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Financing the climate transition

The EU is committed to achieving a low-carbon, resource-efficient, and sustainable economy. Together with its member states, the EU is the biggest provider of climate finance in the world.

Climate mainstreaming in EU expenditure

The EU strongly supports the transition to a low-carbon, more resource-efficient and sustainable economy. This is part of the EU's efforts to achieve its climate and energy goals in line with the Paris Agreement and the 2030 UN Sustainable Development Goals (SDGs).

To deliver on climate, environmental and social sustainability goals, major private and public investments are needed.

While the COVID-19 pandemic led to severe health, financial and economic challenges, the recovery from the pandemic has offered the opportunity to rebuild better and more sustainably by strengthening public policies favourable to climate action, such as:

  • carbon pricing
  • discouraging environmentally harmful and economically inefficient subsidies
  • shifting towards sustainable investments

Under the EU's recovery plan Next Generation EU (NGEU), 37% of the €672.5 billion Recovery and Resilience Facility is being spent on climate-related objectives. An overall climate target of 30% applies to the total amount of expenditure from the long-term EU budget for 2021-2027.

EU sustainable finance policy

Leveraging private investment

Succeeding in the green transition requires channeling private investment, as a complement to public finance.

Since the Commission published its 10-point action plan for sustainable development in March 2018, the EU has put in place the foundations of its sustainable finance policy.

In October 2019, the EU and its member states joined third countries in launching a new international platform on sustainable finance. The aim of this platform is to scale up the mobilisation of private capital towards environmentally sustainable investments.

With its European Green Deal, presented in December 2019, the Commission announced it would put forward a renewed sustainable finance strategy. In July 2021, the Commission proposed the new strategy to cope with climate change while increasing investment in a more sustainable economy.

Implementation of the sustainable finance action plan

In 2019 and 2020, the Council adopted legislation to direct private capital to more sustainable investments on the capital market by:

  • improving transparency obligations for financial intermediaries to incorporate environmental, social and governance factors (ESG) into their risk assessment processes
  • creating a new category of benchmarks for sustainable investments to help investors compare the carbon footprint of their investments 
  • establishing a unified EU classification system (‘taxonomy’) of sustainable economic activities 

In June 2019, the Commission also published non-binding guidelines to help companies disclose relevant non-financial information in a more consistent and more comparable manner.

EU taxonomy regulation

In April 2020, the Council adopted a regulation setting out an EU-wide classification system, or ‘taxonomy’, which will provide businesses and investors with a common language to identify those economic activities which are considered environmentally sustainable.

The European Commission has since adopted two delegated acts under the EU taxonomy regulation. Inter alia, it established technical screening criteria for:

  • determining whether an economic activity contributes substantially to climate change mitigation or climate change adaptation
  • ‘do no significant harm’ ensuring that a given economic activity has no significant negative environmental impact

European green bonds regulation

In October 2023, the Council adopted a regulation creating a European green bond standard.

The regulation lays down uniform requirements for bond issuers that wish to use the designation ‘European green bond’ or ‘EuGB’ for bonds they claim are environmentally sustainable.

It establishes a system for the registration and supervision of entities acting as external reviewers for European green bonds and to regulate the supervision of European green bond issuers.

All proceeds from European green bonds must be invested in economic activities that are aligned with the EU taxonomy for sustainable activities. For those sectors not yet covered by the EU taxonomy and for certain very specific activities, there will be a flexibility margin of 15%.

The EU's contribution to international climate finance

The EU and its member states are the largest provider of public climate finance in the world.

In 2022, the European Union and its 27 member states contributed €28.5 billion in climate finance from public sources and mobilised an additional amount of €11.9 billion of private finance to support developing countries to reduce their greenhouse gas emissions and adapt to the impacts of climate change. Over 54% of the public funding was dedicated to either climate adaptation or cross-cutting action (involving both climate change mitigation and adaptation initiatives) in developing countries. Close to half of the total funding was committed in the form of grants.

The climate finance contribution is an important part of the 2015 Paris Agreement. The agreement set a goal of $100 billion per year for developed countries' contribution to international climate finance until 2025. Before 2025, the parties to the UN framework convention on climate change will set a new collective goal.

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Last review: 27 January 2024