9 Dec 2020

Investing in a greener recovery and sustainable growth

James Rydge is a Policy Fellow at the Grantham Research Institute on Climate Change and the Environment, London School of Economics

The world has been transformed by the COVID-19 crisis. Beyond its tragic human costs and loss of life, the pandemic and the necessary lockdowns have resulted in severe economic impacts with immense job losses and a major threat of global depression.

Nordic-Baltic countries have proved quite resilient, compared to other EU countries, but are still likely to takea hit to GDP of around 3-4% in 2020 (revised down from around 8-10% in May 2020)1, and unemployment has increased. Governments have had to respond quickly and act decisively, shaping and implementing rescue plans.2 Despite the huge amount of rescue stimulus to date, and signs of resilience in Nordic-Baltic countries, a fast bounce-back cannot be guaranteed. The outlook is uncertain. Even with encouraging prospects for a vaccine it could take several years to recover from this crisis, with long-lasting effects, including for investment, employment, debt and fiscal positions.

At the same time, there can be no going back to the “old normal”. Decisions made now are crucial in shaping the recovery and future development across countries. The dangers involved in climate change and biodiversity loss are still bigger than the COVID crisis we are experiencing. COVID has highlighted that the old normal was deeply fragile and dangerous, including in the probability of pandemics.

A clear macroeconomic vision is required from governments to restore private sector confidence, create quality jobs and grow economies out of post-COVID recession and debt by supporting activity in the short term and expanding productive and sustainable capacity in the medium to long term. There will be a need to ensure fiscal and monetary policy work together to guide liquidity and savings towards the growth of productive sectors.

A focus will necessarily be in dealing with the immediate impacts of job losses, but also managing the structural challenges ahead that will see a rapid shift in skills and labour markets. In this context, countries need to choose fiscal measures carefully. They need to both stabilise the economy and public finances while at the same time ensuring a better and greener recovery and long-term productivity, competitiveness and sustainable growth.3 This is the most attractive route to recovery and debt sustainability; a return to the path of austerity followed post 2008, and the unwinding of existing environmental policies and regulations, would be particularly damaging – socially, economically and environmentally.

For the immediate recovery period, governments need a strategy for investments - supported by sound institutions and climate aligned growth policies - that are fast, labour intensive, have high multipliers, co-benefits for climate and resilience, and can be targeted at the places that need them most. Examples of these types of sustainable investments include:

  • Clean physical infrastructure investment in the form of renewable energy assets, storage (including hydrogen), grid modernisation and carbon capture and storage (CCS) technology. Other options include digital infrastructure, e.g. broadband, and clean transport investments in EV charging infrastructure and low-carbon rail and bus networks.
  • Building efficiency investment in the form of renovations and retrofits, including improved insulation, heating, and domestic energy storage systems.
  • Education and training investment to tackle both the immediate impacts of COVID on employment and wider structural shifts from decarbonisation.
  • Natural capital investment to improve ecosystem resilience, restoration of degraded land and habitats and changing forestry and agriculture practices. Will be key to securing resilient food and water systems at the community level, while securing strong enabling conditions and a sustainable supply of natural resources for agricultural businesses to thrive.
  • Clean R&D investment and partnerships to bring down the cost and encourage diffusion of innovative new technologies that can drive low-carbon, climate resilient growth.4

There are strong arguments, supported by mounting evidence, that fiscal multipliers from these types of sustainable investments can outperform alternative high-carbon options.5 To maximise these multipliers and other benefits, including for jobs, governments can restart sustainable investments that were already underway prior to the pandemic and design investment programmes and projects that can be implemented rapidly. The investments will be quicker where plans already exist, there is spare capacity and skills, and the right supporting policies and institutions are in place.

Recovery investments can also serve as the foundations for the transformational investments that are needed to strengthen growth and make it more sustainable in the long run. This highlights the importance of developing long term strategies that anticipate the major structural challenges countries will face over the coming decades (including decarbonisation, technology/digitisation, health, natural capital). Once recovery investments are aligned with long term transformation objectives, countries can then design a framework for a sustained increase in investment, beyond the recovery. Most discussions today recognise the importance of investment but claim it is too difficulty in debt laden world. As these investments will boost productivity, competitiveness and sustainability, and have attractive returns that are likely to exceed their financing costs, it would not be wise to use the issue of debt to delay action.

Supporting policies are crucial to maximise the benefits of these investments. Carbon prices (all Nordic-Baltic countries participate in the EU-ETS), including fossil fuel subsidy reforms, regulations and bailout conditions will be needed. Recent reports, including for the Coalition of Finance Ministers for Climate Action, have set out the policy options.6

Also crucial will be the right institutions, in particular to provide the right finance at the right time for the right investments. This is particularly relevant during a time when private financial and real sector confidence has taken a hit. Fortunately, the Nordic-Baltic region is well served by the Nordic Investment Bank, established 45 years ago, which has a mandate to focus on green investments and the productivity and competitiveness of the Nordic-Baltic region. It can support productive and sustainable investments for a better and greener recovery and a sustained increase in investment for long-term transformation. A key task will be mobilising private sector finance. Productivity and competitiveness is directly linked to the strength of private sector investment.7 Nordic-Baltic country leaders have recognised the importance of private sector investment, but the private financial sector cannot do all the heavy lifting on its own.8

Recent research has set out some specific ways green investment banks can help governments deliver a better and greener recovery and support the transition to net zero.9 They can help by:

  • Leveraging both domestic and international sources of private finance, providing liquidity for the recovery;
  • Rapidly increasing lending to cities and regions that need finance for recovery projects that are fast, labour intensive, have high multipliers, and other co-benefits. This is especially helpful where a crisis has constrained private finance;
  • Overcoming market failures by reducing, managing and sharing/allocating risk, including early stage private sector project risk and political/policy risk, through innovation in financial instruments and co-investing (often through public-private partnerships). Also overcoming other barriers to sustainable investments, e.g. they can act as a trusted convenor in the early stages of projects where there are many actors who need to be coordinated. Together these actions, and their presence, can bring down the cost of capital, helping to mobilise and crowd in private finance;10
  • Bringing forward and preparing sound projects at scale, from large complex sustainable infrastructure projects to aggregation models, e.g. district or neighbourhood scale energy efficiency retrofit programmes. Their ability to tackle the inherent complexities in delivering infrastructure investments is crucial and results in better decision-making;
  • Creating platforms for going to scale in new green technologies such as batteries and hydrogen – they can set new examples of scaling investment and others can duplicate their efforts.

A green recovery is a strong recovery and will establish the foundations for an orderly transition to net zero and the more competitive and sustainable growth path we must pursue from now on for our own well-being and that of generations to come. Nordic-Baltic countries are fortunate to have an established green bank that can help support a better and greener recovery from COVID and the long-term transformation to net zero. The Nordic Investment Bank can set a strong example for other countries and national development banks around the world.

1 OECD Economic Outlook, November 2020. SEB Nordic Outlook, Research Report, November 2020.

2 See the IMF Policy responses to COVID-19 Policy Tracker for details of Nordic and Baltic Country rescue packages.

3 Zenghelis, D. and Rydge, J. (2020) Rebuilding to Last: designing an inclusive, resilient and sustainable growth strategy after COVID-19, Aldersgate Group.

Estevão, M. (2020). Climate-Smart Fiscal Policy Can Foster a Lasting Economic Recovery. One Earth 3, September 18.

4 Hepburn, C., O’Callaghan, B., Stern, N., Stiglitz, J., and D., Zenghelis (2020). Will COVID-19 fiscal recovery packages accelerate or retard progress on climate change?, Smith School Working Paper 20-02.

5 Coalition of Finance Ministers for Climate Action. (2020) Better Recovery, Better World: Resetting Climate Action in the Aftermath of the COVID-19 Pandemic.

6 Ibid.

7 Besley, T., Davies, R., Hussain, A., and N. Stern. (2020) Could a national investment bank support recovery from the COVID-19 crisis? Economics Observatory.

8 See Climate Investment Coalition (2020) The Nordic Prime Ministers back investment mobilisation from institutional investors in green recovery and climate action. October.

9 Zenghelis, D. and Rydge, J. (2020) Rebuilding to Last: designing an inclusive, resilient and sustainable growth strategy after COVID-19, Aldersgate Group.
Stern, N. et al. (2020). Strategy, investment and policy for a strong and sustainable recovery: An action plan. Centre for Economic Performance and Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science. A CEP COVID-19 analysis. Paper No. 005.
Besley, T., Davies, R., Hussain, A., and N. Stern. (2020) Could a national investment bank support recovery from the COVID-19 crisis? Economics Observatory.

10 The benefits from a green investment bank’s activities and presence will be maximised if supported by clear, credible and coherent government policies that align expectations that green is the only viable business opportunity for recovery and the future.