Europe’s two major challenges, energy independence and climate change, are closely intertwined. But they share one solution – a swift transition to a greener, more sustainable economy.
The spike in energy prices caused by the Ukraine war put enormous pressure on EU firms, increasing their costs and hurting their competitiveness internationally. While energy prices have since come down, the crisis brought into focus Europe’s dependence on fossil fuels.
Firms, however, are also dealing with a more profound crisis: climate change. The severe weather caused by climate change threatens individual businesses, particularly those that are unprepared for the consequences of higher temperatures and extreme weather events. In Europe alone, extreme weather caused over €145 billion in economic losses from 2012 to 2022, according to the Intergovernmental Panel on Climate Change. Meanwhile, businesses are struggling to adapt to the decarbonisation of the European economy demanded by Europe’s ambitious goal of cutting net emissions 55% by 2030, compared to 1990 levels.
The economic shift required by the green transition will present enormous opportunities for some firms, but it also threatens others that are ill-equipped for the transition or for climate change more generally.
High costs push firms to save energy
The Ukraine war sparked questions about Europe’s ability to respond to a drop in energy supplies from Russia and to diversify supplies. The rush to secure energy resources caused energy prices to surge in all EU countries during 2022.
Nevertheless, the European Union responded quickly to the emergency, encouraging energy savings, diversifying energy supplies, and accelerating the roll-out of renewable energy. By the end of 2022, those efforts had brought prices down from their highs.
EU firms, however, felt the shock. A large majority of EU firms said high energy costs were dampening their ability to invest. Around 60% of businesses considered energy costs to be a major impediment, compared with 31% in the United States.
Firms are worried about climate risks
The progressive increase in global average temperatures gives rise to extreme weather events that can potentially threaten businesses. According to a recent report published by the United Nations Office for Disaster Risk Reduction, there has been a “staggering rise” in the number of such events in the past 20 years, and most of those events can be attributed to climate change.
Companies were asked whether extreme climate events, also called physical risks, were affecting their business activities. They were also asked whether they had invested in various forms of adaptation to better cope with these risks.
- Almost 60% of European firms report facing physical risks, while only 33% have taken at least one action to protect their business from those risks.
- A slightly higher share of US firms (59%) are worried about the physical risks of climate change than EU firms (57%).
- Firms in Southern Europe (SE) feel the most exposed, but they are doing less to address the issue than firms in Western and Northern Europe (WNE) or firms in Central and Eastern Europe (CEE).
Views about the energy transition are mixed
The European Commission presented the European Green Deal with the aim of limiting the increase in global average temperatures to well below 2°C compared to pre-industrial levels, as set forth in the 2015 Paris Agreement. The green deal, which was introduced in March 2020, sets a target of reaching net-zero emissions by 2050.
This ambitious target will require strong involvement from firms. The EIB Investment Survey for the first time provides detailed insight on firms’ mitigation strategies.
- 88% of EU firms have undertaken some sort of action to mitigate the impact of climate change.
Not only are firms called upon to play a pivotal role in ensuring the transition, they also have to adapt to a rapidly changing business environment. European firms have mixed views about the impact the climate transition will have on their business.
- While 29% of EU firms are optimistic about the green transition, around 32% are pessimistic.
Climate investment is on the rise
Uncertainty is known to weigh on investment. Russia’s invasion of Ukraine, spiralling prices and economic upheaval are all fuelling uncertainty.
Despite the challenges, European firms are showing resilience.
- Over the last year, the share of European firms investing in climate measures has increased by 10 percentage points, reaching 53% on average. The increase has been particularly pronounced in regions such as Central and Eastern Europe (+15 percentage points) and in small and medium enterprises (+11 percentage points).
- Energy-intensive manufacturers have a stronger appetite for climate investment than non-energy intensive firms. 48% of them are currently investing, while 57% are planning to invest.
Adapting to the climate reality
EU firms realise that climate change is no longer a distant reality. Some 57% of EU firms have lost money or had supplies disrupted because of extreme weather. Despite these threats, only one-third of EU firms have invested in measures to adapt to climate change.
Most firms are focusing more strongly on climate mitigation, such as waste management, recycling and energy efficiency. Some 88% of European firms have implemented at least one mitigation measure compared to the low 33% of firms that have invested in adaptation measures. Besides concerns about energy costs, firms are investing because they worry about climate change and are under pressure to set carbon targets.
As the United States recommits to its own green transition and dedicates significant resources, Europe needs to double down on its target of net-zero emissions by 2050. Enhancing investment for the net-zero transition calls for coordinated policies, reducing barriers to investment, pooling resources, and preserving and strengthening the cohesion of the EU single market.