The report from energy transition bank NORD/LB and European think tank Themis Foresight, titled ‘Futures of the European Capital Markets’, draws on insights from in-depth interviews with over a dozen leading capital markets experts.
It finds that, while money is available, Europe’s markets are being held back from raising and allocating it for a number of underlying and persistent reasons:
Fragmentation of the European capital market
Current capital allocation model ineffective at unlocking and moving critical funds towards renewable energy projects
Low-risk appetite from investors for renewable energy projects
The report authors analysed four potential scenarios to identify a path forward for Europe’s capital markets. They concluded that “The Great Reform” scenario offers the best route to unlocking finance for the renewable energy transition. In this example, a coherent and fresh financial landscape with a comprehensive capital markets union would be created, ensuring the efficient and targeted flow of capital into renewable energy projects.
To achieve this prospect, several critical steps will need to be taken:
Completing the EU’s flagship Capital Markets Union (CMU): Creating the CMU will allow capital to be delivered more efficiently to renewable energy projects.
Creating a new capital allocation model and diversifying the investor base: As it stands, the net-zero transition is largely being financed by banks. However, achieving 2050 net-zero targets will require a significant increase in capital, and this can only be done by recycling capital and tapping into funds from the asset management industry. To do this effectively partnerships must be created between asset managers and banks, who have the infrastructure and balance sheets to manage and de-risk renewable energy investments on behalf of asset managers.
De-risking green investments: Some investors still consider financing renewable energy projects too risky. Governments will therefore need to play a bigger role in helping to de-risk those investments by acting as guarantors and via public-private partnerships.
“Europe clearly has enough capital to hit its ambitious 2050 net-zero targets” said Heiko Ludwig, Global Head of Structured Finance at NORD/LB. “But the current model is not moving funds quickly enough into critical renewable energy projects – threatening to hold back the transition, particularly when volume and demand will grow. We urgently need a fresh approach that brings together stakeholders from across the financial ecosystem with the skills, knowledge, and different forms of capital to finance cutting-edge renewable energy projects and “recycle” bank debt faster to achieve these ambitions.”
Jan Berger, Founder & CEO of Themis Foresight, added that Europe is one of the dominant forces driving the global renewable energy transition, and there is ample capital available but the existing scenario is not delivering, and this must change.
“By completing the EU’s CMU, creating a new capital allocation model, and bringing in a different kind of government support, Europe can unleash the full potential of its markets and drive much-needed finance towards renewables” said Mr Berger. “In turn, this will help to accelerate the net-zero transition and create a greener, financially stable, and more prosperous world for all. In the mid-term, it will also benefit government budgets.”
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