In the context of the European Green Deal, the Paris Climate Agreement and other international initiatives to combat climate change, sustainable finance is discussed almost daily. It is becoming not only one of the most important tools in achieving environmental goals that create high added value for society, but also one of the most attractive investment directions for investors. Not surprisingly, many experts view sustainable finance as crucial to the future of the economy and the current well-being of states. Is Lithuania ready to attract sustainable finance and what are the main obstacles to doing so?
More clarity on what sustainability means
Clear criteria for defining sustainable finance are essential for creating a sustainable financial environment and promoting sustainable finance. So far, this has been a significant problem, as sustainable finance has long been debated without clear standards, and solely on the basis of a definition provided by the European Commission which leaves considerable room for interpretation.
However, a significant step forward has been taken in this area with the adoption by the European Parliament of the Taxonomy Regulation, which defines which economic activities can be considered sustainable. In total, the regulation provides four conditions for sustainable economic activity.
In general, such activities must first and foremost make a real contribution to environmental objectives, such as the transition to a circular economy or the prevention and control of pollution, and must be subject to social protection and sustainable management measures, such as gender equality. In addition, it must be possible to verify all this in practice and in accordance with criteria approved by the European Commission. Accordingly, if the investment is targeted at activities that meet the above conditions, they can be considered to be sustainable.
Although so far the regulation has only applied to some participants in financial markets, such as fund managers and insurance companies, as well as large companies, a precise definition of sustainable finance is a very important step in providing more clarity and specificity for sustainable businesses and investors. The standards of the regulation should eventually be adopted by other sectors, which will further encourage the growth of sustainable finance.
Sustainability is becoming a necessary basis for operation
Businesses should already have an interest in carrying out their activities according to sustainability criteria. It is very likely that they will be forced to take these principles into account, if not due to market pressure, then due to a regulatory environment that will undoubtedly be increasingly conducive to businesses operating in accordance with the principles of environmental protection, social responsibility and good governance.
Looking at global capital markets, the advantages of sustainability-oriented companies and greater resilience in crises are already becoming apparent. Although the example is quite extreme, there are trends in the energy sector that demonstrate this – international renewable energy and green technology companies such as Iberdrola or Vestas Wind Systems have shown strong growth in recent years, and with the onset of the Covid-19 pandemic, the value of shares in some of these companies has almost doubled. Fossil fuel power companies like Shell certainly can’t boast any similar results. However, the telling factor is that Shell and many other traditional companies are also working to reorient and make their operations more sustainable. This just proves that sustainability is becoming mandatory for companies to achieve long-term success.
Not everything painted green is actually green
Of course, it is very important to distinguish between real and perceived sustainability. Greenwashing is a real problem and there are indeed cases where attempts to gain an unfair competitive advantage or profit have been disguised by claims to be focusing on the environment and sustainable development.
So far, only evaluations issued by various rating and certification agencies for companies have been used to help investors to choose sustainable finances options. But the lack of any common international standards has made it difficult to understand the differences between criteria used by different certificate providers. As a result, this limits the opportunities for investors to evaluate the significance of these certificates properly. It is hoped that the above-mentioned Taxonomy Regulation will harmonise the methods used by different rating agencies.
Another necessary way to ensure that green finances are truly sustainable is to monitor the use of the funds raised. There are also many challenges ahead in this area, but the first step has already been taken with the adoption of the Sustainable Financial Disclosure Regulation. This obliges companies to include specific information on sustainability and costs in this area when concluding contracts and publishing periodic reports.
In the field of sustainable finance, Lithuania is lagging behind
The Lithuanian financial market is very concentrated and lags far behind the leading countries in the field of finance, so it is not surprising that sustainable finance in our country is still in the initial stages of development. This is not just a local problem – in this respect, Lithuania does not differ from the rest of the Baltic region.
Currently, it is not easy for local sustainable businesses and projects to find sources of sustainable funding from either local or international markets. Generally in Lithuania, there are either no financial instruments adapted for this purpose or they are not flexible enough. Local businesses still tend to rely on traditional, i. e. bank financing rather than attracting investments through stock and bond issues or from alternative sources. In terms of the international market, projects developed in Lithuania are relatively low value, which makes them less attractive to international investors.
For this reason, in order to develop an internal market for sustainable finance, Lithuania must first look at the identification of sustainable businesses, as well as the significance of these issues for the economy of the future, and look for incentives to finance sustainable areas faster – both from public and private sources. These decisions should become the basis for sustainable finance and investment. In addition, Lithuania needs greater integration into the EU capital market, and for this it is necessary to look for measures that would allow it to offer international investors large projects – worth at least a few hundred million euros.
Attempts to attract sustainable finance are on the rise
However, recently in Lithuania we have been seeing positive examples of local companies managing to offer investors sustainable and attractive investment projects. First of all, eyes are, of course, on the Ignitis Group, which pays great attention to the development of renewable energy and the decarbonisation of energy. During the initial share offering this year, the group managed to raise 450 million EUR. The company‘s shares were listed on the Baltic Nasdaq and London stock exchanges.
It is also worth mentioning the activity of the AUGA group, which develops sustainable organic farming and organic food production business in the capital markets. The group‘s shares are traded on the Nasdaq stock exchanges in the Baltic States. Moreover, this business group has issued 20 million green bonds. It is planned for the volume of such investments to increase even further. There have also been attempts by the public sector to offer investors green investment products: since 2018, the government has issued 68 million green bonds in three issues for the Modernisation Fund for Apartment Buildings.
A Green Finance Institute could provide impetus
A systematic review of the areas and standards regulated by ministries, and greater integration of sustainable and environmental criteria into the existing legal framework, could provide a significant impetus for more active reorientation of local businesses towards green industries and the development of sustainable finances. The new government is starting its work in an extremely fast-changing environment where the importance of environmental issues is significantly increasing environmental issues are increasingly influential. It will be really interesting to see whether the new Lithuanian Government will be able to take this issue seriously and propose measures that will be able to fundamentally shift the Lithuanian economy towards sustainability.
With regard to the implementation of sustainable goals, a specialised body for the promotion of sustainable investment could also make a significant contribution. Institutions of this kind, such as the Green Finance Institute in the United Kingdom, Finance for Tomorrow in France or the Stockholm Sustainable Finance Center in Sweden, are successful in other European countries and help to create a favourable environment for accelerating sustainable finance.
A similar sustainable investment institute in Lithuania could ensure the standardisation of sustainability requirements and the dissemination of relevant information, as well as organising and supporting discussion between public sector institutions, private business and science. This body could also help to solve the above-mentioned problems experienced by small projects by encouraging businesses to cooperate and combine their own projects.
Lithuania does not hide its ambitions to become the financial centre of the region, and we will only be able to achieve this if we are able to create a favourable environment for both sustainable business and the financial market participants who invest in it. The European Bank for Reconstruction and Development, together with Sorainen, is currently preparing a study on a sustainable finance model commissioned by the Ministry of Finance of Lithuania to answer key questions about the supply of and demand for sustainable financing and measures to help Lithuania become a regional leader.
The success story of FinTech shows that we can find ways to attract innovation to Lithuania, so it is obvious that there are opportunities for business and the whole country to turn to the path of sustainability, but joint efforts from both business and state are important in order to achieve this. And this is worth devoting effort to, because the future depends on those who are able to be sustainable and contribute to the preservation of the environment.