Europe’s green finance sector is showing signs of stagnation, highlighted a recent report by London-based capital markets think tank New Financial, published in collaboration with Luxembourg’s financial centre development agency, Luxembourg for Finance.
The sector has experienced significant growth in recent years, with fundraising volumes more than doubling since 2019 to €378 billion, and green finance penetration also doubling, accounting for 11% of total capital market activity. Notably, Europe’s green capital fundraising volume will surpass that of the United States, nearly double the €200 billion raised in 2023. However, the second edition of Luxembourg for Finance’s “European Green Finance Landscape Study” suggests that this growth may be losing momentum. The report, published on April 18, 2024, notes that despite substantial inflows of green capital, the pace of growth in the green finance market is slowing. Green capital market activity volumes have stagnated over the past few years, declining slightly in real terms, and green finance penetration also declined in 2023.
Signs of stagnation
The report highlighted a worrying trend: growing backlash against “green” initiatives and the net-zero transition in recent years as policymakers in Europe and beyond scale back green pledges in the face of economic and political challenges. To maintain its position as a global sustainability leader, Europe needs to not only address obstacles within its green finance markets, but also effectively communicate the need for green policies and finance to the wider public, the report said.
Regional disparities
Europe leads the world in green finance, but markets vary in the scale, depth and penetration of green capital raising activity. Germany is the largest green capital market with a 17% share, followed by France and the UK. However, the penetration of green finance in these markets is below the European average. Conversely, the Nordic and Benelux countries are the countries with the largest green finance markets relative to GDP.
Regulatory challenges
Regulation has played a key role in shaping the European green finance landscape, but there are concerns that it may be overly burdensome. The report notes that efforts are underway to simplify the regulatory framework, aiming to reverse the slowdown in green finance issuance. However, the ambitious regulatory regime has created burdensome regulations that hinder green investment. Efforts are needed to ensure that sustainable finance regulation effectively promotes transparency and investor choice, while balancing the delicate act of addressing greenwashing and promoting progress towards a net-zero future, New Financial and Luxembourg for Finance noted.
