A green light for Luxembourg
Ursula von der Leyen proposes the world’s first Climate Bank
Sr. Macro Strategist at Nordea Asset Management
LUXEMBOURG, LU —To support the EU’s objective of becoming carbon neutral by 2050, Ursula von der Leyen has proposed that the EU spend a trillion euros on green projects. To fund this initiative, she has proposed amending the mandate of the European Investment Bank in Luxembourg to make it the world’s first Climate Bank. How would this work and what would be the implications?
The only way to do this is to allow the bank to borrow enough and to maintain a sufficient amount of capital while benefiting from the European Central Bank’s (ECB) easy policy. Generally, the bank would need a tenth of the capital to maintain a high credit rating. As such, the European Investment Bank (EIB) would need EUR 100bn in funding over the next five to ten years. To put things in perspective, the 2019 EU budget was EUR 166bn. In other words, Von der Leyen will need buy-in from member states who will be called upon to contribute to the project.
Such a Climate Bank would likely focus on solar, wind, natural gas and electricity infrastructure. It would help fund start-ups in incubators and invest in artificial intelligence—the more intelligent transportation systems are the less energy they will consume. Other potential investments include car sharing companies, as we move beyond the need for ownership, and electrical vehicle infrastructure, e.g. developing more battery plants and new sensitive materials mines in secure countries.
While a Climate Bank would accelerate the European Union’s goal to become carbon neutral, there could be a cost in terms of competitivity and the EU will likely decide to tax polluting countries five to ten years down the road.
On the up side, the initiative would increase the number of Supranational Sovereigns and Agencies available to sovereign investors, including the ECB, thereby creating a virtuous circle. A short-term benefit is that it would likely inspire the ECB to expand the type of assets it buys to include European supranationals. The EIB and World Bank typically operate in safer investment areas and create vehicles for private investors to invest in riskier projects.
Finally, there are no immediate trading implication from this, only a sense that the equilibrium is shifting toward green, which is changing the type of companies that are in demand as well as the behaviour of companies. For example, investors are increasingly divesting from coal, a cheap but dirty source of energy.
The EU may be slow to change, but it is steadily setting a new course for a cleaner and safer future.