New report from EIB on what drives firms’ investment in climate change

The European Investment Bank has recently published its most recent EIB investment survey.

From extreme heatwaves and wildfires to in North America to the deadly flooding in Western Europe and Asia in 2021, the dramatic rise in catastrophic weather events has repercussions for firms. At the same time, cutting emissions sufficiently to limit global warming will require an overhaul of business models.

An increasing share of EU firms realise they need to invest to prepare themselves for climate change and the energy transition, but the COVID-19 crisis weakened their ability to do so.

Some key findings from the EIB Investment Survey 2021-2022:

• 58% of European firms say their business is affected by the physical risks of climate change.
• The share of European firms investing in climate measures was relatively flat in 2021, likely a result of the pandemic.
• About 46% of EU firms have plans to invest in climate measures in the future, a significant increase from 2020.

From the report

The report ends with a section on paving the way to a net-zero carbon future. Here it is:

Paving the way to a net-zero carbon future

Firms are waking up to the reality of climate change and the green transition. EIBIS 2021 suggests that a high share of European (58%) and US firms (63%) are exposed to physical climate risks. Across Europe, Southern European firms are exposed to higher physical risks, with wildfires and floods plaguing Mediterranean countries every year. At the same time, a shrinking number of firms believe that the transition to a low-carbon economy will not affect their business operations. Of companies that expect the transition to affect their business, European firms tend to hold a neutral view whereas US firms consider this transition to be a risk rather than an opportunity. Across Europe, firms in Western and Northern countries are more optimistic about the transition’s impact on their activities.

In EIBIS 2021, rising energy prices emerged as a major factor influencing European firms’ investment activities. More than 60% of firms say energy costs are impeding their investment plans. That share rises to 70% for firms located in Southern and Central and Eastern Europe. Energy prices are an issue for companies across sectors of the European economy, with manufacturing firms recording the highest concerns, followed closely by services and the remaining sectors. EIBIS 2021 shows that the majority of firms perceiving transition risks are also concerned about higher energy costs, which suggests that firms expect stricter climate policies to push up energy prices in the future.

To offset the increase in energy prices and retain their competitiveness, EU firms need to improve their energy efficiency, by using less energy per unit of production. Nevertheless, EIBIS 2021 data suggest that only 37% of EU firms are investing in energy-efficiency measures, a ten percentage point decline compared to the previous survey wave. In addition, EU firms spend a very small share of their total investment budget on energy-efficiency projects, despite growing concerns about energy costs. The significant drop in the share of firms investing in energy efficiency in 2021 is likely a result of the pandemic and the toll it took on firms’ investment plans.

The good news for Europe is that the future looks brighter for climate investments. Around half of European firms report that they have plans to invest in climate measures, significantly more than the 28% of US firms. The rising trend is observed across all EU regions. Firms in Western and Northern Europe are leading in climate investment and gaining momentum. The majority of firms in Southern Europe are catching up. By contrast, firms in Central and Eastern Europe are lagging behind the rest of the European Union and appear to be losing momentum.

Availability of finance and uncertainty are hindering firms’ climate investments. Both investment barriers, according to EIBIS 2021, appear to be highly relevant to countries vulnerable to the debt crisis, including Cyprus, Greece and Ireland and to firms operating in Central and Eastern Europe. In contrast, these investment barriers are reported to a much lesser extent by firms in Western and Northern Europe. To bridge the gap in climate investment, policymakers should support firms in regions that are lagging behind, encouraging them to play their part in energy conservation and enabling them to adapt to a changing economy. For example, efforts to provide clear climate policies should continue, along with a supportive regulatory framework and improved access to climate finance and information.

Policymakers could also provide more impetus for firms to consider transition and physical risks when making investment decisions. EIBIS 2021 suggests that neglecting to take into account physical and transition risks reduces a firm’s willingness to invest in climate measures, which ultimately threatens firms’ long-term viability and hinders progress on the European Union’s climate objectives. Climate change will continue to have a significant impact on business activities, which will require firms in various industries and regions to adapt appropriately. Firms that do not adapt risk losing ground to more forward-looking competitors. If perceptions of climate change are not aligned across sectors, countries and various participants, the effectiveness of EU climate policies is in danger and climate action could stall (Kalantzis et al., 2021). To avoid this, it is important to promote good practices, effective communication on climate and support programmes and to help firms set climate targets.

Europe’s ambitious transition to a carbon-neutral economy leaves no room for complacency. The European Union’s ample support for the economic recovery presents an opportunity to act and to contribute to regional and international climate objectives. Delayed actions will result in higher long- term costs and emissions and overall lower economic growth, or even contraction. Therefore, providing a clear path to decarbonisation would allow firms to roll out strategies and investment plans that are in line with Paris Agreement commitments. Regulations that push for higher energy performance standards and phase out subsidies for fossil fuels could indirectly influence investing and individual behaviour, as well as steer production and consumption towards a sustainable path. Finally, yet importantly, improved access to finance and favourable conditions for climate investments would help firms and especially small businesses to transition to a greener economy, without affecting their competitiveness.

The report is available here.

External link