Green Financing in Serbia: An Overview of the Green Agenda

Green Financing aims to support projects for cleaner energy and engage the private sector

Green Financing in Serbia: Global warming, climate change, and other environmental concerns are pressing issues that affect the entire world population. It is increasingly evident that achieving a sustainable future demands significant investments from the private sector, which is primarily driven by profit motives. However, the state aims to regulate and guide these investments, although it cannot exert complete control over them.

Our goal is to define green projects and green financing and provide an overview of green financing instruments.

Generally, “green projects” refer to initiatives that involve the creation of products or the development of technologies aimed at reducing greenhouse gas emissions or promoting the use of clean energy. Green financing refers to investments directed towards sustainable development projects, ecological products, and policies that foster the development of a more sustainable economy.

One form of green financing is a green loan, which entails financial support from banks to companies and corporations for the research and development of environmentally friendly products and technologies. Green traded stocks and bonds primarily support projects in the green industry, including green indices and green exchange-traded funds.

While there is an existing EU standard for green bonds, significant changes are expected to improve the regulation of the entire green bond market. These changes aim to enhance transparency, establish European labels for green bonds, and mitigate eco-manipulation.

The willingness of banks to engage in sustainable investment practices is largely influenced by political agreements on environmental issues and climate change. Central banks have begun requiring banks to obtain green certificates, green credit scores, and demonstrate environmental innovation and social inclusion. Banks that comply with these requirements may enjoy tax breaks and other incentives from central banks. Moreover, intense competition and a desire to improve reputation put pressure on the banking sector, leading to the growth of green finance.

Financing green projects carries specific risks compared to traditional projects, which are typically more established and predictable. However, traditional projects now face increased risks due to factors such as the rising cost of carbon within the European Carbon Trading System (ETS) and other levies imposed on greenhouse gas emitters. Banks’ assessment of risks and the implementation of risk control measures influence their decisions regarding green credit and investment in green projects.

Studying risks is particularly crucial in the context of environmental disasters, as understanding the interplay between hazards, vulnerability, and exposure has led to the development of comprehensive and sophisticated risk models and assessment methods. When engaging in trading ESG (Environmental, Social, and Governance) securities, a company’s non-financial reporting becomes essential.

Consequently, green financing aims to support projects that offer clear profitability and lower risks compared to “dirty” projects burdened by factors like ETS or CBAM (Carbon Border Adjustment Mechanism) and other environmental taxes, as well as strict regulations and prohibitions.

The crucial factors in attracting green investments in Serbia are clear regulatory framework and strategies, and their effective implementation, along with the involvement of the private sector and the expansion of the market. The European Investment Bank (EIB) has played a significant role in Serbia’s progress towards EU accession, particularly in the areas of energy and environmental protection. In 2022, the EIB’s investments in these sectors reached EUR 36.5 billion, accounting for 58% of its annual lending volume.

However, when it comes to the involvement of the private sector in the green agenda, companies in the Western Balkans still lag behind their counterparts in similar countries. According to a survey conducted by EIB, the European Bank for Reconstruction and Development (EBRD), and the World Bank, only 21% of companies in the region invest in energy efficiency, despite 10% of them reporting losses due to extreme weather conditions. Furthermore, 59% of companies do not consider such investments a priority. The report highlights the need for companies to revise their strategic goals regarding environmental sustainability, increase management involvement, and improve access to finance.

The “EU for Green Agenda in Serbia” project, supported by the EIB, the United Nations Development Programme (UNDP), and other partners, is a step in the right direction for promoting green innovations. Additionally, the EBRD, as one of the largest investors in the Western Balkans, invests approximately EUR 700 million in Serbia each year. From 2023, all EBRD projects needed to be aligned with the Paris Agreement.

It is evident that creating an enabling regulatory environment, formulating clear strategies, engaging the private sector, and expanding the market are essential for attracting green investments in Serbia. The support and involvement of international financial institutions such as the EIB and the EBRD play a crucial role in promoting sustainable and climate-friendly projects in the country.

Although the energy crisis, inflation, rising interest rates, and general uncertainty may affect the expectations for green investments this year, the development of regulations, increased ESG expertise in the industry, and improved data availability should enhance companies’ ability to manage ESG risks. This is especially relevant with the development of mechanisms for reporting environmental parameters through the Corporate Social Responsibility (CSR).

Anticipating increased complexity in controlling and verifying green projects, as well as the continued evolution of non-financial reporting criteria, we hold hope that Serbia will reap the benefits of such projects in the future. We also hope that the state authorities, in collaboration with the National Bank of Serbia, will acknowledge the necessity for more comprehensive regulation in these domains.