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    By Fotios Kalantzis

    The European Union’s plan to “build back better” after COVID-19 could be the impetus businesses need to invest in climate measures and prepare for the transition to a net-zero carbon future. Before firms embark on those massive investments, however, they need clear government regulations to guide their decisions. 

    The European Union’s new taxonomy, which provides a list of environmentally sustainable economic activities, should provide some clarity, as should proposed climate reporting requirements for large companies. As the realities of climate change sink in, firms are gradually beginning to include climate risks in their investment strategies, operations and asset valuations.

    Our new climate report, European firms and climate change 2020/2021: Evidence from the EIB Investment Survey, looks at how prepared EU businesses are to meet the challenges of climate change and the energy transition. The report’s findings are based on the EIB Investment Survey (EIBIS 2020), a survey of 13 500 firms, primarily in the European Union. The new climate report provides a brief overview of firms’ perceptions of climate risks, investment to address those risks and the main factors influencing their decisions. 

    Firms are feeling the heat

    Massive flooding in Europe in early July killed more than 200 people and caused an estimated €2.5 billion in property damage. These kinds of cataclysmic weather events have European businesses on edge. Nearly 60% of European firms said in the EIBIS 2020 that they felt exposed to the physical risks of climate change compared with 50% in the United States. 

    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. Southern European firms’ fears of physical risks could be linked to recent heatwaves and droughts, which limit food production and could potentially disrupt tourism in the area. 

    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 for climate change, reassuring firms and the public that their country’s infrastructure is more resilient. 

    Underestimating 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 European Union have not yet internalised how that shift could affect their businesses and operating environment.

    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.

    Climate investments gain momentum

    EU firms’ investment in climate change measures is rising steadily. More EU firms (45%) are actively investing to address climate change than US firms  (32%), according to the EIBIS 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. The difference between countries is even more pronounced. Firms from northern countries, like Finland and the Netherlands, are leading climate investments, while firms in southern countries, like Cyprus and Greece, are far less active.

    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.

    Firms push energy efficiency

    When they do spend on climate change, firms often invest in energy efficiency. Despite the pandemic, the share of EU firms investing in energy efficiency increased substantially to 47% in 2020, from 38% the year before. The figure also rose significantly in the United States, to 50% of firms. Once again, regional differences in Europe are pronounced. Firms in Western and Northern Europe invest the most in energy efficiency, followed by Southern, Central and Eastern Europe.

    Firms that implement better green management practices, including, those that have a dedicated climate staff, set clear climate targets and conduct energy audits, invest in energy efficiency measures almost twice as much as firms without these priorities. In short, the more informed firms are about their energy needs and climate impact, the more willing they are to invest in energy efficiency.

    Incentivising climate investment

    Barriers to climate investments are hindering Europe’s progress in meeting its 2030 climate change goals, such as reducing carbon emissions by 55%. A majority of firms say that uncertainty over regulations and taxation, along with high upfront investment costs, limit their ability to invest in climate measures. EU firms consistently report higher barriers to climate investment than their US counterparts.

    Europe is also struggling to persuade firms  to embed climate change risks into their governance, strategy and risk management. Many firms simply don’t think the energy transition poses a serious risk. That’s a dangerous bet, considering that many countries are weighing relatively strong climate policies. Europe needs to create a virtuous circle where strong climate change policies lead firms to invest, helping to green Europe’s economy.

    Ultimately, businesses will need to understand that they face a stark choice: Invest in the green future or risk being left behind.

    Fotios Kalantzis is an EIB senior economist specialising in climate issues. Sofia Dominguez contributed research to this article.