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Is sustainable finance the silver bullet for the energy transition?

In light of the current, new, geopolitical situation, there is an urgent need for energy transition and decarbonisation. As underlined by Roberts Zīle, Vice-President of the European Parliament, in his opening speech for an event about sustainable transition organised by Business & Science Poland on 27 October in Brussels, “the Green Deal is the right direction in the long run, but thinking about the security aspect, the European Union needs to make some adjustments.”

And the security of supply, the acceleration of renewables, hydrogen and alternative sources and the role of tools like the taxonomy and the REPowerEU were among the topics discussed during a panel discussion entitled: What is the silver bullet for the sustainable transition in business in light of the new geopolitical situation?

Bogdan Rzońca, Member of the European Parliament paved the ground by saying that “the debate on sustainable finance for far too long was conducted without adequately considering the stakeholders.”

The impact of the taxonomy on companies and decision-makers

Indeed, under current unprecedented circumstances, we are tackling different challenges at the same time, which means also that we need to have some more clarity: what is sustainable and what is not? In January 2022, the first Climate Delegated Act came out and, despite not having concrete data yet, Elisabetta Siracusa, Principal Advisor of the Director General of the Directorate-General for Financial Stability at Financial Services and Capital Markets Union, DG FISMA noted that we can already observe some positive impacts both on companies and decision-makers. First of all, she recalled that the taxonomy is a classification of which economic activities can be considered as making a substantial contribution towards sustainability based on a number of criteria.

sustainable finance

“The taxonomy itself only sets obligations for companies in terms of disclosures,” she pointed out. “It doesn’t oblige anybody to change activities or invest in different ones. It obliges disclosing whether their economic activities are covered by the taxonomy and whether they are in line with the taxonomy.”

And the Commission is observing that companies are taking this obligation very seriously.

“They are putting attention on the transition: how to go from an activity that might not be ideal today to one that tomorrow will align with the taxonomy,” she continued.

From the businesses’ perspective, Tomáš Pirkl, Head of the Brussels Office of ČEZ noted how the battle about the technical details is over. Today, it is more about the transition, usability and reporting.

“It is true that there is no obligation except for the disclosure’s one,” he said, reacting to what was mentioned by Ms Siracusa. “However, in my experience, the first question investors ask is about new projects: are they going to be taxonomy-aligned?.”

The Climate Delegated Act is a compromise for many sites but still, there is space for interpretation and Mr Pirkl urged the Commission to give more detailed guidelines as soon as possible.

“Usability will be a great focus of our next work,” replied Elisabetta Siracusa. “Guidance is needed and is forthcoming. But, the most important thing is to raise the questions and raise them explicitly.”

For Dr Adam Czyżewski, Chief Economist at PKN Orlen, “the taxonomy at the product or activity level is forward-looking when goals are concerned, but they are backwards looking when it comes to innovation and new technology of the future.”

“It is very difficult to describe and label something that does not exist yet,” he said.

The role of REPowerEU: it is important to focus on consumers

Especially today. For Ruud Kempener, Team Leader of Renewables and Energy System Integration Policy in the Directorate-General for Energy of the European Commission, DG ENER, some progress were made.

“If I look today at the electricity systems in the EU, we are way above what we expected the industry to be able to do in 2015,” he pointed out. “But we are going both slow and fast.”

He mentioned how the REPowerEU is just an acceleration of the goals included in the Fit for 55.

“We are talking about energy efficiency, except that we need to do it a lot faster,” he said. “The same goes for renewables and biogas to replace natural gas and renewable hydrogen, everything should be done a lot faster. So the Green Deal doesn’t have to change, we just need to accelerate it. Billions of euros are going to the energy sector, let’s use them to address short-term issues and accelerate the transition towards 2030.”

He underlined the importance of changing mindset and focusing on consumers as well.

“We have to think more as an integrated system,” Mr Kempener said.

And also Adam Czyżewski agreed that we must put our focus on the consumers.

“The energy transition is about the economic system and decarbonisation of consumption so we need to focus not only on greening the energy industry but also on households,” he said. “Politicians always want to accelerate economic growth but you cannot do it without paying the cost of it.”

And we are seeing that the cost is already high for households, due to the record-high energy prices that are affecting the whole energy industry globally.

“Energy markets are connected. Diesel is expensive because gas is expensive and gas is expensive because there is a shortage of it,” explained Mr Czyżewski. “When there is a threat of no gas coming from Russia, we have a new boost on diesel prices, because we have additional demand. In order to really balance the market, demand has to go down because this winter there won’t be any way to further boost the production of refineries.”

For Tomáš Pirkl it is great to witness such resilience to challenges, noting how fast proposals are coming and how fast are adopted.

“What is very important is to remember that we have short-term and long-term measures, national and European ones. And they all have to work together. And this is going to be very difficult.”

sustainable finance

“We should not be sitting companies versus the Commission – we should be here one by one, because I can’t agree more, it was not the European Green Deal which made the current crisis,” he continued. “It was Russia, which was playing with the gas prices and then the impact of the war on Ukraine.”

Mr Kempener replied that indeed when they looked at the Fit for 55, the Commission looked at the decarbonisation and the cost-effectiveness of the solution.

“With the REPowerEU, we are looking at decarbonisation cost-effectiveness and security. Locally the answers were the same but the objectives were different.”

The hydrogen targets and the European Hydrogen Bank explained

The REPowerEU is setting a target of 10 million tonnes of domestic renewable hydrogen production and 10 million tonnes of imports by 2030, to replace natural gas, coal and oil in hard-to-decarbonise industries and transport sectors.

“There is no hydrogen market yet,” underlined Ruud Kempener. “There is also no trade for hydrogen but certain sectors will need hydrogen to be ready within this decade.”

He mentioned the maritime sector and the steel industry, for example, which could make great use of hydrogen to decarbonise their operations if the market would be ready.

“In the Fit for 55 we put the demand targets out there so that the industry had 8 years to create the product to meet the demand,” he recalled. “But, this was before the invasion and the high prices.”

Now, many industries want to make investments earlier which means scaling up the production of hydrogen earlier. And here’s where the recently-announced European Hydrogen Bank will play a role. In September, the Commission proposed that such a Bank will be able to invest 3 billion euros to help build the future market for hydrogen, well before 2030.

“Prices of natural gas today make green hydrogen competitive,” added Mr Kempener. “The Bank will look at what kind of financial solutions we can bring at the European level. We are thinking about using the Innovation Fund to develop the so-called Contract for Difference (CfD). For those producers and off-takers who find each other but cannot match the price, we would give them the cost difference over the period they put down in the contract. So, we can create bilateral agreements well before 2030.”

The goal of the Bank will also be to look for more international partners, in the Mediterranean, the Middle East and in Ukraine, once the war is over.

Thus, are our financial markets becoming greener? For Elisabetta Siracusa, there is no doubt about that.

“There are many different instruments for sustainable finance,” she said. “We tend to focus on the taxonomy because it does catch the headlines and we had debates about it. But it is one of many instruments. The financial markets are becoming greener if we look at bonds, ratings, benchmarks, disclosures.”

Is sustainable finance the silver bullet for the energy transition?

Therefore, if sustainable finance is just a means to achieve something, for Tomáš Pirkl we cannot define it as the silver bullet.

“The silver bullet will be a combination of measures that reflects the regional capacities to the best and most efficient way in terms of future and current investment and the energy mix,” he said, concluding the event.

For Ruud Kempener, another way to talk about sustainable finance is not using energy. He raised the question about how to value a company that produced at certain times by not producing during others.

Also for Elisabetta Siracusa, there is no silver bullet and sustainable finance itself “is not a silver bullet but it is part of a series of tools of which the most important are government regulations.”

Finally, according to Adam Czyżewski, a silver bullet exists and it is called cooperation.

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