Euro and the green transition
Summary
Claudia Gabriela Baicu
The European Union (EU) adopted the „European Green Deal” that reveals the vision regarding a new economic growth strategy. The EU has set the ambitious goal to become climate-neutral by 2050. However, to meet this goal, estimates indicate that large amounts of money should be mobilized from both private and public sources. Therefore, to support the green transition, the EU has built a sustainable finance strategy and adopted several regulations to promote sustainable investments.
The most important steps in the development of the EU strategy on sustainable finance took place after the adoption of the 2030 Agenda for Sustainable Development and the Paris Agreement. In its Communication of 8 March 2018 entitled „Action Plan: Financing Sustainable Growth”, the European Commission published several measures aimed at: (i) redirecting capital towards sustainable economic activities; (ii) managing financial risks related to climate change, environmental and social factors; (iii) promoting transparency.
One of the most relevant legislative initiatives in this field is the Regulation (EU) 2020/852, known as the Taxonomy Regulation, which sets out the criteria that an economic activity must meet in order to be considered environmentally sustainable. This is an important step in promoting sustainable investments because adopting a common language helps to reduce ambiguities and the greenwashing risk.
Another measure in the Action Plan on Financing Sustainable Growth is the creation of EU standards and labels for green financial products. It is worth mentioning the creation of the European green bond standard. The Regulation (EU) 2023/2631 includes the uniform requirements for a bond to receive the designation of „European Green Bond” („EuGB”). The standard is adopted on a voluntary basis. Besides, any issuer, even from outside the EU, can issue green bonds in accordance with this standard. The standard can accelerate the development of the green bond market thanks to its clarifications, increased transparency and supervision.
The EU climate benchmarks are also important tools for the growth of sustainable investments and European financial markets. The Regulation (EU) 2019/2089 contains provisions on (i) the EU Climate Transition Benchmark and (ii) the EU Paris-aligned Benchmark, whose methodology is based on carbon emission reductions and alignment with the objectives of the Paris Agreement.
At the same time, the European authorities have focused on improving transparency in terms of sustainability. The Directive (EU) 2022/2464 sets out the new standards for corporate sustainability reporting.
In addition, the European Central Bank (ECB) has taken actions to incorporate climate change considerations into its monetary policy. Last but not least, the EU supports international cooperation and coordination in the field of sustainable finance.
Given the EU’s climate commitment and its actions to promote sustainable finance, the green transition can strengthen the international role of the euro. One of the most important instrument to finance the green transition is green bond. In recent years, the euro has strengthened its leadership in global green bond issuance, position supported by European issuers and the EU legislative framework on sustainable finance. It is important to note that the euro is also used in green bonds issued by entities from outside Europe, which contributes to strengthen its role.
EU issuers stand out for the volume of issuances and innovations brought to the market, including through the European Investment Bank (EIB). Moreover, the EIB is both an issuer and an investor in green bonds. On the other hand, sovereign green bonds in the EU have been growing rapidly since the outbreak of the COVID-19 pandemic, and are on the rise. The world’s first sovereign green bond was issued by an EU member state, Poland, at the end of 2016. This is another proof of the EU’s pioneering work in this market.
The experience of the first EU countries to enter the sovereign green bond market between 2016 and 2020 reveals that most of the issuances were denominated in euros. However, other currencies were also used, including Japanese yen, Hungarian forint, Chinese yuan and Swedish krona. After the inaugural issuances, some EU countries have issued other green bonds, with maturities reaching up to 30 years. These issuances were based on the adoption of national sovereign green bond frameworks, which were aligned with the Green Bond Principles developed by the International Capital Market Association. It is worth mentioning that as the market evolved, other standards were also taken into account, relevant being the EU taxonomy and the European green bond standard. The national frameworks have been evaluated by international rating agencies, including Moody, Morningstar Sustainalytics and Cicero.
Investors were geographically diversified, but investors from the euro area made a significant contribution. With the development of the market, some innovative techniques have been introduced. France has issued the world’s first inflation-linked sovereign green bond and Germany has used the „twin bond” mechanism to increase market liquidity.
In addition to Poland, the list of the first EU countries to issue sovereign green bonds includes only Lithuania and Hungary. Romania issued its first sovereign green bond later than other European countries, in 2024. Similar to other bonds issued by EU governments, the green bond issued by the Romanian state has attracted the attention of international and local investors. It is desirable that the success of this green bond will stimulate private issuers, given the need to increase green bond issuances in Romania.
The European green bond market has received a strong boost with the European Commission plan to mobilize 30% of NextGenerationEU funds through the issuance of green bonds (NGEU green bonds). Therefore, the European Commission expects the EU to become the world’s largest issuer of green bonds. However, in order to achieve this objective, it is necessary to accelerate the issuances.
The international role of the euro in green finance can be reinforced as new issuers of euro-denominated green bonds are attracted from outside its traditional pool, including emerging markets. Last but not least, increasing the role of the euro in sustainable development can be achieved by boosting its attractiveness as a currency for green/sustainable financial products.
On the other hand, the ECB’s climate agenda has started to develop in the last five years, with the development of the EU strategy on sustainable finance. In this regard, the ECB’s most important initiatives are aimed at incorporating climate change into its monetary policy and managing climate-related risks.
In 2020, the ECB published the „Guide on climate-related and environmental risks”. While the guide is not mandatory, it provides institutions with the ECB’s supervisory expectations on climate risks management and disclosure. The ECB has also set out a „Detailed roadmap of climate change-related actions” to include climate change considerations into monetary policy. The ECB climate agenda 2022 has set three objectives: managing the financial risks associated with climate change, promoting sustainable finance and sharing expertise in the field.
The ECB’s climate change initiatives also focused on conducting economy-wide climate stress tests. Moreover, the ECB’s supervisory priorities for the period 2024-2026 address weaknesses in the management of climate risks. Besides, earlier this year, the ECB published its „Climate and nature plan 2024-2025” which, among other things, aims to improve the analysis of the macroeconomic impact of climate change and climate-related data.
In summary, the EU’s efforts to support the transition to the green economy and sustainable finance contribute to the promotion of the euro, which is beneficial for both European investors and green bonds issuers. Therefore, it is necessary to scale up measures that can increase its role at international level, including by improving the legislative framework in line with market developments.
