How we evolved to put climate into everything — EIB becoming a climate bank
During the last decade, the European Investment Bank (EIB) has presented itself — not only as a multilateral development bank — but also as the EU’s climate bank with climate action as one of its top priorities. The EIB has now announced increased ambition in climate and environmental sustainability. In the European Green Deal, too, the EIB has been allocated a major financing role — backed by EU budget guarantees as provided for in the InvestEU instrument. That instrument also concerns certain climate goals, and is essential to the Next Generation EU recovery funds, launched by the European Commission on 27 May 2020 in response to the Covid-19 crisis. Nancy Saich is the EIB’s Chief Climate Change Expert, and for many years has led the bank’s work on climate finance and impact reporting. Below she provides insights on how the EIB has developed its climate focus, its investment plans for the future and how auditing has helped the EIB to reach its green goals and set higher standards… for the benefit of the planet.
By Nancy Saich, European Investment Bank
Climate investments — shifting from promise to proof
A lot has happened in climate finance investing and sustainable finance in the past ten years. The many technical advances might be enough to save the planet — but we have to stay focussed on the scale of Greenhouse Gas (GHG) reductions needed and importantly on the speed with which we must reduce them.
The big changes at the European Investment Bank and at many other public and private banks started a bit more than ten years ago, when people became more aware of the problems surrounding climate change. Investors started calling for their investment money to support low-carbon causes, and then later as we all realised the importance, in adapting to climate-change impacts. Climate finance tracking and climate finance targets were born. In the past, you could largely say to people that we finance this green project or we do that thing for the climate, and everybody believed you. That is not the way it is today. First, investors started asking for robust proof that money was going where it was promised. People realized that we have no time left to put our money in the wrong places. If we are going to make a huge effort to mobilise billions in private finance and develop climate projects around the world, we need to be sure that we are really having an impact directed at solving the climate problem. That’s because according to the IPCC — the Intergovernmental Panel on Climate Change, we are almost out of time to make the changes needed to keep humanity safe on its home planet.
The auditing and robust reporting at the EIB were a natural result of these changes, which started when investors and other people started calling for more proof of our actions. They wanted more information, they wanted to understand the impacts of the projects and whether or not our climate finance was doing what was expected. And actually this has been very important — investors and stakeholders have the right to challenge us, and so do the auditors. This helps everyone to do better and strengthens our climate efforts.
Mitigation and adaptation
If you go back more than ten years, people were aware of the need to address climate change and were very focused on certain types of mitigation investments, like renewable energy and energy efficiency, and this then expanded to other mitigation efforts such as afforestation, low carbon transport, resource efficiency etc. But there was not a lot of talk about another important part of climate investing: adaptation. Apart from the scientists, I did not see a lot of people in finance who thought that climate change adaptation was something that we were going to be worrying about for quite some time in the future. Adaptation experts were obviously aware but the finance industry in general was not. Then we started seeing more studies and more evidence that the climate was changing faster than we thought, and that we were already seeing significant economic and social impacts of more extreme weather and other effects of climate change. This is when adaptation started to catch up with mitigation. What was very important was the decision in the 2015 Paris Agreement to give equal weight to mitigation and adaptation. Many banks then started keeping track of climate finance for mitigation and adaptation at the same time.
In 2015, the EIB had also published its Climate Strategy, putting all its climate efforts under one overarching approach. This was in fact EIB’s contribution to the pre-Paris negotiations. At this point, we were thinking more about the new idea of climate mainstreaming. We helped launch the Climate Mainstreaming Principles at the COP21 climate conference in Paris and these changes were really about taking account of ‘climate in everything we do.’ Mainstreaming refers to the shift from financing climate activities in incremental ways to making climate change a core consideration through which financial institutions deploy capital. So climate action became a wider and more strategic issue at the EIB.
Around this time, it became clear that investors and other parties wanted to know whether what we were doing was really climate finance or whether it just looked good and sounded good. We had been working for several years on harmonising climate finance (Climate Action) reporting. The Bank, together with other multilateral development banks and public banks, published in 2015 a harmonized approach to climate finance, showing that International Financial Institutions (IFI) agreed on common definitions and robust reporting. The EIB’s leading role in all the efforts to harmonise data and develop joint agreements on green investing were another kind of verification of our openness and concern for clarity and transparency. And at that point, as we were changing our internal quality assurance procedures, we also started the outside auditing of the greenhouse gas figures from our investments and then the Climate Awareness Bonds (the Bank’s Green Bond) and then the Bank’s annual climate finance figures. This was a major step forward for us in robustness and transparency, because the auditing gave people a second and importantly external opinion on our climate lending and borrowing activities.
Since 2007, the EIB Group has published a yearly Sustainability Report. The EIB Group is the only international financial institution to have this type of report independently reviewed by external auditors. The Bank also follows Global Reporting Initiative standards at the highest level. Since 2016, the EIB has published the Climate Awareness Bonds Statement, including detailed reporting on the bonds’ impacts.
Meeting the Paris goals
Following the 2015 Paris Agreement, the discussion developed that climate finance is not enough by itself. Of course we need to focus on the things that really help solve the problem. But — it does not help if we are climate-focused in one area, but also finance things that are causing the climate problem. Article 2 of the Paris Agreement talks about making finance flows consistent with the climate goals. All the multilateral development banks realized early on that they would need to respond to Article 2. This is much more than mainstreaming. This is about making sure that everything we do is supporting the goals of the Paris Agreement and not undermining them. The evolution over roughly the past decade can therefore be seen as a path in which we start from a focus on mitigation, to a focus on climate finance including adaptation, to mainstreaming climate tools, and then to understanding that a systemic change is needed in the financial system as a whole. And that everything we do, all the financing activities we do, need to be compatible with the Paris goals for both temperature and climate-resilience.
The Paris Agreement aims to keep global warming well below 2 degrees, aiming for 1.5 degrees. Scientists estimate that we are heading for 3–4°C of temperature increase by the end of the century. If that happens, large portions of our planet will become uninhabitable, with disastrous consequences for people around the world. According to the most recent UN Emissions Gap report countries will need to reduce emissions by 7.6% a year in the next decade to meet the 1.5°C target. Yet, emissions worldwide have been increasing by 1.5% per year in the last decade. IPCC reports have highlighted that if we do not keep the increase below 1.5 degrees, millions more people will die. Millions more people will be exposed to more extreme floods and droughts. The difference between 2 degrees and 1.5 degrees does not sound a lot, but it will make the difference between a significant amount of warm water coral loss or an unmanageable and almost complete loss of warm water coral — with all the implications for the nature and people that depend on them. When the latest scientific information indicates so clearly all the damage that can occur, it is not optional to target 1.5 degrees. There is no real alternative. Therefore EIB’s new Climate Bank Roadmap 2021–25 and our climate finance (see also Figure 1 ) will be focussed on the 1.5 degrees temperature goal.
Figure 1 — EIB investment totals in 2019
Another systemic change getting attention right now, is the emphasis on sustainable finance, which in addition to climate change, addresses areas like environmental degradation, biodiversity loss, pollution, plastics in the ocean. It is bringing a total rethinking of our economy to adopt a more circular approach. This is not to take attention away from the fight on climate change but to add these other aspects that needs to be thought about and addressed at the same time, together with vital social-equality and inclusion issues that also link to the climate and environment debate.
On the issue of sustainable finance, the EIB meets regularly with other development banks, international finance organisations and governments to improve the standards around sustainable finance and its reporting. The EIB has assisted the High Level Expert Group on Sustainable Finance to classify climate change mitigation activities. Over the last nearly two years technical experts from the bank have been active Members of the EU’s Technical Expert Group (TEG) — working on ‘green’ definitions — the EU Taxonomy — specifically those activities and investments that make a substantial contribution to climate change mitigation, and climate change adaptation. Our colleagues from EIB’s Finance Department have also been very active in the TEG work on the EU Green Bond Standard. This is fantastic ground-breaking work that will go forward now through a permanent EU Platform for Sustainable Finance.
The Bank issued the first green bonds in 2007 and has been a key figure in improving standards in the green bond market. Together with everything else, this gives us credibility when we go into discussions with different groups on developing global standards around green investing. People know that we have the sectoral knowledge and the experience of being transparent and robust in our reporting and they trust that we will put that robustness and experience into all the work we do including into wider EU taxonomies and standards.
So — going into the critical decade that I mentioned, the EIB Group is ready to continue supporting the EU Commission and EU and partner countries in their sustainability plans, the pursuit of the Sustainable Development Goals and the Paris Agreement on climate action. We also are assisting with the new Green Deal, including importantly a revision of the EU Adaptation Strategy, and on the next steps of the EU Taxonomy on green investments — going beyond climate to four other environmental objectives. It is a lot of work but the EU is taking a lead role to address the climate and environmental emergencies and as the EU Bank — we must do so as well.
The dual-purpose plan
Today, the Bank has a dual plan that addresses both climate action and environmental sustainability. In my view there are three reasons why the bank is absolutely right to make this move from climate action to the wider approach on climate action and environmental sustainability:
• there is the big picture of the dual emergency of the climate and environmental crises — the biodiversity losses, the ecosystem collapsing, pollution, acidification in the oceans. These are all linked, so we cannot address the climate without the environment;
• the dual plan supports the EU’s sustainable finance and green action plans. The Bank is putting into practice EU policy by adopting sustainability on a wider basis, including the important related social issues;
- this is a practical evolution: to help people and communities adapt to current and future climate change, we need to deliver more and better adaptation measures– and these actions are often found closely linked to environmental sustainability objectives such as sustainable water use, and nature based solutions.
As part of this new exciting and ambitious plan, the Bank announced a new energy lending policy that will end financing for conventional fossil fuel energy projects by the end of 2021. As the EU Climate Bank, the EIB Group also pledges to unlock €1 trillion in climate action and environmental sustainability investment in the 10 years ending in 2030. We will align all financing activities with the goals of the Paris Agreement from the end of 2020. And the EIB itself will gradually increase the share of financing dedicated to climate action and environmental sustainability from 31% in 2019 (audited figures!) to 50% of our overall financing by 2025.
To make sure we meet these goals, we need solid, scientifically based definitions and robust reporting. The EU Taxonomy will help! And so will our auditing — which has already helped us to improve our reporting, our paperwork and our processes. It helps us continue to be transparent and lead from the front on the robustness of our reporting. Anybody who has actually been through an audit knows that there is a lot of preparation and sweat! And there are monitoring processes, and standards and procedures to be put in place.
Box 1 — Climate emergency response
EIB Bank Group dramatically increases climate and environmental goals:
• €1 trillion in climate action and environmental sustainability supported by EIB Group from 2021 to 2030;
• climate action and environmental sustainability to reach 50% of EIB financing annually by 2025;
• align all EIB Group financing activities with goals and principles of the Paris Agreement by the end of 2020;
• stop supporting traditional fossil fuel investments by the end of 2021 and increase financing for climate change adaptation.
But at the end of the day, the effort is worth it, because audits actually help everyone. They bring a new pair of eyes. They help us develop better systems, be more efficient and document things better, which in the end saves us time and effort later, because we have documented projects properly at the beginning. Audits require a lot of work, but they make sure we are ready when stakeholders or investors come to us, with queries about what we are doing to address climate change and what our green bonds are supporting. Audits give us solidity internally and externally. They help us to know that what we are doing is correct now and to consider where we need to go in the long run. They will help us reach our green goals, and a set a high standard for ourselves and others as well, which is a benefit to the whole planet.
This article was first published on the 2/2020 issue of the ECA Journal. The contents of the interviews and the articles are the sole responsibility of the interviewees and authors and do not necessarily reflect the opinion of the European Court of Auditors.
