The European Green Deal and ESG

The growing trend of ESG investing has had great support from various contemporary developments and is impacting our lives in various areas. This includes, but is not limited to, economic, political, social and legal areas. The European Green Deal is another example of how growing concerns for the environment are manifesting themselves.

The European Green Deal was officially announced on December 1, 2019 by the European Commission. Following support from the European Council, the plan was officially accepted on December 13, 2019, apart from Poland. On January 15, 2020, the European Parliament also voted for the deal, increasing its ambitions to reduce carbon emissions to at least 55% by 2030.

WHAT ARE THE GOALS OF THE EUROPEAN GREEN DEAL?

The European Green Deal is a set of policy initiatives that aims to:

Let us take a closer look at each of these points, and what they specifically mean for ESG investing.

Achieve climate neutrality by 2050

Climate neutrality means that the emissions from company activities, production plants or any other industry in any given city, country, or, in this case, a continent, have no negative impact on climate change. An example of this would be not generating any greenhouse gases. This would mean that in terms of ESG as it stands today, it would solve many concerns that investors have regarding the potential impact of a company on the environment. Therefore, investors who favour sustainable investment will prefer these companies, given that their performance on other ESG metrics is not neglected.

Decouple economic growth from resource use

This means that the economic growth of Europe will not be dependent upon resource use. To further clarify, this point emphasizes the need for a sustainable form of production that does not deplete the resources that it relies upon. The European Commission website lists many examples of actions targeting various areas, such as that of agriculture and food productionrenewable energy, and chemical sustainability.

Apply all its policies inclusively and without exception

The EC’s aim is not only to apply these changes to the member states of the EU, but also to become a world leader in promoting ESG values. In order to do this, the European Climate Law has been submitted to the legal authorities, and the EU has laid out its plan to incorporate other parts of the world in its endeavours. This allows for the worldwide spread of ESG investing criteria and shows that the EU acknowledges that global climate change must be tackled globally, rather than merely in one continent.

Implications of the EGD

The biggest criticism of the EGD is that it centres too much on the corporate world, with an essential goal of growth in mind; that countries in Europe are still making investments requiring fossil fuels, and that the 2050 goal is not soon enough. Concerns continue to be raised as to whether these changes will truly have the impact they promise, or whether they are solely an attempt to vent public frustrations regarding climate change and other current environmental issues.

Going forward, businesses providing clean energy services and environment friendly alternatives to fossil fuel dominated industries, such as construction, transportation, and agriculture, will have the opportunity to grow. However, other businesses, such as those dealing with oil and gas, are expected to alter their approach if they wish to have access to the funding provided by the EU.

Additionally, the Carbon Border Tax will draw clear lines as to what is expected from trade partners. Its application will mean that imports will be taxed according to the amount of greenhouse gases generated upon production and consumption. This means that rather than introducing a strict ban on certain products, the EU will tax them to the point that they are gradually driven out of the market. This approach is quite fitting as it will incentivize countries outside the EU to participate in the Green Deal.

However, how these changes will affect markets that are not within the EU, yet share similar trading practices, remains to be seen. Ambassador Nikolaus Meyer-Landrut, the Head of the EU Delegation to Turkey, pointed out that the Green Deal is one of the most important programs for the EU in the post-pandemic period, specifically stating that “The agreement focuses on making the EU a clean, efficient and competitive economy and a structure that will find solutions to environmental problems.” while placing emphasis on creating an EU economy which is not only carbon neutral, but also competitive at the same time. He also noted that “The Turkish private sector has been paying greater attention to the EU’s Green Deal.”

Since the EU is Turkey’s biggest trading partner, we believe these changes will impact Turkey’s exports to the EU significantly. Businesses in Turkey have a fair opportunity to adapt their practices before the Carbon Tax hits the market. Since Turkey is a developing country, raw material exports are one of the main sources of income. Turkish products must reduce their impact on the environment if they wish to compete economically.

In theory, the Green Deal will allow good opportunities for markets to transition to energy friendly methods. However, the participation of countries outside the EU will also be crucial. If the EU increases taxes, the demand for products with high carbon emissions will drop, causing their prices to decrease globally. This will mean that the demand for these products might increase elsewhere, so that the EU will have applied the Green Deal and reduced its carbon consumption drastically, but the rest of the world has established new trade practices essentially bypassing the EU and producing the same amount of greenhouse gases as before. In other words, the Green Deal will have no impact if it is only applied locally, or if countries choose to ignore the EU and continue trading elsewhere.

On the other hand, adapting to the standards of the Green Deal would present companies with a new method for competing through the Carbon Border Tax. Thus, companies could gain an economic advantage by reducing their carbon emissions, whereas usually this would cost them drastically. Another ray of hope is that even if bigger companies choose to ignore the EU and continue using their old products, emerging businesses could benefit from the incentive and start competing with bigger companies.

Although this is still in progress, coupled with the European Green Deal’s proposed deadline for climate neutrality being 2050, it serves as a great example of how trends for ESG investing have grown, and will continue to do so in the future.

More information can be found on the EC’s website: https://ec.europa.eu/info/index_en

Disclaimer: Opinions expressed within the content are solely the author’s and do not reflect the official opinions and beliefs of the companies that he represents.

Written by Ata Kösten