The EU is facing the impacts of climate change, but solutions exist. While the EU has set climate targets, reaching them requires a massive mobilization of the private financial sector. However, EU financial institutions are not on track to meet these goals, with investments in fossil fuels outweighing those in sustainable energy. Ahead of the 2024 EU Elections, Reclaim Finance urges political parties and candidates to implement four key measures to redirect financial flows toward climate action.
In June 2024, EU citizens will decide whether the European Parliament should have a majority of representatives to continue working towards the development of solutions to address the climate emergency we are in, such as the shift from fossil fuels to sustainable energy, home renovations, and more generally, addressing the need for climate justice and tackling growing inequalities caused, among other things, by climate change.
During the 2019-2024 mandate, MEPs contributed to the European Green Deal, which set ambitious climate targets for the EU. However, developing solutions to meet these goals does not come cheap. The European Commission estimates that an additional €620 billion will be needed each year until 2030 (1), where the European Court of Auditors gives a less conservative figure, advocating for a yearly additional €1000 billion (2). To fill the gap, both public and private finance will have to be heavily mobilized. Nonetheless, according to data from the International Energy Agency (IAE) (3), and supported by the EU Commission (4), between 80 and 85% of the money needed for the EU transition must come from the private sector.
Today, financial institutions are not on track to reach our climate goals. Since 2015, the European banks have poured over $767 billion USD on fossil fuels (5). Without accountability for their investments, financial institutions are literally banking on climate chaos.
In addition to being a human catastrophe, the consequences of climate change also weigh heavily on the European economy. In 2021 for example, responding to the impact of climate change cost €126 per European citizen (6).
To avoid the worst impacts of climate change, the EU must grasp the urgency of the situation, and act accordingly. Ahead of the 2024 EU Election, Reclaim Finance calls on the political parties and (future) Members of the European Parliament to implement these four key measures.
1 – Require financial players to invest at least 6 euros in “clean” energy for every euro spent on fossil fuels by 2030
To ensure that financial players actually play their part in the energy transition, the EU should put in place a ‘clean energy:fossil fuel’ finance ratio (7). For the major EU banks today, this ratio averages ‘1.6:1’ (8).
Clean energy to fossil fuels ratio of banks in Europe in 2021
| France | Netherlands | Italy | Spain | Austria | Germany | Sweden | Finland | Total EU Banks >$1bn |
|
|---|---|---|---|---|---|---|---|---|---|
| Ratio 2021 | 
1.10€ |
1.13€ |
1.23€ |
1.54€ |
2.76€ |
3.70€ |
7.03€ |
7.18€ |
1.60€ |
This ratio should reach at least ‘6:1’ in 2030 to limit global warming to 1.5°C, according to data from the IEA. To ensure that European finance is directed towards the energy transition, objectives for a gradual increase in the “clean” energy to fossil fuel financing ratio must be enshrined in law.
Projected increase in the ratio of clean energy to fossil fuels between 2025 and 2030
| 2025 | 2026 | 2027 | 2028 | 2029 | 2030 |
|---|---|---|---|---|---|
| 2.5:1 | 3:1 | 3.5:1 | 4:1 | 4.5:1 | 5:1 |
2 – Oblige financial institutions to adopt and apply robust climate transition plans
Climate transition plans can be a real tool to support the economic transition and enable companies to implement a gradual transformation. However, transition plans can become a tool for greenwashing if they are poor quality or if they are not properly implemented. It is therefore necessary to better regulate the content and implementation of these plans, in particular sectoral policies for the highest emitting activities and the methods for setting decarbonization targets.
With recent reforms, transition plans have been introduced to a limited extent in EU laws, but their content is not standardized and their implementations are neither binding nor monitored. By setting up specific audit procedures, as well as sufficiently dissuasive sanctions, the transition plans would be less likely used as a greenwashing tool.
3 – Cut financial support for developing activities that are particularly harmful to the climate and the environment
The continued development of activities with high greenhouse gas emissions jeopardizes the EU’s climate and environmental commitments and increases financial risks. For the fossil fuel sector in particular, investments today enable the construction of projects that will emit considerable volumes of emissions throughout their lifetime.In this context, the principle of “do not significantly harm” (DNSH) should become the compass for European players. Applying this principle to all financial services would ensure financial institutions do not support new infrastructures and n activities that would lock-in amounts of emissions at odds with EU climate goals as well as a proper management of climate-related risks.
4 – Offer preferential rates for the financing of sustainable activities
The access and cost of credit can have a significant impact on the roll-out of climate solutions. For example, building retrofits are financed by a large diversity of actors – including households – that rely on credit, while the cost of credit makes up for a large share of the total cost of renewable energy. Therefore, by granting banks lower refinancing rates to finance activities that are essential to the energy transition the European Central Bank (ECB) could support the EU in mobilizing the volumes of capital necessary to achieve its climate objectives. In the current context, this “differentiated” rate mechanism would protect sustainable activities from the effects of rate hikes decided by the ECB.
