Report – A reality check on green finance 2.0

This report shows that while green finance in Europe has grown rapidly over the past five years to more than €375bn in green capital raising last year alone, there are signs that the growth and penetration of green finance are slowing down.  In the face of critical issues ranging from climate change to energy insecurity, it is essential that Europe redoubles its efforts to achieve net zero and build a clean energy economy.

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Europe has established itself as a world leader in financing the transition to net zero. By building a transparent and dynamic green finance market, it has mobilised green financing totalling more than €1 trillion over the last three years and is approaching the annual amounts of investment needed to achieve its 2030 targets.

This report, published in partnership with Luxembourg for Finance, is the second edition of our reality check on green finance in Europe. It shows that while Europe has mobilised significant amounts of green finance, growth in the green finance market is running out of steam. The value of green capital raising has flatlined over the past few years – and fallen in real terms – while the penetration of green finance as a proportion of all capital markets activity has slipped back. While there is no single reason for this slowdown, we highlight several some significant challenges to green finance that threaten Europe’s net zero goals.

The report also highlights one of the most troubling trends in green finance:  the backlash to ‘green’ and the net zero transition in general. Policymakers in Europe and beyond are starting to pull back on green pledges in response to a difficult economic and political environment. If Europe wants to maintain its place as the world leader in sustainability and green finance, it will need to not just tackle the challenges facing its green finance market: it will also need to provide a more convincing argument to the wider public on why green policy and green finance is needed.

The first part of the report analyses how the green finance market in Europe has evolved over the last five years and provides a unique country-by-country ranking of the value, penetration, and depth of green capital raising (across labelled green bonds, capital markets markets activity by ‘green’ companies or with ‘green’ use of proceeds, and green venture capital investment).

The second part analyses how ‘green’ green finance actually is. And the third part outlines the challenges facing Europe’s green finance market and provides some context on the recent political backlash and recommendations on how to address it.

Here is a short summary of the report:

1) Explosive growth: this report highlights the significant rise in both the value and penetration of green finance in Europe over the past five years. Green capital raising has more than doubled since 2019 to €378bn and the penetration of green finance has more than doubled to 11% of all capital markets activity. For reference, activity in Europe was nearly double the €200bn in green capital raising in the US last year.

2) Worrying signs: there are signs that the growth in green finance in Europe is running out of steam. The value of green capital markets activity has flatlined over the past few years and fallen slightly in real terms, and the penetration of green finance also dropped last year. This suggests that Europe has already scored the ‘easy wins’ and that the political backlash against ‘green’ and ‘ESG’ is taking its toll.

3) Business as usual: for the transition to net zero to be realised, Europe will need to shift financing en masse  from fossil fuels to renewables. The report shows that ‘bad’ companies – or those whose day-to-day activities delay the transition – still receive five times as much financing as ‘good’ or ‘green’ companies.

4) Questions about ‘green’: the biggest driver of green finance in Europe is the labelled green bond market, making up around two-thirds of the total value of green finance. Our unique analysis also includes non-labelled capital raising by ‘green’ companies or with ‘green’ use of proceeds, and green venture capital. However, our analysis shows that not all green financing is as green as it looks.

5) Growing green companies: a big positive note is that the value of green venture capital investment surged over the last few years and reached 18% of all European venture capital in 2023. Supporting innovative green companies and enabling them to scale up will be critical if Europe wants to achieve net zero.

6) A range in depth: while Europe is a world leader in green finance, there is a wide range in the size, depth and penetration of green capital raising activity. Germany is by far the largest market for green capital markets (with a 17% share) ahead of France and the UK. However, the penetration of green finance in these markets is lower than the European average, and Nordic and Benelux countries have the largest green finance markets relative to GDP.

7) Challenges on the horizon: European policymakers and financial institutions have helped create a transparent and vibrant green finance market. There remain issues around data availability, definitions of ‘green’ and ‘not green’, and around the overall narrative of transition financing. Addressing these will be key if Europe wants to continue being a world leader in sustainability.

8) Regulatory overload: regulation has played an important role in shaping Europe’s green finance market, but there is a risk of it becoming too much and too burdensome. There are already efforts to simplify this regulatory regime – a step that could help reverse the slowdown in green finance issuance.

9) Addressing the ‘backlash’: the emerging anti ‘green’ backlash has put policymakers on the back foot. This backlash has been seen from the watering down of the regulations and net zero targets to farmers protesting on the streets of European capitals. We show that there are multiple elements of this backlash – some inevitable, some that can be addressed – and outline its importance, particularly with the upcoming European Parliamentary elections.

10) No time for complacency: the slowdown in issuance and the burgeoning backlash show that Europe has no time for complacency. Leaders from all parts of society have emphasised the importance of the transition to net zero – particularly in the context of Russia’s invasion of Ukraine and its impact on Europe’s energy supply – and it will be up to them to shape the right regulation to accelerate the growth of green finance.