Martin Berg on sustainable finance: Where does it stand?

Technologies, reporting and de-risking investment to beat the climate crisis

From the end of 2020 onward, the European Investment Bank has committed to aligning all finance activities with the Paris Agreement and help bring EUR 1 trillion into sustainable investment by 2030. Philippe Put, Flickr
25 November 2019

Martin Berg will speak at the Global Landscapes Forum Luxembourg 2019 on 30 November. Apply to attend or join online.

In 2018, the European Investment Bank (EIB) put 30 percent of its total financing expenditures – EUR 16.2 billion – into projects focused on slowing and adapting to climate change, and this year is on track to invest more. This makes the EIB one of the biggest climate financers in the world and further weaves sustainable finance into the identity of Europe.

As the head of the Bank’s Environmental Funds and Climate Finance Policy unit, Martin Berg is behind many of these investment decisions. He guides money toward forward-thinking enterprises and innovators who are shaping the future with new technologies. He also makes land-based projects less risky, so that other investors might reach into their pockets to support them too. Here, he speaks about how the European Union (EU) bank is learning from experience and leading by example as the field of sustainable finance continues to grow.

This interview has been edited for content and clarity.

How have you seen mindsets change toward sustainable finance over the course of your career?

Fifteen years ago, when I started working on sustainable finance, the field didn’t really exist. Since then, I’ve seen a lot of growth. In more recent years, the biggest shift is that the bigger investors, such as pension funds or central banks, are looking at this issue. They are considering sustainability from two angles: first, they are integrating climate risk into all operations; and second, they are incorporating environmental and social considerations into all operations.

At the moment, particularly environmental and social [considerations] are more on the reporting side. But I do expect that in the future financial institutions will try much more to actively secure environmentally friendly projects, rather than only demonstrating that certain considerations are taken into account in their normal business.

What reporting and accountability mechanisms are in place to ensure projects are truly ‘green’ and that greenwashing is avoided?

Here at the EIB, we almost exclusively invest in projects. We are not a financial investor investing in, say, financial derivatives. This makes it easier for us to track what is really being done on the ground. For each of our operations, we require reporting, and in addition, we are also now following certain standards to track whether a project is ‘climate’.

We have worked with other multilateral development banks to develop a common definition of what can be considered a climate investment. We also issue green bonds and give assurance to the buyers of our bonds that they are backed by real projects. We’re doing this through two things. We have reporting, so that each investor can see the projects that the bonds are financing. And on the other side, we’re asking our auditors every year to sign off on a statement that all the information we’re providing in regard to this is true and accurate.

What technologies should investors be looking at to drive this field forward?

We support the existing technologies that we know can help us address the sustainability challenge. With regard to electricity generation, this is renewable energy, including new types of renewable energy generation like floating offshore wind projects. That’s a good example where wind power, a very mature technology, is now taken to the next level. If you look at transport, it becomes very clear that we have to change how we address transportation and particularly look at electrification. So it all comes down to how we actually generate electricity. It’s not only that we’re supporting new types of electricity generation, but also how we integrate this new electricity in the energy mix.

To really achieve the massive carbon emissions reduction that we have agreed upon, we need new technology. We’re working for example with the Bill & Melinda Gates Foundation and the European Commission on an investment fund supporting breakthrough energy technologies, the Breakthrough Energy Ventures project.

How can capitalism be reconciled with a more sustainable future?

I don’t see a contradiction between seeking profit and striving for sustainability. If you look at landscape projects, we actually see that working with communities to build business models around sustainable landscapes can really work, and we’re supporting a few funds – for example, the Althelia Climate Fund or the Land Degradation Neutrality Fund – that are working with local communities to preserve landscapes, while also finding new forms of economic activities for them. I think that’s very important. We have to realize that in order to preserve landscapes, we have to offer economic opportunities for the people that live there.

The EU – and Luxembourg, in particular – is leading in the field of sustainable finance. What benefits have been seen so far? And what benefits do you think will come down the road?

I believe the EU sees sustainable finance as a real opportunity while doing the right thing. Let me give you one example: When you look at the offshore wind technology, which was developed mainly in Europe, you will see that a lot of that technology is now being deployed around the world and a large part of this technology is European. This is a win-win situation.

The Luxembourg government sees this quite similarly and is very active in this field of sustainable finance. Luxembourg a very small state, however, it really tries to find new ways to redirect its comparatively limited resources in a more meaningful way. We have a joint platform – the Luxembourg-EIB Climate Finance Platform – where the Luxembourg government is providing us with some first-loss funding that we can deploy into funds to attract other investors and raise additional climate finance. The government sees this as a benefit to build a green marketplace to attract more fund managers to the country.

Where I really believe the EU is leading is in the field of standards for sustainable finance. We fully support the EU Sustainable Finance Action Plan and as a member of the EU’s Technical Expert Group we have contributed to the report on an EU Taxonomy for environmentally sustainable activities. I suspect that this work and the important leadership role the EU is taking on this issue has the potential to have very significant implications around the world on how we address sustainable finance in the future.

What are the major investment risks for land-use projects, and how can those risks be avoided?

For sustainable land use, the biggest risk concerns the land. When we go to Africa or Latin America, one of the key challenges is that land ownership is not always clear. Engaging in a project always carries the risk that someone else may claim they own the land or that some people who live on the land have to be displaced. This reputation aspect as an investor is quite significant, because sometimes it’s extremely difficult to be 100 percent sure that all aspects have been addressed.

Then, in addition to that, forestry projects, for example, require a long-term time horizon of investment, which only a long-term investor can really do. And that is a challenge for the entire financial community – in particular, those that need a quicker or constant return on their money and cannot say, “I’m now investing a sum of money, and I’m only getting this back in 20 or 30 years, when the trees have actually grown.”

What advice would you give to governments and other banks that want to expand into sustainable finance?

I think governments should seek to deploy funds in a more meaningful way and look at two things. One is requiring good reporting on impacts. The other is increasing the financial impact by using grants to attract other investors. We call this “blended finance,” and it is something that, we believe, will increase. It allows us to develop financial instruments and mechanisms that then draw in others, in particular, private investors.

On the private investment side, we’re already seeing significantly more interest in sustainability and sustainable finance. But I think then we need to be clear what that really means. My advice would be to go beyond environmental and social considerations reporting and try to find environmental products. What I do hope is that the new sustainable finance framework in Europe and, potentially, also regulation will really help companies move into this area.

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