What does Refinitiv data say about how the European Commission’s (EC) goal of putting sustainability at the heart of the European financial system is being aligned with the urgent need to fund the COVID-19 recovery?
- EU member states are in urgent need of recovery funds to mitigate the economic impact of COVID-19. However, there is also an urgent need to put sustainability at the heart the European financial system.
- Is it possible for these two priorities to be aligned with one another, and the EC’s goal of sustainability to be successfully implemented? And are those countries that will receive the bulk of the recovery funds prepared to deploy the funds to support sustainable growth?
- Refinitiv data looked at which member states are well placed to uphold the vision of an environmentally and socially responsible recovery.
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Europe has been badly hit by COVID-19. The IMF predicts 2020 GDP will fall by 10.2 percent and rebound by 6 percent in 2021 for the Euro area1.
The crisis is not yet over, nor are the GDP predictions fixed, however on 21 July the EU reached a political agreement on the 2021-2027 Multiannual Financing Framework (MFF) budget.
The overall commitment is €1,074bn, with an extra recovery instrument of €750bn for the sole purpose of addressing the challenges posed by the COVID-19 pandemic.
The additional €750bn has been coined the ‘Next Generation EU’ Fund (NGEU). It will be composed of €390bn in grants and €360bn in loans. The NGEU will be funded by allowing the European Commission to borrow directly on the financial markets for the first time in its history.
The NGEU is divided into seven programs. The biggest of these is the Recovery and Resilience Facility (RRF), which will act as direct aid to member states, and contains €312.5bn in grants.
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Since the pandemic took hold, European policymakers and central bankers have been considering their options. This included early discussions on ‘CoronaBonds’ and national level debt issuance. These discussions evolved into the NGEU, which should come into effect on 1 January 2021.
However, allocation of the funds from the NGEU has not yet been finalized and will be based on member states’ recovery and resilience plans for 2021-2023, which will be developed at the country level and then assessed by the EU Commission.
The ambition is for the NGEU to be a green stimulus package in the COVID-19 response, reflecting the commission’s commitment to sustainability and the green agenda. However, it has also highlighted differences between member states’ prioritization of sustainable finance.
The political agreement on the recovery fund notably contains a conditionality on disbursement based on requirements on the rule of law, as well as effective contribution to the green and digital transition. On paper, the EU remains committed to a ‘Just Recovery’.
Although it is too early to determine exactly how much each member state will get from the NGEU, the political agreement indicates that 70 percent of the NGEU will be allocated according to the current MFF key and the remaining 30 percent will be allocated by considering the real GDP loss suffered by affected countries.
As the financial impacts of COVID-19 become clearer, the countries with the highest projected GDP loss so far are Italy, Spain and France, and they are therefore likely to be top of the list of disbursements of grants and loans.
In addition, and if funds are allocated according to the proposed MFF key, the allocation from the RFF of €312.5bn in grants from the NGEU fund could include these 10 countries:
Supporting EU sustainability
Are the member states who are poised to receive the lion’s share of the MFF and NGEU prepared to deploy the funds to support sustainable growth?
Refinitiv data shows that despite the economic shock of the pandemic, sustainable investment remained strong globally.
In the first quarter of 2020, ESG funds saw inflows of US$36bn. The region that recorded the largest inflows was Europe excl. UK, with US$17bn. During the period, the majority of ESG funds have outperformed their technical indicators.4
This bodes well for Europe, but the question remains whether all EU 27 countries are equally ready for a Just Recovery. To get some indication of the potential for a sustainable recovery in Europe, we need to consider member states’ ability to support a Just Recovery by combining:
- Percentage of green debt issued in 2020 YTD
- Overall Refinitiv ESG5 score of their national index
- Existing country-level commitment to a green transition6
Using this system, the top three countries are Spain, followed by France, and Germany. Employing the same methodology, the bottom three countries are Poland, Romania, and Bulgaria.
Which member states are best prepared?
If applied across the all 27 EU member states, and taking into account the overall green debt issued by each country, Finland, Spain and France are the three most prepared countries for a Just Recovery.
This highlights significant risk to an EU green recovery plan. Italy, the country most likely to be the beneficiary of EU funding from the MFF, is less prepared to deploy those funds sustainably.
Spain and France, also likely to receive high levels of EU funding from the MFF, are poised to play an important role in upholding a green recovery because they scored highly on their preparedness.
Meanwhile, Poland ranked low on the preparedness scale, but high on the receipt of both grants and loans (ranking third overall). These discrepancies may signal that it may be difficult to implement a green recovery in Europe.
It is important to note that on top of the level of preparedness of the EU 27, there is a wide disparity in financial market depth and maturity. This will affect both economic recovery and investor requirements in various markets.
The path to sustainability
At a time where the EU is making plans to inject significant amounts of money into countries and companies, keeping a close eye on recipient countries’ ability to deploy capital to sustainable projects will be essential to protect the European New Green Deal.
There needs to be a consistent approach to deploying funds for recovery, which has not necessarily been on track in recent months. The unprecedented level of state aid approved by the EC since March 2020 was not assessed or approved with a green transition lens7 in mind.
According to the EC, from the start of May, it had approved an estimated EUR 1.9 trillion in state aid to the EU economy. This corresponded with the total seven-year MFF-NGEU fund proposal made by the EC. These early funds may already have gone towards industries directly threatening the green transition.
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It will take a concerted effort by the EC, the member states, policymakers, and global investors to make the EU’s plans for a Just Recovery a reality.
Refinitiv’s initial data assessment suggests some of the European ‘winners’ in terms of receipt of funds, are the ‘losers’ in terms of their green finance deployment track record.
More than ever, data will be key in determining and understanding how successful and green the EU will be on its path to recovery.
1. https://www.imf.org/en/Publications/WEO/Issues/2020/06/24/WEOUpdateJune2020
2. https://www.oecd.org/economy/release-of-the-june-2020-economic-outlook.htm
3. https://coronavirus.jhu.edu/map.html
4. https://www.refinitiv.com/perspectives/market-insights/covid-19-flows-into-esg-funds-continue-during-1q20/
5. https://www.refinitiv.com/content/dam/marketing/en_us/documents/methodology/esg-scores-methodology.pdf
6. Based on their membership of the Network for Greening the Financial System (NGFS)
7. https://ec.europa.eu/competition/state_aid/what_is_new/State_aid_decisions_TF_and_107_2b_107_3b_107_3c.pdf
