Green Finance: The role of the EU, US and China, and how Securitization can unlock the market potential

As sustainability becomes a key priority on global agendas, green finance has emerged as a crucial mechanism to finance the transition towards sustainable development. Currently, the EU, US, and China are leading the “green investments market”. However, their approaches, priorities, and progress differ significantly, reflecting their unique political structures, economic priorities, and societal pressures. This article explores where the EU stands compared to the US and China in this green journey and how the EU can leverage securitization to unlock its market potential and stay competitive internationally.

The Global Green Market: Where the EU, US, and China Stand

The global green finance market has been experiencing significant growth, with major contributions from the EU, US, and China. As of 2024:

The European Union (EU): The EU has been a leader in green finance, heavily investing in renewable energy, green bonds, and environmentally friendly projects. The European Investment Bank's (EIB) Green Bond Program with a total issuance of EUR 197 billion by the end of 2023 is a tangible success story. Similar initiatives are currently ongoing within Europe. The EU remains committed to financing a net-zero transition with innovative funding structures and regulatory frameworks, including Green Taxonomy. To meet the ambition of EUR 1 trillion¹ investments per year proposed by the European Green Deal (EGD), it is estimated that an additional EUR 520 billion from 2021-2030 needs to be invested in sustainable transition projects, and an additional EUR 92 billion directed to the manufacturing industry with net-zero technologies, to boost the EU’s capacity and competitiveness from 2021-2030.

The United States (US): The US green finance market continues to grow, with strong support for renewable energy projects via initiatives like the Clean Energy Investment Initiative. The private sector also plays a significant role, with corporations issuing sustainability-linked loans and bonds. From the public sector, the US Inflation Reduction Act (IRA) and its subsidy package, around USD 1.2 trillion², could be reached by 2031 in the economic landscape. In 2023, the US individually reached investments of USD 225 billion in sustainable projects, focused on cleantech companies. The IRA's ambition is for the US to become the global leader in sustainable finance by 2031, outpacing Europe and China.

China: China has emerged as a major player in green finance, driven by its massive investments in clean energy technologies, electric vehicles, and urban green infrastructure. China has developed a consistent environment that allows investments in sustainable projects, allied to green loans and bonds both worldwide top-ranked, benefiting from government policies and local initiatives like the carbon trading market and green finance pilot zones. China has seen rapid development of green industries over the past years. In 2024, the Chinese carmaker BYD surpassed Tesla in terms of revenue, reported in the third quarter, reaffirming its strength in the international competition in the green market. China relies on its renewable energy capacity, mostly solar, wind, and hydro, reaching about 50% of its total generation capacity, and clean energy contributes around 40% to the 2023 growth of its GDP³. However, to meet the country’s carbon peak and neutrality deal “30/60”, it is estimated that a total of USD 450 to 570⁴ billion of green investments per year is needed, requiring significant collaboration from the public and private sectors.

How Securitization Can Act as a Critical Tool in the EU to Leverage Investments Towards Green Finance

Securitization can play a key role in the economy as a tool for attracting new investors’ money and as a risk management tool, sharing credit risk from banks (or non-bank lenders) with a broad number of investors, allowing greater exposure and diversification according to the profile of investors. Securitization can provide financing opportunities and free up capital for banks and non-bank lenders, stimulating and enabling them to provide additional lending to the real economy. This promotes competitiveness, sustainable growth, and attractiveness of the EU securitization market. More than ever, future investment needs for the green and digital transitions, in order to enhance the EU’s productivity, competitiveness, and resilience, make it clear that the allocation of capital is necessary and important to ensure that banks and non-bank lenders have at their disposal all the necessary tools. The EU securitization framework can act as such, to finance strategic projects while safeguarding financial stability and investors.

However, the EU needs to work toward making the securitization market attractive again. Overall, the European securitization market has decreased significantly after 2008-2009, from approximately EUR 2 trillion at its peak to EUR 1.2 trillion at the end of 2023. Meanwhile, in other countries like the US, it increased from USD 11.3 trillion in 2008 to USD 13.7 trillion in 2021, despite the higher default rates of securitizations during 2008⁵.

One way to revive and strengthen the EU securitization market could be through green finance in sustainable projects, as it is estimated that more than EUR 1 trillion5 per year is needed to meet the EU ambitions towards the EGD. Worldwide, the green market is expected to reach its peak investments in 2033 by USD 28.7 trillion . This creates opportunities, and the EU can benefit from its securitization framework, established in 2019, to penetrate this worldwide market, attracting investors with the objective of financing the economy without creating risks to the financial system while providing a more transparent and standardized framework.

The European Council conclusions of 18 April 2024 reinforced the call to relaunch the European securitization market, including through regulatory and prudential changes. Relaunching securitization has been recommended as a means of strengthening the lending capacity of European banks, creating deeper capital markets, and increasing the EU’s competitiveness. This might lead the EU to maintain its global leading position in the green market.

By modernizing and turning the securitization framework in the EU into a more friendly and attractive environment for investors (with less bureaucracy, yet protecting the investors), the path to unlocking the ambitious plan of EUR 1 trillion from 2025-2034 could be made. 

The range of opportunities in green industry and social investments (see footnote 2) are as follows:

• Green Industry Investments – EUR 400 billion: Focused on cleantech manufacturing and the transition to sustainable energy and transport.
• Social Investments – EUR 620 billion: Supporting sustainable housing, public services, green infrastructure (solar panels, wind farms, professional development into new skills to meet market demands, water treatment).

What are the two main challenges to address in this green journey?

Greenwashing Risks: It is not new that non-governmental and financial institutions push for claims towards net-zero pledges without being net-zero. A lack of clear standards and regulations, as noted by the UN panel presented at COP27 on 16 November 2022, “not only erode(s) confidence in net-zero pledges overall, but also undermines sovereign state commitments and understates the work required to achieve global net-zero.” Securitization could also be used for non-green assets presented as sustainable financing, misleading its purpose to benefit from incentives for sustainable projects. In a more regulated and standardized environment, companies are required to ensure transparency and accountability by making their data available in an open format, facilitating global comparisons among competitors and increasing trust in the market.

Regulatory Harmonization: In a connected economy, it is necessary to develop clear and harmonized standards to maximize the potential of green finance, including securitization structures, and more importantly, to maintain investors' trust. The challenge with regulations is that each country focuses on its own environment, but as a worldwide market, governments should come together to better align regulations that address various scenarios to better guide investors and protect their interests, using this to meet the global needs for net-zero emissions by 2050. In Europe, the SFDR (Sustainable Finance Disclosure Regulation) was introduced in 2019, designed to allow investors to properly assess how sustainability risks are integrated into the decision process. In the US, the TCFD (Task Force on Climate-Related Financial Disclosures) was introduced in 2022 by the SEC, which is comparable to the SFDR in Europe, and in China, the GFS (Green Financial System Guidelines) was introduced in 2016. All the frameworks are comparable but lack harmonization among them, increasing the level of adaptations companies and investors must make to comply with each different framework.

Conclusion

Green finance is crucial for achieving global sustainability goals, and securitization can play a key role in achieving it. However, the most important thing is how to turn this tool into a more attractive way of investment, safer for investors, and how to benefit from this growing market that is foreseen as an economic ambition worldwide, creating a huge environment for business and opportunities. The potential is on the table; now it is up to governments and lawmakers to put in place a harmonized framework and create a solid foundation that allows investors to change their mindset about green finance while maintaining their trust.