Pushed by prominent political leaders, the Capital Markets Union (CMU) is expected to be one of the main projects to transform the European economy in the coming years. Its supporters argue it is essential to finance the European Union (EU) green transition. However, the lack of mechanisms to channel support to sustainable activities and willingness to weaken prudential frameworks and supervision is likely to result in higher overall emissions and related financial risks. To avoid this disastrous outcome, the CMU proposal must considerably evolve.
Over the past five years, the European Union positioned itself as a leader in the fight against climate change. With the adoption of the European Green Deal, the “Fit for 55” and the sustainable finance package, the EU outlines a path to a green transition. However, the EU is yet to walk that path, and is not on track to reach the targets it has set for 2030 (-55%), 2040 (around -90%) and reach carbon neutrality by 2050.
The EU is off-track because most recently adopted EU Directives and Regulations have been amputated of their strongest elements to fight climate change. This lack of ambition in final texts makes it difficult to fully embark on a just and fair transition, as noted by the European Environment Agency. (1) But, another major reason for the EU’s misfiring: a massive gap between the money invested into the green transition and the money actually needed to achieve it.
To fill this investment gap, several European figures – from former prime ministers to central bankers – have argued building a Capital Markets Union (CMU) is necessary. If the CMU could solve the EU climate funding gap, then we should advance it. But would it actually help solve this problem? Looking beyond high-level speeches, it is clear that CMU advocates provide no evidence to justify this claim. In fact, as currently proposed, the CMU could even be detrimental to the transition by boosting investment in activities that impair it.
From financing the green transition to the CMU
To enable the green transition, the EU needs to mobilize financing. Several figures have advanced over the years. The European Commission estimates that the EU would need an additional 620bn euros each year until 2030 to reach our 2030 climate target. (2) The European Court of Auditors raised this figure to an additional trillion each year. (3) Major investments, both from the public and private sectors are thus needed to finance the transition.
The Letta report “Much more than a market” published earlier this year argues the development of a CMU is a prerequisite to solving the EU’s main financing issues. (4) Similar elements can be found in the report published by Mario Draghi on EU competitiveness. (5) So far, both European Commission President Ursula von der Leyen and European Central Bank President Christine Lagarde largely agree. These CMU advocates notably stress that a large amount of the European savings are invested in companies outside of the European markets. This money is thus “lost” to greater markets, as the European Union does not have a strong European Common Market but national ones.
If Reclaim Finance agrees that we must solve the financing gap and that much more could be done with European savings to finance the green transition, we challenge the view that the creation of the CMU – as proposed in Enrico Letta’s report – would as such help achieve this.
The CMU is not a green finance tool
While the CMU promises to increase capital volumes and streamline financing for small capitalizations and unlisted companies, its impact is not limited to green activities or entities. In fact, the CMU’s benefits extend to all sectors, including those with the highest carbon footprints. Indeed, the currently proposed CMU lacks concrete mechanisms to channel investments towards sustainable activities and is focused on boosting economic activities no matter their environmental impact. With it, the union is likely to support both eco-friendly and polluting industries, leading to a global rise in greenhouse gas emissions.
Furthermore, key measures proposed under the CMU involve relaxing current prudential standards and supervisory mandates, to the immediate benefit of European banks. This regulatory easing occurs without adequate consideration of growing climate risks, raising questions about long-term financial stability. In a not-unlikely worst-case scenario, the CMU would increase climate-related risks with rising financing to high carbon activities and simultaneously weaken the prudential safeguards set to absorb them.
The example of securitization
The CMU package includes a greater use of securitization, a method used to bundle illiquid securities, sell them and/or transfer the associated risks on the financial market. Securitization could help banks increase their lending capacity and reduce risk exposure, but this increased capacity would not necessarily benefit green investments and could just as much facilitate lending to heavily polluting activities. It could also partly hide the risks stemming from financing high emitting activities.
In fact, only a subset of securitizations could help mobilize private finance for the transition. Such “green” securitizations are not clearly defined today, they should notably ensure additional financing capacity goes exclusively to green activities, and securitized assets do not originate from companies developing fossil fuel production. In parallel, securitization in general should not be used to finance fossil fuel development.
The envisioned CMU structure does not prioritize the green transition. CMU’s undifferentiated measures would contribute to finance all economic activities, and are likely to increase emissions. At the same time, the CMU’s emphasis on prudential weakening raises risks. For the CMU to be a useful contributor to the EU transition, measures must be targeted and safeguards must be installed. For example, securitization should not be made easier without a clear definition of “green” securitization and barriers to avoid supporting polluting activities.
