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New EU climate law likely to help green investments – but only in the long run

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Published: 26 April 2021

The new EU Climate Law forces the union to become emission neutral by 2050. “Businesses that have an evident business case for reducing greenhouse gas emissions will probably thrive in that environment,” said an EU sustainable investments expert.

Wind turbine in the sun
The EU is set out to become climate-neutral by cutting emissions, investing in green technologies and protecting the natural environment. Rob Voss / ANP

In short

  • The new European Climate Law makes it legally binding for the EU to reach “climate neutrality” by 2050 and to cut greenhouse gas emissions by 55% compared to 1990 levels.
  • Targets are set for the EU as a whole and not for individual member states – which risks triggering lack of accountability at national levels, environmental groups say.
  • The new law paves the way for more specific, upcoming legislation expected to reshape all sectors concerned with emission trading, such as energy, industry, aviation and shipping. European Parliament and EU member states are yet to officially approve the EU Climate Law.

As world leaders prepared for the US-led climate summit starting on Earth Day 22 April, EU leaders clinched a timely deal on the so-called European Climate Law, effectively writing the overarching European Green Deal policy into law.

According to the EU Commission the new climate law will help create a predictable business environment for businesses and investors.

But immediate effects for investors may be limited, according to the European Sustainable Investment Forum (Eurosif), the leading membership association promoting SRI based in Brussels.

Eurosif Executive Director Victor van Hoorn believes the new regulation will have limited direct impact on the day-to-day business of impact investors in general. “But we do now have the objectives from the Paris agreement and the Green Deal set in law. That is important,” he added.”

Because as we know: political statements can change, but it is harder to change the law,” he told Impact Investor. “Hopefully, this will foster debate on how to set up net zero commitments by investors and companies.”

“Struggling over financing”

The new climate law signals that the EU is “very serious” about its decarbonization trajectory, according to Van Hoorn.

“From an investor perspective, that means that it is very likely that companies in business involving a lot of fossil fuel will increasingly be struggling over their financing in the decades to come. Businesses that have an evident business case for reducing greenhouse gas emissions will probably thrive in that environment.”

“Momentum continuing to build”

A spokesperson for Institutional Investors Group for Climate Change (IIGCC), a leading platform for investors focusing on climate change, said the group welcomes the EU climate law’s strengthening of Europe’s institutional and governance processes for achieving net zero emissions.

“With the momentum continuing to build as asset managers and asset owners are making their own net zero commitments, this law sends a signal that the EU policy landscape will be supportive of the realisation and implementation of these investor commitments,” the IIGCC spokesperson said.

Stronger policies expected

The new EU climate law will directly result in stronger policies EU-wide and in specific member states, according to Elise Attal, head of EU policy at Principles for Responsible Investments.

“These policies will shape opportunity and risk and are expected to bring an overdue market repricing of assets,” Attal told Impact Investor.

“This leads to stronger returns for companies and investments delivering positive impact through clean technologies and low carbon solutions of the future.”

… But not ambitious enough, says the green sector

The news on the EU climate law deal was met with cheers and criticism in European media last week. The law is generally welcomed and deemed highly necessary, but too limited in scope according to some.

“The landmark climate change law will form the basis for Europe’s plan to slash greenhouse gas emissions, which will reshape all sectors, from transport to heavy industry, and require hundreds of billions of euros in annual investments,” Euroactive reported.

Green politicians and climate scientists were more sceptical. The fact that targets are set for the EU as a whole – and not for individual countries – makes it hard to put pressure on member states, they argued.

They also stated that greenhouse gas emissions need to be cut by 65% by 2030 (instead of the agreed 55%) to live up to the Paris Agreement’s goal to limit global warming to 1,5 degrees.

Additional climate legislation expected

The EU climate law sets the stage for an upcoming revision of key EU climate legislation. In June the European Commission will announce a major package of climate laws.

Legislation on renewable energy, CO2 standards for cars and the EU emission trading system are part of the package.

At that point, the new climate law becomes more concrete for impact investors, says Van Hoorn at Eurosif. “We now have the long-term target set in the new climate law. As a result, we expect other legislation to follow,” he said.

A taxonomy for green investments

Just hours after the agreement on the new climate law last week, the European Commission presented its long-awaited classification system for sustainable investments.

The sustainable finance taxonomy lists economic activities in sectors ranging from transport to industry and forestry. It also specifies which targets the different sectors must meet to be labelled as green investments in the EU.

Making green investments more visible to investors will help steer huge sums of private capital into businesses and projects that support the EU climate goals, the EU hopes.

However, vexing decisions on whether to label nuclear energy and power plants fueled by natural gas as ‘green’ were delayed until later this year.

The deal on the EU Climate Law will now be fine-tuned by legislators ahead of formal adoption by the European Parliament and the Member states in the month to come. The law is expected to enter into force by the end of the summer.

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