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EIB study: EU climate investments gain momentum while uncertainty about regulation and taxation remains a big constraint

The EU’s global leadership in the fight against climate change combined with its plan to build back better after the pandemic could be the impetus businesses need to invest in climate measures and prepare for the transition to a net-zero future. Although EU firms show commitment, enhancing their awareness of climate change-related risks will be key to greater climate investment.

These are the key findings of a new European Investment Bank (EIB) report, that provides an overview of EU firms’ perceptions of climate risks, their investment to address those risks and the main factors influencing their decisions building on the EIB Investment Survey, an EU-wide survey that includes interviews with over 13,500 firms.

Firms are more aware of the physical risks of climate change

Due to the more and more common extreme weather conditions, nearly 60 per cent of European firms said that they felt exposed to the physical risks of climate change. Within Europe, Southern European firms say they are more vulnerable to the effects of climate change, followed by firms in Central and Eastern Europe, and, lastly, Western and Northern Europe.

The survey also found that firms in less-wealthy countries were more worried about the physical risks of climate change. Higher-income countries tend to have more means to prepare, reassuring firms and the public that their country’s infrastructure is more resilient.

But they tend to underestimate transition risks

Firms, however, are less concerned about the risks associated with a low carbon future, primarily because the impact of the transition seems to be less clear. While the energy transition will require significant changes in the way we do business, the majority of firms in the EU have not yet internalised how that shift could affect their businesses and operating environment.

“As the realities of climate change become more apparent, firms have to start accounting for climate risks,” said EIB Chief Economist Debora Revoltella revealing that nearly 60 per cent of EU firms perceive physical risks, while transition risk is less well understood.

Somewhat surprisingly, firms that are thinking about the energy transition tend to see it more positively, equating the transition with increased demand for their products or a boon to their reputation. Nonetheless, this positive outlook darkens when firms reflect on the transition’s impact on their supply chain. Roughly one-quarter of EU firms expect the transition to cause disruptions in their supply chain.

“The majority of firms are unaware of the challenges ahead and how to adapt to regulatory changes that will affect their supply chains, products, or reputation,” underlined Ms Revoltella adding that enhancing firms’ awareness of these risks will be as important as reducing uncertainty about regulatory changes.

Climate investments gain momentum

At the same time, the report found that EU firms’ investment in climate change measures is rising steadily. Nearly half of firms in the European Union have invested in energy efficiency, up from 37 per cent in 2019 to 47 per cent in 2020. Firms in Western and Northern Europe are the most active investors, while firms in Southern Europe and Central and Eastern Europe are less involved.

Firms’ willingness to invest in climate change measures is closely linked to their green capacities. Firms that understand the danger climate change poses to their business are more likely to invest in climate change measures. Also, firms that see the transition as an opportunity are far more likely to invest in climate measures. Firms that view the transition negatively are not investing as heavily – even though they say they are vulnerable to climate change’s impact.

When it comes to specific investments in climate change, the push towards energy efficiency continues with nearly half of firms in the EU investing in energy efficiency. However, Europe’s energy savings potential remains largely untapped given the energy and non-energy benefits that these entail.

Uncertainty about regulation and taxation cited as the biggest threat

The most frequently cited constraints to climate-related investments are uncertainty about regulation and taxation (43 per cent), followed by investment costs (41 per cent). Uncertainty about regulation can delay or cancel investment decisions, as firms try to have the full picture of expected cost benefits before an investment.

“Regulatory requirements and transparency, as well as setting the right incentives for businesses will be crucial,” said EIB Vice-President Ricardo Mourinho Félix adding that firms need to plan today to gain a competitive edge or they risk losing ground to more forward-thinking competitors.

“As the EU climate bank, we finance climate projects around the world. We can assure you, becoming green pays off — for the environment but also economically,” he underlined.

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