Investment Implications of the EU Green Deal

With an aim to effectuate a fully sustainable economy, the EU Green Deal was announced in December 2019 at the 25th Climate Summit in Madrid by the European Commission. The proposal targets to make the European Union Climate Carbon neutral by 2050 using a comprehensive strategy that outlines guiding principles for policymaking, regulations, and allocations of investments.

The deal aims to ensure a supply of clean and affordable energy, establish a circular economy, eliminate pollution, safeguard biodiversity, and create sustainable food and transportation systems. One of the most important objectives of the deal is to switch from fossil fuels to renewable sources of green energy, electricity, and other alternative fuels. A major impact would be brought about in the energy and transport sector. Other industries that would be affected by the same would-be agriculture, forestry, packaging, plastics, and textiles wherein aim to cut down on carbon emissions during manufacturing/distribution and to produce higher quality products would be realised.

It is estimated that in order to achieve the target of the EU Green deal, about €1 trillion funds need to be injected. This provides an opportunity for investors to invest in upcoming lucrative business models. The sustainable financing segment under the EU commission is set to support the deal by channeling private investment to the transition to a carbon-neutral economy. The commission has also established a classification system for tax treatments called EU Taxonomy that would aid the green businesses and their investors.

A prominent project under the deal is the InvestEU which has sub-projects under it namely: high-tech trees for clean air, rooftop greenhouse to cut CO2, and drones against marine litter amongst other projects relating to the social and health welfare of the people. Apart from the investment opportunities and threats, this transition has had a behavioural impact on the investors as well. Investors are now warier of the ESG factors and have started to practice socially responsible investing. This change is favourable to the stocks with higher ESG scores and vice versa.

Overall, the deal will impact all industry sectors by pushing businesses to adopt a sustainable business model and motivating investors to choose sustainable ESG investing. This shift will bring upon a rise in significant investment opportunities. At the same time, this transition poses some risks pertaining to the firms’ success in undergoing the transformation. Time will tell how businesses will adapt to these measures but it’s quite apparent that the businesses investing in the green deal would thrive and are advantageous to invest in.

Aanchal Gupta