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Poised for growth: the green finance sector of Central Europe

Given the enormous amount of investments necessary to bring about the green transformation, the financial sector will definitely play a central role in allocating resources towards a sustainable and green economy and in denouncing to finance activities that harm the environment.

Against this backdrop, it’s paramount to closely examine and understand how financial institutions and their counterparts can identify, quantify and manage climate and environmental risks, incorporate environmental aspects into their business strategy and help to scale up the financing of investments, required for a post-COVID green recovery.

“It is important to see that the infrastructure capital spending needed in a low-carbon scenario is not significantly higher than maintaining business as usual,” highlighted Mattia Romani, Managing Director of the EBRD during the Central European Green Finance Conference organised by the Hungarian Central Bank (MNB).

Mr Romani explained that the additional spending in low carbon technologies and energy efficiency will be balanced by lower CAPEX needs of fossil investments, savings of electricity transmission and distribution, but also cost reduction of more efficient cities.

The cost of inaction is high, according to the estimates it can be commensurate of the costs of the 2008 financial crisis, an estimated 20 trillion dollars across the whole economy can be at risk because of climate change.

Ma Jun, Special Advisor to the Governor of the Central Bank of China emphasised that the economic impacts of the pandemic and climate change cannot be mentioned in the same league, while the former is a short-term impact, the latter has an overarching aggregate effect on the global economy.

Climate change is leading to physical and transition risks for corporations as well, and the past years have been an awakening for many companies to include these risks in their business strategy. Jo Paisley, Co-President of the GARP Risk Institute highlighted that according to their recently conducted global, cross-sectoral survey on climate-related financial risks, firms recognize that there are risks and opportunities arising from climate change, however, an overwhelming majority think that climate risk has been either partially priced or totally omitted from the market’s pricing of products.

Sean Kidney, CEO of Climate Bonds Initiative underlined that besides the serious risks triggered by climate change we must identify the opportunities so that we can “build back better” the economy. The success of the green bond market is an excellent indication that the demand for green investment is high we simply need to divert investment. According to Mr Kidney, the EU taxonomy is a positive regulatory direction, that will become a shopping list for investors in the future.

The seeds of green financing and investments have already been planted in Central Eastern Europe as well. However, the region has unique challenges that must be addressed in order to scale up financing the transition to a low-carbon economy.

“Managing the risks of stranded assets and communities is a huge risk that is concentrated mainly in the CEE region,” said Mattia Romani adding that if we don’t manage the political risk of the transition and the following tensions some regions and communities will fall behind.

The EBRD is well aware of this and aims to contribute to the repurposing of assets and reskilling of the workforce on a project by project basis. Just a few days ago the EBRD decided to support the largest renewable energy project in Greece to date by financing new solar PV plants built in the most coal-dependent region of the country.

The International Renewable Energy Agency (IRENA) also confirmed that there is a huge potential for clean energy in the CEE region. According to a recently released study the economies of Central and South-Eastern Europe could cover 34 per cent of their rising energy demand cost-effectively with renewables by 2030.

Gurbuz Gondul, Director of Country Support and Partnerships at IRENA highlighted that there are multiple benefits of investing in renewables and that all countries in the region have additional cost-effective potentials beyond existing plans and projections. IRENA estimates that the region would need an additional investment of 78 billion euros in the next decade to create a clean and modern energy system.

Mr Gondul mentioned renewables powered heating systems as untapped potential in the region pointing out that currently there is not so much attention from policymakers on this segment but a well-designed incentive system through grants and tax credits could have a huge impact and create many opportunities.

According to Mattia Romani, another peculiar characteristic of the financial sector of Central and Eastern Europe is that it is dominated by the EU bank subsidies, which leads to a regulatory patchwork that is difficult to manage.

“We need better regulation to ensure that this banking system is ready to support the green transition,” said Mr Romani.

The Central Bank of Hungary (MNB) already started to lay the groundwork for coherent policies pointing at the direction of a greener financial system as it launched its Green Program to mitigate the risks associated with climate change and to expand green financial services in Hungary.

Csaba Kandrács, Deputy Governor of the MNB notes some positive developments of the capital market in the past year, such as the issuance of the first green sovereign bond and the first green corporate issuance. The Budapest Stock Exchange’s work on ESG Guidelines for issuers is an ongoing project just as the ESG categorisation of the Hungarian investment funds.

“We need to make sure that financial institutions also make their contribution,” emphasised Mr Kandrács adding that the MNB pledged to become a carbon-neutral central bank and decided to reduce its emissions by 30 per cent in the next two years and 80 per cent within five years, while offsetting the remaining emissions to achieve net-zero.

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