On 21 October, the European Commission announced more than €380 million in grants to 133 new projects across Europe to achieve the EU Green Deal’s broad range of climate, energy and environmental goals, including the EU’s aim to become climate-neutral by 2050 and to halt and reverse biodiversity loss by 2030.
But the amount allocated under the LIFE Programme represents only around half of the €574 million total investment needs for these projects, the remainder will have to come from national, regional and local governments and, crucially, private investment.
Looking at the wider picture, the European Commission has estimated that an additional investment of €620 billion a year will be needed between 2023 and 2030 to meet its Green Transition objectives. “These investment needs come in addition to the historical investment, which for climate-related investment only amounted to €477 billion per year for the decade 2011-2020,” explained the European Central Bank’s Piero Cipollone in May.
Mobilising €1 trillion
The European Commission will mobilise €1 trillion in sustainable investments over the next decade, but €2.5 trillion remains to be financed predominantly by the private sector. With private equity and venture capital capacity for new investments reaching €410 billion in 2023, the industry can rapidly invest in companies and technology that can help deliver the green energy transition, says Invest Europe.
According to Mario Draghi, former Italian prime minister, former ECB president, and author of the landmark report on European competitiveness: “We need to mobilise private savings on an unprecedented scale, and far beyond what the banking system can provide.”
Private equity and venture capital investments are thus a critical component in tackling the climate crisis.
Fortunately, the financial sector, including private equity and venture capital, is increasingly recognising the importance of climate-related investments. Many firms are now integrating environmental factors into their investment decisions and risk management processes.
This shift is driven by both the need to mitigate climate risks and the opportunities presented by the transition to a greener economy, explained risk expert Arthur Charpentier, fellow of the French Institute of Actuaries.
ESG portfolios
In 2022, 78% of surveyed European private equity and venture capital firms had environmental, social, and governance (ESG) investment and portfolio management processes, including 90% of buyout firms.
The Invest Europe Climate Change Guide is a reference for the industry, setting a new standard in ensuring that investors can understand private equity and venture capital firms’ approach to sustainability and, for each relevant fund, the main impacts of its investments on relevant sustainability factors. Private equity and venture capital accelerate investments in companies and technology to help tackle the climate crisis and deliver a low-carbon energy system.
Venture capital, in particular, is vital for supporting early-stage companies developing breakthrough technologies in areas like renewable energy, energy storage and carbon capture.
Accelerating carbon capture
At a recent Euractiv event, Chris Davies, Director of the advocacy body Carbon Capture and Storage (CCS) Europe, said, “There’s certainly no technology that needs more acceleration than carbon capture!” And venture capital investment can help to bring promising climate solutions to market faster.
Private equity and venture capital have already invested $7bn in European renewable energy companies between 2019 and 2022. Private equity and venture capital’s model of active stewardship of businesses and long-term investment means it is well suited to identify opportunities to action the transition to a low-carbon energy system, especially with investments that facilitate both cost-saving and emission reduction.
However, Europe faces some challenges in this area compared to other regions, particularly the United States. There’s often less venture capital and private equity available in Europe, which can hinder the growth of innovative startups and scale-ups working on climate solutions. To address this, there are calls for creating a more robust ecosystem for venture capital and private equity in Europe, including potentially establishing a deep tech stock exchange to strengthen markets and improve competitiveness.
It’s worth noting that while private investments are crucial, they need to work in tandem with public funding and supportive policies.
Many experts argue for a combination of public and private money to finance the green transition. By leveraging private equity and venture capital alongside other financial tools and policy measures, we can accelerate the development and deployment of the solutions needed to tackle the climate crisis effectively.
Private equity infrastructure
Private equity-backed infrastructure also makes sense for long-term investors such as pension funds and insurance companies.
Yet, as Invest Europe explains, to unlock the capital to fund European change, barriers to pension fund and insurer investment must be removed. Institutional investment remains hindered by a series of misconceptions and national restrictions. EU law, for example, requires banks and insurers to hold disproportionately high amounts of capital when making investments in long-term, diversified funds, making these investments comparatively more expensive.
Meanwhile, many national laws still prevent pension funds from being exposed to long-term funds altogether.
As well as removing these barriers and tackling misconceptions, policymakers could consider
creating incentives for investments in green technologies and companies, improving the regulatory environment to make it easier for startups to scale up and fostering collaboration between public and private sectors to de-risk investments in new climate technologies. All to encourage more private equity and venture capital investments in climate solutions.
Importantly, because of the long-term nature of these investments, safeguards need to be provided to ensure that infrastructure investors do not risk losing their investment due to changing government priorities.
With this in mind, Invest Europe is now calling for the creation of a European Infrastructure strategy designed to incentivise private infrastructure and for the development of a high-level forum bringing together investors and regulators to exchange on how public finance can be best leveraged to attract private finance in high-value projects.
[Edited By Brian Maguire | Euractiv’s Advocacy Lab ]
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Publish date : 2024-10-31 14:32:00
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