The green aspects of the EU's €750bn fiscal stimulus package announced in July to address Covid-19 have been widely reported.
However, investors are beginning to consider how elements of the recovery plan's green agenda may influence the broader investment landscape, and what impact it may have on global asset valuations.
While some caveats apply, the EU's green recovery plan promises to go beyond previous efforts to reduce carbon footprints by moving toward a climate neutrality pledge that prioritises the broader societal benefits of a "greener" growth.
Dubbed "Next Generation EU", the deal is notable in that the bloc as a whole, rather than individual countries, will borrow money from the markets, with roughly half the recovery funds distributed as grants to the hardest-hit EU nations and low-interest loans making up the remainder.
Programmes to fight climate change are the centerpiece of the stimulus announced by European Union leaders in July, amounting to a roughly €550bn package.
The plan includes expenditures earmarked for promoting energy efficiency and developing renewable energy resources, emission-free vehicles, and sustainable transport, alongside other measures of environmental protection designed to help meet Europe's 2050 climate neutrality pledge.
Regulation will likewise drive the green agenda, with member states tasked with shaping their national recovery plans in ways that 'do no harm'.
While implementation plans are yet to be defined, small and medium enterprises (SMEs) that focus on digitisation appear to be natural recipients of the green stimulus.
By contrast, it is expected that heavy manufacturing and service industries will continue to rely on government support to modernize their carbon-intensive infrastructure while staying cost-competitive.
As such, there are five critical areas of the EU deal's green agenda that investors should be monitoring.
A clear framework
First, the methodology used to monitor spending on green initiatives will be vital to enhance the credibility of the EU's policy. In particular, market participants will see the governance structure put in place as a litmus test for the green projects that will be selected.
As such, the EU must clarify a climate risk management framework to effectively align stimulus funds with national and corporate projects.
A clear framework should help overcome market participants' uncertainty about the effectiveness of monitoring the progress achieved by green stimulus projects upon disbursement of funding.
Second, facing a decade-long decarbonisation effort, the EU will need to be mindful of safeguarding communities that rely on old-economy industries to avoid counterproductive socio-economic damage to local communities.
The EU final stimulus deal announced in July also allotted €17.5bn to the Just Transition programme, nearly half the initial proposal.
Third, these challenges highlight the potential for green stimulus to yield lower outcomes than hoped if not closely coordinated with local regions. It is important to recognise that carbon neutrality and emission reduction are not the same thing.
As many European companies had developed carbon neutrality ambitions well before the current EU stimulus plan, a concerted effort that includes public-private partnerships will be necessary to position the EU as a competitive global hub for sustainable green growth, as opposed to merely providing green financing.
Specifically, the private sector will have to ensure that existing company-specific carbon neutrality plans align with the EU's green-mapping - something that may prove challenging as product lifecycle decisions cannot change overnight, especially for heavy industries.