Turning faith-based green transition into gain-based green transition

19. November 2020

It is difficult to envy economic analysts who are busy making forecasts right now. Besides the usual inputs, something should be thought of the spread of the virus and the reactions of other countries. Politicians have found a solution and are busy rounding up billions as a counter-measure. This has brought about a situation in which, based only on financial logic, Estonian companies should prepare for the next economic upswing.

This is the conclusion if one side of the equation sees the economy shrinking by about EUR 2 billion, the other side however sees EUR 5 billion being borrowed to cope with the effects due to the economy shrinking and an additional EUR 1.8 billion being added from the EU rescue package. The real world is indeed more complicated, as the economic downturn leads to and amplified effect in the reduction of investments, while various subsidies and loans must also first be invested productively in order to reap the benefits thereof.

However, given the political and central bank measures, a significant portion of the funds will also reach the real economy through the money markets. Whether all this is sensible or good should remain a topic of discussion for economic theory, but mathematics should not be ignored when it comes to making investment decisions today. As Boston Consulting has aptly written in a summary, companies are not lacking opportunities, they are lacking imagination. One could, however, imagine a changed world where new investments would have to fit with the increasingly focused climate goals.

The COVID-19 pandemic is seemingly the first great and clear warning that humanity is operating outside of the safe boundaries of the planet. The scientific community has proven that wildlife trade and large-scale deforestation release various pathogens from their natural environment and increase the spread of zoonotic diseases. Other environmental problems are only adding to this burden.

The virus forced everyone to stop for a moment and gave people a chance to ponder what we are doing, how we are doing it and why. It is a good time to re-evaluate strategies and plans. Are existing strategies and plans still suitably taking into account such fluctuations? How do the environment and economy fit together with each other? As time passes, the number of similar major world-shaking events taking place will increase, today’s inaction regarding the environment will be tomorrow’s cost to the economy. This is a cost which will increase over time.

The driving force of the Estonian economy

The prosperity of a country without abundant mineral resources is dependent on the capacity of the companies operating there. Estonia sees new capital being created indirectly through budgetary investments and directly through the sale of private sector goods and services, but also through private sector investments. The latter, in turn, is financed by investors and various financial institutions.

Thus, exports of Estonian goods over the last five years amounts to EUR 60 billion, incl. EUR 45 billion to the EU and EUR 20 billion to Scandinavia. During the same period of time, Estonia has received EUR 5 billion from EU structural funds and EUR 1.5 billion from EU institutions. Companies have been issued EUR 13 billion worth of new bank loans during the same period. The volume of direct and portfolio investments in the total value of approximately EUR 28 billion must be added to that sum.

The aforementioned cash flows are the driving force of the Estonian economy. To a greater or lesser extent, the green transition is taking place against the backdrop of these cash flows. Exporters sell to clients, especially in the European Union, where the requirement of green certificates for goods is commonplace. Companies participating in Scandinavian procurements must have a timetable for achieving climate neutrality. The priority of the EU budget is to make investments related to achieving climate goals, it is worth remembering separately the EUR 1 trillion highlighted in the European Green Deal. European financial institutions, which have also financed Estonian companies, have brought their funding policies in line with climate goals.

Most of the foreign capital of Estonian companies comes from banks, with banks operating in Estonia issuing new loans in the amount of EUR 5.5 billion each year. It can be reckoned that with the help of possible regulations, the near future will see loan policies increasingly taking into account green metrics and the consideration of the environmental footprint. This is true for both corporate and private loans.

Possibilities of a benefit-based green transition

The biggest obstacle to the green transition is considered to be a lack of awareness and the failure to link environmental objectives with economic goals. The current deadlock – where necessary investments into technology have been insufficient due to their high cost, while prices are high precisely due to the low distribution of innovations – is starting to break. Gradually, examples of cheaper products, investments or financing aligned with environmental objectives are becoming more common.

This leads to the conclusion that the first wave of a green transition is under way. This concerns large companies, international exporters, the EU and Estonian budgets, banks, pension funds and insurance companies. Major industries have understood the impact of changing tax policies and regulations on the prices of their raw materials and products. In the case of high-emission projects, the trends of a few decades have to be taken into account in today’s decisions due to the long investment cycle.

This trend is irreversible, reaching smaller businesses and the average consumer in the second wave. Adding an increase in people’s awareness to the greener capital, the country’s policy choices will also align to this trend. All the more so due to the country having committed itself to the objective of reaching climate neutrality by 2050, and this also becomes economically viable. New regulations in public procurement, e.g. regarding the materials used in production and construction, but also regulations concerning the transport, energy and waste sectors should no longer come as a surprise.

Taking climate change into account is not a charitable act. This is the consideration of material risks and new opportunities. Corporate governance is dependent on financiers, suppliers and clients, and if they all move in the same direction, the faith-based green transition will be replaced by a benefit-based green transition. This will dictate new business directions and methods of operation. Therefore, if we are already preparing for economic growth, it is desirable to do so in such a way that the green transition would be possible and beneficial. The moment right now is the best opportunity to do so.

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