European banks have yet to ‘unleash to potential’ of green bonds to fund the energy transition, new research from the Institute for Energy Economics and Financial Analysis (IEEFA) has suggested.
According to IEEFA, outstanding green bonds represent less than 1% of assets, on average, across Europe’s 47 largest banks, despite most financial institutions having established green bond frameworks.
‘Too small’
“Green bond issuance remains too small to materially shift European banks’ asset allocation,” commented Kevin Leung, author of the report and a sustainable finance analyst at IEEFA.
“Green bond programmes are held back by banks’ business-as-usual lending to high-emitting assets and a limited pipeline of green projects.”
As its research noted, European banks currently only allocate a ‘minority’ of proceeds from green bonds to activities focused on decarbonisation, energy security and industrial resilience.
For example, renewable energy accounts for around 20% of proceeds allocated by European banks’ green bonds, but IEEFA said the sector represents about 90% of the avoided emissions reported from those bonds. At the same time, green buildings receive around 70% of proceeds, but account for just 3% of reported avoided emissions.
“This composition of allocations does not squarely address Europe’s clean transition and resilience needs,” Leung added. “More credible green bond programmes should therefore actively align funding with a well-represented set of transition-critical assets, which have low climate risk exposure.”
Integrate green funding
The IEEFA recommends that banks seek to integrate green funding ‘more explicitly’ with sustainable finance targets, transition planning and risk management, which would direct more capital towards Europe’s transition and resilience agenda.
“Unlocking the full value of bank green bonds is particularly important given banks’ role in financing the real economy,” said Leung. “European banks have the opportunity to move from issuing green bonds as a mature market practice to using them as a strategic instrument for financing the assets Europe needs for its climate and energy security agenda.” Read more here.
