU program has already allocated 30% of the funds on fighting climate change, in addition to the resources made available within the framework of the EU Cohesion Policy. These initiatives should become sustainable features of our response to climate change. What we decide today will help determine the future of our societies.

Strengthening financial integration.

Encouraging green finance is an excellent way to strengthen financial integration. The transition to a carbon neutral economy will require adequate green financing. For example, the achievement of European climate and energy targets will require an estimated € 330 billion annually by 2030. Financial integration across euro area countries will generate investment opportunities and diversification of financial risks across national borders. Currently, green bonds are more likely to be held cross border than other European bonds; Environmental, Social and Governance (ESG) funds appear more stable, as investors are less likely to withdraw funds following negative performance than investors in other types of funds; and there is evidence to suggest that equity funding could help incentivize green innovation and greener activities. In short, scaling up green finance can be a driver for a carbon neutral economy, financial integration and stability in the euro area.

Strengthening the Capital Markets Union (CMU).

The strengthening of the CMU is necessary for the completion of the European Economic and Monetary Union because it will reduce market fragmentation and encourage diversification of financial resources. The development of a Green CMU can support the move to a CMU by adding depth and diversification to the financial instruments available, also enhancing the risk sharing capacity of the EU financial system. Green capital markets are dynamic and relatively well integrated in Europe. They provide a rapidly growing market and are the location of choice for green bond issuance and ESG investment. Important elements of a Green CMU include corporate sustainability disclosures, green financial products with official EU seals, such as the forthcoming EU Green Bond Standard, and harmonized regulation and supervision for sustainable finance. A Green CMU would both make the EU economy more resilient and more environmentally sustainable.

In my next article, I will elaborate on the role of central banks in tackling climate change.