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Active is: Accelerating economic growth through sustainability
The European Commission has set out to achieve both economic and sustainability goals. Our ESG Strategy team summarises the important implications for investors, from an overview of the Sustainable Europe Agenda targets to three potential policy scenarios for sustainable development.
We stand at the crossroads of European Union’s (EU) sustainability strategy that is full of turning points with important implications for investors. In its recent reflection paper the European Commission (EC) highlights that it envisions strong future EU economic growth through sustainability transformation and business innovation.¹
The EC aims to win GDP Growth and Sustainability in
tandem and estimates an annual finance need of EUR
270bn for Climate, Energy, and Water alone. The potential
global benefits have been estimated to unlock USD 26tn of
economic value through new jobs, well-being, and
competitiveness.* Question remains which economy will
snap up the most of it?
In this Environmental, Social, Governance (ESG) economic
research, we summarise the key EU targets for the
Sustainable Europe Agenda. We start with an overview
about the sustainable development’s status quo in the EU
and put out the key questions. Then we lay out three
potential future EU sustainable development policy
scenarios. As an outlook we highlight the opportunities for
the EU on globalization of sustainability to win the
international race to be the first true sustainability leader.
European Commission’s reflections for Sustainable
In a recent 2019 reflection paper, the Commission sees the UN
Sustainable Development Goals (SDGs) as a compass to
achieve prosperous future economic growth in the EU.
Expectations are set high in business success by sustainability
innovation and transformation of sectors and corporates.
Complex environmental challenges require new technology
and business solutions, especially, as the EU is also sensitive
towards the large societal challenges that a rapid
sustainability transformation will bring with potential short
term costs to its citizens and corporations.
Internationally, the EU’s SDG reflections also discuss how
sustainability could exert more strategic independence and
be exported globally.
Ideas to stimulate successful growth via Sustainable
Development innovation and investments
How can the EU economy capture its slice of business, and
investors contribute to financing the USD 6tn per annum to
reach the 17 SDGs until 2030? In our view, the responsibility to
commercialize this opportunity lays primarily with the
private sector, with EU crucially supporting and accelerating
this change. For this, a clear political direction with set policy
and economy targets by the EU is desired.
Access to capital and investment opportunities is key. For
example, we think joint private-public partnership (PPP)
desks with active investors can critically bridge SDGs closer
to long-term investors via a much larger scale of project
flow. To achieve these, the EU could promote more
sustainable investment knowledge innovation communities
(KICs).3 Long-term investors, such as pension funds and
insurers will be central.
Sustainable Development in the EU4
EU Status Quo
Maintain and increase the economic growth in the European Union
Economy in the Environmental sectors has far outpaced the Total Economy growth, both in terms of Value Added and Emplyment as seen in Chart 1
Chart 1: Change in GDP and Employment of Environmental Economy versus the Total Economy in EU-288b
2030: Reduction of Greenhouse Gas (GHG) emissions by min. 40% vs 1990
2050: Net-zero GHG emissions
Emissions in the EU-27 have been reduced by 23%5 out of the 40% necessary
In the next EU budget, 25% are to be used for climate objectives, 12% of the bdget will be from sustainable resources6
2030: Renewables share of 32% in end-use of energy
2050: More than 80% of electricity to originate from renewable energy7
EU is on track to meet its 2020 goal of 20% energy from renewables (currently – 17.5%8a)
EU is the global leader for Renewable Energy per capita
Currently 55% of the gross EU energy consumption is imported, and only 0.35% of it is from renewable sources8c
EUR 55bn2 p.a. of energy subsidies in the EU are still going towards coal and carbon sources
2030: Lower Energy consumption versus 1990 by min. 32.5%7
Energy use in the EU-28 still must be reduced by more than 34%
Currently total EU energy consumption is 2% higher than in 199011 (Chart 2)
Chart 2: Energy consumption in the EU‑28 from 1990 to 201610
With EUR 79bn of the EU budget allocated to agricultural rural development, at least 30% have to be spent on climate measures9
Organic Farming has increased by 25% in the last 5 years
45% of EU agricultural soil is still poor organically2
Key questions still in need of clarification on Sustainable Development in the EU
If the EU see SDGs as a general indicator for the direction of the economy, then investors seek answers to:
How can sustainability technology innovators find a better access to private sector investment?
What incentives could be given to small, mid and large caps corporates to innovate sustainable services and products with the direction to transform business models?
How does the EU plan to improve the accessibility/ supply of SDG-related investments for private investors?
Public-Private Partnerships (PPPs) work - what more roles can they play, e.g. European Investment Bank, European Fund for Sustainable Development, or the European Fund for Strategic Investments?
Fiscal policy is a powerful tool for policy objectives – how can sustainability driven fiscal policy be leveraged better to achieve global sustainability aims? Should the Finance Ministry Coalition for Climate Action be expanded further?
Three potential policy scenarios
For addressing these sustainability challenges, we outline three potential policy scenarios that may define the Sustainable Europe agenda from an investment perspective going forward.
In this case, the EU would not interfere much into the private sector activities, if at all. Consequently, the required sustainability innovation and economic transformation would be completely put on the shoulders and appetite of the private sector.
This could be beneficial in avoiding free-rider issue and unintended consequences, through market distortion via subsidies. But it risks the Sustainable Europe agenda being too slow, or opportunities being overlooked by the private sector, potentially leading the EU to fall behind on sustainability akin to falling behind on other new technologies such as Artificial Intelligence.
„Instead of asking what should be regulated, we must ask what can private investment achieve without regulation already”
The EU preferably could engage as a supporter of the economy's sustainability transition. While more clarity on the EU's policy and economics targets is wanted, it could reach sustainability equilibrium by guidance, collaboration, and support. For example, setting a carbon price instead of directing how to assess carbon risk.
Such action could create a prosperous eco-sphere for matching sustainability driven business innovation with the investor's demand for attractive long-term investment opportunities. Active investors should be supported to target the opportunities set by true Sustainable Business innovation in creative Research & Development solutions.
It does take at least two to dance the sustainable development tango. Thus, if the EU was to facilitate it, for example by PPPs and KICs, it would also be important for corporates, start-ups, and investors to take part. Through the EU Sustainable Finance Action Plan, the EU has addressed key components to sustainable investing (Taxonomy, Green Bonds, Climate Benchmarks, EU Ecolabel for green financial products). A leap-frog in mainstreaming could possibly be achieved beyond a green impact investment focus to a broader impact focus that includes many more of the 17 SDGs.
Large subsidies and financial support from the EU towards sustainable development themed businesses would be expected if this policy scenario was to come to fruition. To incubate innovation and growth, the EU would have to re-channel subsidies from "the old economy" e.g. thermal coal, into "the new economy" with a focus on sustainability targets. Additionally, new fiscal mechanisms could be introduced such as a carbon tax and dividend scheme for the EU – similar to what is promoted by the Carbon Pricing Leadership Coalition and has been endorsed by over 2,500 leading US economists spearheaded by former US Federal Reserve chair Janet Yellen.11
This will attack the time paradox inherent in most sustainability challenges such as climate change where immediate action is required while there may be no or very limited market incentive to innovate and invest. On the downside, there is a risk of free-riding, lack of true innovation and public discontent due to taxpayers footing the bill as well as administrative complexity being perceived as too much "red-tape".
Global race to sustainability: outlook on the future of international sustainable development
If the EU will be successful as a global leader in sustainability technologies and innovation, including sustainable finance standards and solutions, then sustainability as a trade commodity has the option to lift the EU GDP growth even further as a global export and a trailblazer success. There could also be positive effects via the Generalised System of Preferences through more trade policies and Foreign Direct Investment opportunities in countries also endorsing sustainability, which attracts back to the EU economy.
On the financial standards side, a comparison to be drawn here is the increasing international adoption of International Financial Reporting Standards (IFRS), which were pushed forward by the EU.
In the mid-term, the EU collaboration with China and other countries about sustainability is important for investors, especially if joint standards were developed to ease cross-border investments and joint ventures around sustainability themes and issuer listings for green finance for example. In the long-term, the EU’s global sustainability role can shift due to Africa, e.g. the new Africa-Europe Alliance for Sustainable Investment and Jobs may present new and previously unseen investment opportunities.
In the global race, for the EU to become the leading sustainability economy that achieves high GDP growth and a balanced sustainable ecological footprint (as shown in Chart 3) the jury is out and the stakes are high. The EU has a good starting position but must make the right calls soon.
Chart 3: Countries’ ecological footprint in relation to Human Development12
A race to be first
* Of great example are the Climate-KIC initiative and Potsdam Institute
for Climate Impact Research, which have helped to foster innovation that
is necessary to tackle climate change. German readers might also find of
interest the article by Prof Hans Joachim Schellnhuber in Perspektive
“Einbindung institutioneller Investoren in nachhaltige Lösungsstrategien”
1. European Commission, Reflection Paper Towards Sustainable Europe, 2019.
2. The views and opinions expressed in this paper, which are subject to change without notice, are those of the author, Global ESG Strategy Team, at the time of publication and do not necessarily reflect the opinion of the issuer and/or its affiliated companies.
3. Garrido, L., Fazekas, D., Pollitt, H., Smith, A., Berg von Linde, M., McGregor, M., and Westphal, M., 2018. Forthcoming. Major Opportunities for Growth and Climate Action: A Technical Note. A New Climate Economy contributing paper.
4. We leave out of the analysis other sustainable development themes, such as, education, poverty, etc, due to the EU already being one of the leaders in these fields or due to the developing methodologies about their measurement
5. European Commission, Two years after Paris – Progress towards meeting the EU’s climate commitments, 2017
6. European Commission, The Multiannual Financial Framework for 2021-2027
7. European Commission, A Clean Planet for all, A European strategic long-term vision for a climate neutral economy, 2018
8. Source: Eurostat a) nrg_ind_ren b) env_ac_egss2, env_ac_egss1, nama_10_gdp, nama_10_pe c) Energy Balances
9. European Commission, EU Budget: the Common Agricultural Policy after 2020
Low rates are back, so where do you turn in fixed income?
Investors who need income and return potential should consider an active, balanced, global approach. Consider pairing high-quality investment-grade corporates, Treasuries and select securitised assets with infrastructure debt and higher-quality US, European and Asian high-yield bonds.
Faced with low or even negative bond yields, many investors are looking to preserve income and return potential – and an active, holistic approach could help
We see opportunities in the securitised fixed-income market and higher-quality corporate bonds, though investors should be cautious and selective with BBB exposure
For additional income potential, look to higher-quality US high-yield bonds, select global high-yield bonds (particularly from Europe and Asia) and infrastructure debt
Using these securities in a “barbell” approach can help investors take selective risks while providing the potential for favourable yields and returns
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