Achieving climate neutrality in Europe by 2050 requires massive investments in public sector projects such as energy-efficient building renovations, renewable energy installations, and sustainable infrastructure. However, commercial banks are rarely the primary financiers for these projects, despite their potential to unlock capital. Understanding why banks are hesitant, and what can be done to overcome these barriers, is crucial to enabling public bodies to implement climate-positive initiatives at scale.
Why public projects struggle to attract commercial bank financing
Commercial banks evaluate potential investments based on three core criteria: risk level, expected returns, and predictability of cash flows. Public-sector energy-efficiency and decarbonisation projects often fail to meet one or more of these criteria for several reasons.
- Complexity of energy performance contracts (EPCs): EPCs are a common approach for financing energy efficiency projects, ESCOs are used to guarantee energy savings in exchange for payments over time. While this reduces energy costs for municipalities, EPCs introduce both real and perceived risks for banks. Unlike standard loans, the repayment depends on project performance as cash flows depend on energy savings, this can vary based on occupant behaviour, technical performance, or weather conditions. Compared with conventional loans, this introduces higher uncertainty and makes EPCs more complex to evaluate.
- Uncertain regulatory and policy frameworks: Energy efficiency projects are subject to complex regulations that vary between countries and municipalities. Regulations regarding procurement, state-aid rules, EPC eligibility, and monitoring & verification standards may change during a project’s lifetime.
- Small project sizes and fragmented pipelines: Many municipalities plan small-scale individual projects, a single building renovation or heating system upgrade. These projects are often below the minimum ticket size that makes due-diligence costs worthwhile for banks. Additionally, project pipelines are frequently fragmented across multiple departments or municipalities. This further increases transaction costs and prevents banks from financing projects at scale.
- Long payback periods and low profitability: Energy efficiency projects often have long payback periods and moderate financial returns. While the social and environmental benefits are significant, commercial banks focus on financial returns, making these projects less appealing without additional incentives.
- Lack of standardized contracts and documentation: Each project may have different EPC structures, guarantees, or technical designs. Banks prefer standardized frameworks that reduce legal and operational complexity. The lack of standardization increases transaction costs and discourages engagement.
Overcoming barriers to bank participation
Although banks are often hesitant to invest, several strategies can be applied to make public sector projects more bankable and attractive to commercial finance:
- De-risking through guarantees and blended finance: Combining public guarantees, EU funds, or development bank support with private loans can reduce risk for commercial banks. Guarantees can cover performance risk, delayed payments, or technical underperformance, making banks more comfortable to finance EPC projects. Addresses: performance risk, payment risk, technical underperformance
- Bundling smaller projects into portfolios: This addresses issues of limited scale and fragmentation as aggregating multiple small-scale municipal projects into a single investment portfolio creates sufficient scale to justify bank involvement. This approach spreads risk across multiple sites, standardizes contracts, and improves transaction efficiency.
- Standardizing contracts and reporting: This addresses issues of contract risk and legal complexity as developing template EPC contracts, performance guarantees, and reporting frameworks reduces legal and operational uncertainties. Banks are often more willing to finance projects if they can rely on standardized documentation.
- Capacity building and technical assistance: This addresses issues of poor project preparation and information asymmetry as municipalities often lack the required expertise to effectively structure bankable projects. Providing training and advisory support in project preparation, financial modelling, and risk assessment. This indirectly increases investor confidence by improving project quality.
- Linking financial returns to verified energy savings: This addresses concerns about predictability, as introducing measurement and verification (M&V) frameworks ensures that energy savings are transparent and predictable. Banks are more likely to finance projects when repayments are tied to clearly monitored performance outcomes.
The role of commercial banks in a future climate-neutral Europe
If these barriers are addressed, commercial banks could play a transformative role in:
- Providing long-term finance: Banks can offer loans or structured financing for projects with long horizons, such as municipal building renovations or renewable energy installations.
- Encouraging innovation: Banks can facilitate adoption of new technologies and EPC structures by providing capital and technical guidance.
- Scaling climate investments: Through syndication, green bonds, and portfolio financing, banks can enable larger-scale implementation across multiple municipalities.
- Enhancing sustainability reporting: Banks can help municipalities comply with ESG and green finance standards, creating transparency and confidence for investors.
However, banks will only fully participate if risk is mitigated, project pipelines are aggregated, and contracts are standardized. Without these improvements, many public projects will continue to rely primarily on grants, subsidies, or development bank support.
Examples of overcoming barriers to bank financing
While commercial banks are often hesitant to finance public sector energy efficiency projects, several initiatives in Europe demonstrate practical ways to make these projects more bankable:
- Bundling small projects in Italy. In the Marche region, multiple small-scale building renovation projects in the health sector were combined into a single investment portfolio. By aggregating projects and pairing them with EU-funded grants and interest-free loans from the European Regional Development Fund (ERDF), municipalities created a package large enough to attract commercial bank financing. This approach reduced transaction costs and spread financial risk, making EPCs more appealing to banks.
- Standardized EPC frameworks via the European Commission. The Joint Research Centre (JRC) has developed guidelines for standardized EPC contracts and measurement & verification (M&V) protocols. These frameworks simplify project evaluation for banks by ensuring transparency, consistent reporting, and predictable cash flows. Standardization reduces complexity and due diligence costs, making banks more willing to participate in public sector energy efficiency projects.
Bridging the gap
The LEVERAGE Accelerator will overcome these barriers by connecting public bodies with private finance, including commercial banks.
The LEVERAGE Accelerator directly addresses the obstacles outlined above by:
- supporting municipalities in bundling projects into finance-ready pipelines
- offering capacity-building on financial modelling and project preparation
- facilitating matchmaking between public bodies, ESCOs, and private finance partners
- integrating risk-mitigation mechanisms such as guarantees or blended-finance tools
Through these support measures, LEVERAGE helps banks transition from cautious observers to active partners in the public-sector energy transition.
Conclusion
Commercial banks are not currently financing most public sector energy efficiency and decarbonization projects due to complexity, fragmented pipelines, small scale, and uncertain returns. However, by implementing risk-mitigation tools, standardizing EPC contracts, and bundling projects, banks could play a central role in achieving climate neutrality by 2050. Their expertise, capital, and financial structuring capabilities can transform public ambitions into real-world climate action, enabling municipalities to implement large-scale, sustainable, and measurable decarbonization projects.