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What are Europe’s prospects for a Just Recovery?

Sherry Madera
Sherry Madera
Chief Industry & Government Affairs Officer, Refinitiv

This summer brought much needed collaboration from European Union countries to agree a financial budget that included a much needed COVID-19 recovery package. In July, member states agreed to a 750B Euro Recovery fund – called the Next Generation EU (NGEU) fund – to be deployed across European states in the form of grants and loans. What was particularly remarkable was for the first time at scale, the Union agreed to collectively raise the needed funds on the capital markets. The overall budget and the NGEU include the requirement for the funds to be raised and deployed in line with the EU’s Green New Deal plans – a policy framework prioritizing a green and sustainable economic plan for the EU’s future. Last week, the spirit of collective agreement hit friction when Hungary and Poland opposed finalizing the European Budget and the NGEU due to its Rule of Law conditionality. As the budget package hangs in the balance, we ask the question of if it is finally agreed, will the EU be in a position to fulfill its self-set obligations for a green and sustainable deployment of the much-needed funds? Sherry Madera, Chief Industry & Government Affairs Officer at Refinitiv, explores.

  1. The next EU budget is one of the greenest budget put forward to tackle the economic impacts of the pandemic globally.
  2. The deployment of the EU funds will be linked to green and sustainable commitments from EU Member States, raising the question of whether all countries are ready to implement such plans.
  3. As a follow-up from our first publication in August on European Union (EU) preparedness for a Just Recovery, and as the deadline for the final agreement on the EU budget approaches, more clarity from the EU and updated data help us track the EU’s trajectory for such a Just Recovery.

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When will the funds be available and what are some of the conditions for getting access to them?

As part of the NGEU, direct aid will be allocated to affected Member States through the Recovery and Resilience Facility (RRF), which will be distributed via grants and loans between the start of 2021 and the end of 2023.

As the COVID-19 pandemic deepens and a second wave engulfs the EU, there is an increasingly pressing need to rapidly deploy the RRF and NGEU. However, the funds have strings attached. In particular, recipients will need to provide a plan detailing how they intend to use the funds and how they will adhere to the green and sustainability objectives set out by the EU.

The total multi-annual financing facility (MFF) – the EU budget – proposed by the Commission is one the greenest budgets put forward to tackle the economic impacts of the pandemic globally:  30% of the NGEU will be raised through green bonds. Going further, it was agreed that 37% of the NGEU will be spent directly on initiatives contributing to a green transition. In additional detail shared by the EU in November, the overall MFF budget between the European Parliament and the European Council now explicitly imposes a biodiversity target to the EU expenditure. This new conditionality on the disbursement of funds will include 7.5% for biodiversity from 2024, increasing to 10% from 2026. With this inclusion the EU recognizes the increased importance of preserving biodiversity, giving it a dedicated place in its expenditure plans.

To ensure that these funds will be effectively deployed towards sustainable projects, the Commission will assess the proposed Recovery and Resilience Plans submitted by all EU Member States in the coming months. The Commission is inviting Member States to take into account the six climate and environmental objectives set out in the draft EU Taxonomy Regulation. Member States will have until April 30, 2021 to submit their plans and funds will be deployed starting in 2021.

What European Countries are prepared for the Sustainability requirements?

The only way the EU will succeed in its plans to have a green and “just” recovery for all will be if its member states stick to the rules.  This will mean some difficult choices for the block’s members in choosing where to fund growth and build back prosperity to their weakened economies.

In order to get a view on which European nations are best prepared for implementing recovery funds to support sustainability we looked at 3 factors:

  1. Their ratio of green debt to all debt issued year to date.
  2. The overall Refinitiv ESG scores attributable to their national stock index.
  3. Their respective Refinitiv country Sustainable Development Goal (SDG) scores.

High-scoring countries include those more ready to implement a green recovery plan while lower-scoring countries display less historical evidence for deploying recovery funds in line with EU sustainability targets. Using the RRF allocation estimates published in July, the comparative table below includes the top recipients of the grants included in the EU RRF funds and their related scoring based on our methodology:

Germany and Sweden rank top of the table tied for first place in our Refinitiv ranking, followed by France and the Netherlands in joint second place. As an indicator for the overall EU preparedness, these 4 nations account for just over 30% of the overall RFF grants (related to projected division of funds by media reports based on historical disbursements and pandemic needs). The lions share of funds will be allocated to nations less well prepared. It is important to note that Italy and Spain, the two Member States most affected by the economic consequences of the COVID-19 pandemic and the biggest potential recipients of grants, are not the most prepared, according to our review. They rank 10th and 5th respectively.

Getting on the with the job

Member states are preparing their plans for submission to the EU to access the RRF but are not sitting idle in the meantime. The table below shows the moves from Q2 to Q3 2020 on Green Bond issuance within the EU:

Germany stands out here as it leaps forward with the issuance of its first-ever sovereign green bond in September 2020, raising €6.5 billion. This pushes Germany into the top spot for Green Bond issuance in Europe – just ahead of France.

Germany, France and Spain have all been quick off the mark to outline budgets and their green components.  No doubt more member states will follow in short order.

Challenges ahead for measuring and monitoring a Just Recovery

Europe’s recovery fund is not yet agreed, and the vetoes used by Hungary and Poland are evidence that all 27 member states are not in harmony on the outcomes. However, the European Commission’s commitment to a Just Recovery that incorporates sustainability is strong. There are risks to implementation which include member states’ ability to deploy capital sustainably and to adhere to the principles by which it was raised on the capital markets – particularly for the 30% of funds from Green Bonds. Data will play a critical role in monitoring and managing the adherence to the high green standards proposed. Challenges remain with data gaps and data holes still prevalent in the data needed to deploy capital sustainability. Working as a financial industry to align the EU Green Taxonomy with the underlying data sets from across the EU member states will be necessary. What you can measure, you can manage – wise words for the EU to consider as the Just Recovery moves forward to deployment.

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