Europe’s green finance sector is showing signs of stagnation, highlighted a recent report by New Financial, a London-based capital markets think tank, published in collaboration with Luxembourg for Finance, the grand duchy’s financial centre development agency.

The sector has experienced significant growth in recent years, with capital raising more than doubling since 2019 to €378bn, and the penetration of green finance also doubling to represent 11% of all capital markets activity. Notably, European green capital raising surpassed that of the United States, nearly doubling the €200bn raised in the US in 2023. However, Luxembourg for Finance’s second edition of “Reality Check on Green Finance in Europe” suggested that this growth may be losing momentum. The , published on 18 April 2024, noted that despite a considerable influx of green capital, the pace of growth in the green finance market has slowed. The value of green capital markets activity has remained stagnant over the past few years, falling slightly in real terms, and the penetration of green finance also dropped in 2023.

Signs of stagnation

The report highlighted a troubling trend: a growing backlash against ‘green’ initiatives and the net zero transition in recent years as policymakers in Europe and beyond are scaling back on green pledges amidst economic and political challenges. To maintain its position as a global sustainability leader, Europe must address not only the hurdles within its green finance market but also effectively communicate the necessity of green policy and finance to the broader public, stated the report.

Regional disparities

While Europe leads globally in green finance, there are disparities in the scale, depth and penetration of green capital raising activities across different markets. Germany emerges as the largest market for green capital markets, commanding a 17% share, followed by France and the United Kingdom. However, the penetration of green finance in these markets falls below the European average. Conversely, Nordic and Benelux countries boast the most substantial green finance markets relative to GDP.

Regulatory challenges

Regulation has played a crucial role in shaping Europe’s green finance landscape, yet concerns exist regarding its potential to become overly burdensome. Efforts are underway to simplify the regulatory framework, noted the report, aiming to reverse the slowdown in green finance issuance. However, with an ambitious regulatory regime, burdensome regulations hindering green investment have emerged. Efforts are needed to ensure that sustainable finance regulations effectively promote transparency and investor choice while balancing the delicate act of addressing greenwashing and facilitating progress towards a net-zero future, remarked New Financial and Luxembourg for Finance.