4.12 Financing the transition towards sustainable activities

This briefing provides an overview of the EU policy framework on sustainable finance, which seeks to redirect capital flows towards sustainable activities to advance the EU’s green transition. It also evaluates the EU’s progress in addressing green investment needs to achieve sustainability goals. Briefing 2.8 on climate financing covers investments in climate change mitigation. The cost of inaction is covered in briefing 2.6.

Key policies

Key policies in the area of financing for sustainability include the EU taxonomy for sustainable activities, the EU green bond standard (EUGB), the European Sustainability Reporting Standards (ESRS), the Corporate Sustainability Reporting Directive (CSRD), the Sustainable Finance Disclosure Regulation (SFDR) and the Corporate Sustainability Due Diligence Directive (CSDD). Public funds are available at the EU and Member State levels. The largest contribution currently comes from the RRF, which is set to end in 2027.

Past trends (10-15 years)

Improving trends/developments dominate

Establishing the EU’s regulatory framework for sustainable financing is considered a major step forward; it creates the conditions for financing the transition towards Europe’s sustainability goals. However, by the end of 2023, the total outstanding green debt financing for the non-financial sector was estimated to be EUR 1.15 trillion. This figure is fairly evenly distributed between green mortgages for households and corporate borrowing, including green bond financing.

Notably, only a small proportion of all green lending complies with the EU taxonomy criteria, underscoring the need for greater alignment to ensure green financial flows' credibility and effectiveness. Only a few companies currently report under the taxonomy framework, meaning that there is only a limited perspective on sustainable investments.

Outlook (10-15 years)

Trends/developments expected to show a mixed picture

There is a significant investment gap as green investment flows lag the investment needs of the Green Deal sustainability objectives. Achieving climate neutrality by 2050 requires significant public and private investments. In climate mitigation, the European Commission (EC) estimates an annual investment gap in energy of EUR₂₀₂₄ 581 billion for 2021-2030. For the same period, the annual investment gap on climate adaptation is estimated at EUR 49 billion in pollution control, at EUR₂₀₂₄ 41 billion in circular economy, at EUR₂₀₂₄ 29 billion in water preservation, at EUR₂₀₂₄ 21 billion and in biodiversity at EUR₂₀₂₄ 21 billion. Overall, it is estimated that 4.1% of the EU’s 2024 GDP will be required to be additionally invested through to 2030 to address the European Green Deal (EGD)'s environmental objectives (Figure 1).

Sizeable public funds are available at the EU level to support the green transition. The RRF (under the NextGenerationEU programme) and the EU budget offer the largest contributions (Figure 2). There may be a noticeable shortfall in EU public funds. Estimates from the ECB suggest that this could total around EUR 54 billion by 2030 after the RRF expires at the end of 2026.

Prospects of meeting policy targets 2030/2050

2030: No specific policy targets

2050: No specific policy targets

Robustness

Significant investments will be required through to 2030 and beyond to achieve the EU economy’s green transition. While estimates of the required investment vary across institutions and are subject to considerable uncertainty, they consistently emphasise the need for accelerated and more ambitious efforts. They also point to the need for the private sector to finance most of these green investments.

Charts/maps

Figure 1. Annual investment gap until 2030 to meet the EGD's environmental objectives

Figure 2. Financing the EGD investment plan