Stockholm (NordSIP) – According to the European Investment Bank (EIB)’s latest Investment Report 2022-2023, an annual publication based on the EIB Investment Survey (EIBIS) of approximately 12 500 businesses across the continent, Europe must increase productive investment if it is to keep pace with global competition and meet net-zero goals.
“Europe’s future depends on our ability to transform and embrace the digital and green transitions. This calls for bold investment in both the public and the private sectors. However, uncertainty, driven by unpredictable policy and market conditions, is proving to be a barrier to investment decisions,” said EIB Chief Economist Debora Revoltella ahead of the report’s release, at the inaugural EIB Forum in Luxembourg. “The opportunity of the green transition cannot be missed. Europe can leverage on its innovation lead in many green technologies and should further exploit the potential of the EU single market, reducing administrative hurdles for investment and addressing gaps in skills.”
The report shows that European green investments rebounded in 2022 and that they were largely driven by how energy intensive the sector in which businesses operate is, the size of the business and commitments to climate targets. The report also reviews ESG debt markets, their volumes, terms and discusses evidence that green premia are higher in sovereign than in corporate markets.
Investing in Climate Action
According to the survey, the share of firms engaging in climate action rebounded after stalling in the previous year, with 51% of them already invested in climate action, of which 8% for the first time in 2022. 51% of European corporates are also planning to invest in the future, up from 41% in 2020.
Green investment by companies advanced in 2022, following a dip during the pandemic. However, the outlook for corporate investment to tackle climate change is mixed, dampened by administrative barriers and uncertainty. According to estimates by EIB staff, there was a multitude of explanations for the intentions of firms to invest or plan to invest in climate and energy efficiency. However, their sectoral energy intensity, climate targets and the size of firms played perhaps the most important role.
While Europe is trailing behind the United States in digital innovation, green technologies are a field in which the European Union leads in patents particularly in transport, smart grids and wind energy. The report also notes that the EU also competes with the USA and China on research focused on energy storage and solar energy. However, competition from the other side of the pond threatens the EU’s competitiveness.
“Global competition around green technologies is intensifying, particularly with the US Inflation Reduction Act and China’s growing focus in this area. While Europe has been a leader in green innovation so far, it must continue to build on that position by seizing opportunities created by its single market. Clear policy frameworks, a level playing field within Europe, investment in skills, and conscious efforts to maximise the complementarity of public and private investment activities will all play a role,” the report argued.
Addressing skills shortages might be an important course of action according to the EIB. 69% of municipalities polled by the EIB stated that they lack the environmental and climate assessment skills needed to advance green investments
The Green Premium
The report also reviewed ESG financial markets and found them to be gaining momentum. “To reduce greenhouse gas emissions 55% by 2030, compared to 1990 levels, Europe will need to invest an estimated €390 billion more per year in the energy system than during the previous decade,” the report argues, noting the importance of debt markets in funding this effort.
According to the EIB’s analysis, the green premium for EU government debt averages 10 basis points (bps), while it stands at 6bps for corporates. However, the situation is more complex than the averages might suggest. The report also cites 2021 research by Natixis according to which, the existence of a green premium is only evident for maturities of 5 to 10 years. Moreover, higher-yielding, lower-rated bonds tend to have significantly higher premiums due to the lack of high-yielding securities within green bond indices, like the Bloomberg MSCI Green Bond Index.