Hugh Wheelan: Good news out of Brussels on environmental investing

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Good news out of Brussels on environmental investing has been in short supply in recent years.
This last week or so, however, has seen at least four stars align, offering much-needed hope.
The source of much woe has, of course, been the languishing carbon price in the EU Emissions Trading System (ETS).
Good news number 1 was the Feb 24 European Parliament vote in favour of backing proposed regulation to introduce a ‘market stability reserve’ (MSR) during 2018. This would pull CO2 allowances from the EU Emissions Trading System in an attempt to support the carbon price, which dropped to a historic low of less than €3 per tonne at the start of 2013.
Under the plans, the MSR would remove 12% of EU allowances from the market if the number of allowances in circulation reaches 833 million. Conversely, it would release 100 million allowances into the market if the number in circulation falls to 400 million. This quantity represents roughly 5% of the current annual emissions in the EU ETS.
In the shorter-term, the Parliament has also backed postponing (known as ‘back-loading’) the auction of 900 million allowances during the 2014-2016 phase of the ETS. The allowances will be held in reserve rather than returned to the market in 2019-20.
As a result, prices for allowances are expected to gradually rise from their current mid €7 mark.The proposals will now go for tripartite approval of the Council of Ministers, the European Parliament and the European Commission, which are expected to kick off later this month.
Stephanie Pfeiffer, Chief Executive of the Institutional Investors Group on Climate Change, said the agreement “sends a positive signal to investors”. But she urged member states not to delay the MSR start date until late 2018. “Waiting until the end of 2018 …risks holding down the carbon price and prolonging uncertainty,” she said. “The sooner the MSR starts, the sooner the ETS will become a factor in low carbon investment decisions”.
Good news number 2 (albeit more moderate on the good news scale) was the European Commission publication of The Paris Protocol, its preparation document for the COP21 UN climate meeting in Paris in December this year. It says the EU’s long-term goal should be to reduce global emissions by at least 60% below 2010 levels by 2050. It also calls on the International Civil Aviation Organisation (ICAO), the International Maritime Organisation (IMO) and the Montreal Protocol to act in effectively regulating emissions from international aviation and shipping before the end of 2016. On the policy front, it says its aim is to promote predictable public and private sector investment in low-emission, climate-resilient development.

The IIGCC noted: “What investors need now is for this vision to be underpinned by policies that give them the confidence to invest in low carbon energy projects. In particular this means strong and early ETS reform, more progress on energy efficiency, and changing signals to favour low carbon over high carbon investment.”
Good news number 3 was the Feb 25th release of the EU’s Energy Union plans, that go some way to doing just that. It’s a ‘big picture’ document, but importantly it posits a vision of the Energy Union as “a sustainable, low-carbon and climate-friendly economy” with backing for “strong, innovative and competitive European companies that develop the industrial products and technology needed to deliver energy efficiency and low carbon technologies inside and outside Europe”.
For responsible investors, energy efficiency, decarbonisation and green R&D are key parts of the document and emerging as key elements of the European Commission’s ambitious €300bn plan to kick-start the EU economy under new Commission President Jean-Claude Juncker’s “Investment Plan for Europe”. See RI article
The last piece of good news from Brussels is directly linked, and could be the most important fillip for institutional investors.
On February 26, The Energy Efficiency Financial Institutions Group (EEFIG) launched its final report covering Buildings, Industry and Small- and Medium-sized industries (SMEs).The report is a milestone, representing one of the most potent collaborations to date between the European Commission and institutional investors on how regulation can feed directly into long-term, green financing: in this case, energy efficiency in property and SMEs. The European Commission Directorate-General for Energy (DG Energy) and the United Nations Environment Programme Finance Initiative (UNEP FI) established the EEFIG as a specialist expert working group. It has 120 active participants comprising banks, investors, insurers, corporates, energy efficiency specialists and regulatory bodies, giving it something of the wisdom of an informed crowd. The report has been ably marshalled by Peter Sweatman, CEO and Founder of Climate Strategy and Partners. Notably, EEFIG was tasked with responding to three questions to give focus to a complex issue: These were:

1. What are the most imminent challenges that must be overcome?
2. Who would be the right party to address them?
3. What should the European Commission/ EU do?

The report’s answers, are, of course, more complex, but clear and practical; a strong plus! At their core is the conclusion that a strong regulatory framework with effective enforcement of regulation is the only demand driver that cuts across all buildings segments. So far, so obvious maybe.

The report’s strength, however, lies in its dissection of the different regulatory and financial drivers and data measurement required for different parts of the property market, from residential to commercial and industrial. These are far from the same. The way the report lays these drivers out will be crucial to the EC’s policy response in crucial areas such as building performance standards, data comparison, targeting of fiscal advantages, accounting methods, public procurement requirements, and the scaling up of sustainable, sensible public-private investments over time with reasonable, secure pay-backs. This is crucial when the EU says €1.3 trillion in investment in low carbon energy is needed from 2013-45 – of which most estimates posit a 5-fold increase in private investment – and when buildings amount to 40% of current energy consumption.
At an event in Brussels, Gerassimos Thomas, Deputy Director General of DG Energy, welcomed the report’sfindings as part of a move in Brussels away from the grant culture of its structural funds towards more strategic partnerships with trusted private sector partners such as institutional investors. At the same event, Tatiana Bosteels, Head of Responsible Property Investment at Hermes Real Estate, said the report had been presented to Maroš Šefčovič, Vice President of the European Commission who was supportive and called for similar initiatives to be launched. Bosteels added: “We see climate change and energy security as long-term physical and market risks to our clients’ property assets. But we see a major opportunity in the transition to a low carbon economy.”
The EEFIG report merits a close read.
While there is an enormous amount still to be done to turn fine words into actions, the broader good news context is that Europe may finally be joining the dots on long-term, green public-private financing.