Greening the EU stimulus plan

03 July 2020

6 minute read

By Damian Payiatakis, London UK, Head of Impact Investing and Olivia Nyikos, London UK, Investment Analyst

As governments look to restart their economies, investors should be aware that many, like the EU, are seizing the opportunity to integrate climate change into these efforts.

Having reacted to the initial economic shock of the pandemic, governments are starting to look to sizeable fiscal responses to encourage economic recovery. Within this, some are seeking to achieve dual aims of stimulating new growth and delivering their nationally determined climate commitments.

In the May Market Perspectives, we argued that climate change, while less visible, was still a risk and opportunity for investors as well as wider society.

Here we highlight the recent “greener” stimulus approaches by the EU and European countries, which reveals the implication for investors from governmental interventions. As well, it is an indicator where other countries such as India, China or the US, with a presidential change, may go.

Ambitious climate plans pre-date the pandemic

In December 2019, the European Commission (EC) unveiled the European Green Deal, laying out the blueprint for the bloc to achieve carbon neutrality by 2050.

As a set of policy initiatives, the overarching ambition is for Europe to become the first climate-neutral, industrialised continent in less than thirty years. Its primary method is to review each existing European law on its climate merits. As well, it calls on the EU bloc to restore biodiversity, cut pollution levels and boost the efficient use of resources by moving to a clean, circular economy. Overall, it has targeted to cut greenhouse gas emissions by 50-55% by 2030 compared with 1990 levels.

According to the European Environment Agency, the continent has reduced emissions by roughly a quarter since 1990. However positive this achievement, the results are not enough to put the EU on track to its net zero target by mid-century (see chart). The Green Deal was set out to bridge this gap encouraging more fundamental review of economic activity and disruptive innovation to accelerate decarbonisation.

Stimulating new, less emission-intensive growth

Of course, the European Green Deal was laid out before the global pandemic. While the pause of most economic activity around the globe gave a glimpse of a less-polluted world, the need for employment and economic activity meant emissions would always rebound. However, rather than simply focus on general economic stimulus, many European governments and the EC have sought to use the crisis as an opportunity to enable their transition to a low-carbon economy.

In France an €8bn incentive programme for battery and electric vehicles has been introduced to help rescue the country’s car industry. The underlying aim is to have one million French-made electric cars a year by 2025. Meanwhile, Air France has been asked to cut domestic flights and agree to target becoming the world’s “most environmentally friendly” airline, to satisfy the conditions of its government bailout.

Similar initiatives have been put in place in Germany, where subsidies for electric cars of around €2.2bn were announced and carmakers along their suppliers were promised €2bn to aid research and development. Financial aid to Lufthansa has also been tied to environmental goals resulting in the reduction of the national airline’s access to free landing slots at major German airports.

Clean energy

In the clean-energy sector, the German government has also approved its 2030 National Energy and Climate Plan (NECP) and adopted a new National Hydrogen Strategy – both critical in shaping the EU green recovery. The NECP aims for 65% renewable electricity and 30% renewable energy by 2030, while the Hydrogen Strategy aims to make Germany the “global number one” for renewable hydrogen applications and production.

To this end the Hydrogen Strategy provides €7bn to ramp up domestic production and related value chains. It also includes €2bn to establish international partnerships, supporting developing countries to scale up their renewable energy capacities.

More widely, the French president, Emmanuel Macron, and German chancellor, Angela Merkel, proposed an EU budget increase of €500bn to fund the Green Deal. This includes proposals to establish a recovery roadmap for each industrial sector and to increase the EU’s 2030 reductions target for greenhouse gas emissions. It also takes a significant step in outlining how the region should achieve a more sustainable future in the long run.

Thereafter, the EC launched a €750bn Next Generation EU fund on 27 May, aimed at helping Europe’s recovery from the COVID-19 crisis. The proposed fund plans to do so “not only by supporting the recovery but also by investing in our future: The European Green Deal and digitalization,” said EC President Ursula von der Leyen.

Green recovery, green opportunities

While these initiatives do not mean all Green Deal activity continues as initially planned, they demonstrate political willingness not to forgo the climate agenda in the midst of economic recession.

For investors, delving into the Green Deal and associated stimulus packages highlights potential climate risks from policy changes or attractive investment sectors that enable decarbonisation goals. Among the major initiatives in promoting clean-energy technologies, the EC plans to:

  • Renovate buildings and infrastructure to increase energy efficiency and build out a more circular economy
  • Roll-out more renewable energy projects, especially wind, solar and clean hydrogen energy
  • Promote cleaner transport and logistics, including the installation of one million charging points for electric vehicles and a boost for rail travel and clean mobility
  • Strengthening the Just Transition Fund to support reskilling of displaced workers and helping businesses create new economic opportunities.

Digging deeper

Then, looking a bit more deeply, investors can identify further sub-sectors and priority areas of note. For example, within the recovery plan, building renovation priority will go first to public sector buildings, especially hospitals and schools, social housing and other low-income dwellings. To further support renovation, the Commission aims to revise its relevant state aid rules by next year, to “provide an enabling framework for public authorities to support high-quality renovation”.

This should be a warning to potential real estate investors of policy risk that would require investment to retrofit buildings to climate resilient standards. Or, alternatively, there will be attractive opportunities in the energy efficiency field given its critical role to deliver the building targets.

Building back better

Despite some of the headwinds to Europe’s Green Deal and arguments it could do more, the approach of the EC and European countries appears to show the benefits of placing the green agenda at the heart of a region’s stimulus. Not only does it provide support for economic recovery in response to the pandemic; it also shifts economic output to lower carbon intensity in response to the climate breakdown. Clearly a win-win for these countries. And for investors who can position their portfolios effectively, it is an opportunity for the same.


Market Perspectives July 2020

Financial markets have had a very strong second quarter, despite geopolitical tensions and fresh outbreaks of COVID-19 in US and German states and in Beijing.

Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk.

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