“The real choice is not jobs or environment. It is both or neither.”
The Just Transition Fund (JTF) will bring significant EU investment to the coal regions of Central and Eastern Europe (CEE) to assist them in the transition to carbon neutrality. This will be particularly challenging for the CEE region where GDP per capita is on average around 70% of the EU average and energy and industry sectors are carbon intensive. In fact, the EU’s ability to achieve carbon neutrality by 2050 is largely dependent on the success of just transition in CEE. The four Central European countries of Poland, Czechia, Hungary and Slovakia are eligible for EUR 5,65 bn (Czechia EUR 1,493bn, Hungary Euro 237m, Poland Euro 3,5bn and Slovakia Euro 418m). However, projects currently under consideration for funding could cost nearly ten times the amount available. In the Czech Republic, for example, projects currently proposed by the coal regions carry a price tag of over EUR 16 bn. Furthermore, a comprehensive and meaningful just transition will need funding far beyond the end of the current Multiannual Financial Framework (MFF), which ends in 2027. What the EU’s funding for just transition beyond 2027 will look like is uncertain.
Earlier this month the ISFC, in cooperation with the British Embassy, organised a webinar on “Filling the Just Transition Finance Gap: the role of private capital”. Members of the expert panel presented examples of how green bonds and transition bonds can provide long-term, sustainable financing for what will clearly be a long, difficult process of transforming the coal regions in Central Europe as part of the transition to a carbon neutral economy.
According to the Climate Bonds Initiative (CBI), green bonds were created to fund projects that have positive environmental and/or climate benefits, or other types of special environmental projects. The majority of the green bonds issued are green “use of proceeds” or asset-linked bonds. Proceeds from these bonds are earmarked for green projects, but are backed by the issuer’s entire balance sheet.
A recent CBI Report found that 54 green bonds with a combined face value of USD62.5bn were issued between July and December 2020, and that global green bond issuance reached a record high of $269.5bn last year. Although they make up a small fraction of the overall bond market, green bonds are proving to be viable fixed-income instruments that raise capital for projects with environmental benefits. They are increasingly being used to fund initiatives to meet emissions-reduction targets. While the vast majority of issuances have been in the US, UK and in Westen Europe, in 2016, Poland launched a green bond valued at €750m to help achieve Poland’s National Renewable Energy Action Plan. Last year, Hungary also launched its inaugural €1.5bn, 15-year green bond that was subscribed at €7.5bn by 345 investors.
CBI and others are promoting a variation on green bonds known as transition bonds, specifically targeting the just transition process to generate private capital to complement financing provided through the Just Transition Fund. A good example is the Italian company Snam, which recently launched its first official transition bond to finance eligible projects related to energy transition. However, according to Katerzyna Swarc of Grantham Research Institute, a successful just transition is not dependent only on increased quantity of investments, but also on improved quality of investment that is in line with the EU taxonomy, and that integrates environmental and social considerations. This means investments that create high-quality, well paid green jobs. This can be challenging in the Central European coal regions where coal companies are among the highest paying employers, and where average salaries are below the national average.
According to Swarc, however, even these challenges can be overcome through a systematic and strategic approach by working with banks, investors and policy makers to mobilise public and private capital, and by introducing policies and regulations that support the just transition. We are beginning to see a shift in the banking sector in CEE, where major banks are adopting investment exclusion policies for fossil fuels, while also developing sustainable investment strategies to promote ESG opportunities to their customers. However, investors still have few options for green investments. The Hungarian central bank has shown policy leadership by starting a process to plan a sustainable capital markets strategy that is backed by the European Bank for Reconstruction and Development (EBRD). The investor demand for green investments is a great opportunity that both governments and businesses should take advantage of.
According to Invest Europe, between 2003 and 2019 the private equity industry invested nearly EUR 29 bn in 4,300 CEE companies contributing to the region’s growth. These investments mainly focused on convergence with Western Europe, consolidation of growth and catalysing new businesses. Now, with a growing awareness of the EU sustainable finance agenda and the climate conditionalities of the current MFF, policy makers in the region are slowly starting to turn their focus to climate financing. With proper incentives and a supportive ecosystem private capital can play a key role in the next stage of development in CEE; a just transition to a carbon neutral, social economy. However, this will take bold policy action and fresh thinking of how to use sustainable finance tools better to mobilise private capital to fill the funding gap. Climate and finance are no longer two disconnected topics, and those who start working on adapting policies and practices first will stand to benefit the most.
* The quote in the title is borrowed from Brian Kohler, just transition pioneer.
