In January, the European Union unveiled its counteroffer to the US Inflation Reduction Act, which offers vast subsidies for green technologies based in the US. With the EU Green Deal Industrial Plan (GDIP), the global landscape for sustainable financing has begun to shift, raising questions around the willingness and ability of governments to steer finance strategically towards decarbonisation.
While financing cleantech through public means has long been China’s domain, other jurisdictions such as India, Japan, Canada and Korea are also joining the race.
In the context of a subsidy competition for strategic industries, how can Europe and European businesses maintain their edge? Their success will in part hinge on their preparedness to place climate transition at the heart of business models.
To do so, Europe should get transition planning right, both in terms of the policy framework and at the level of individual companies.
Some big corporate players have already begun to mainstream transition thinking into their company strategy, planning, risk management and access to finance. However, 99% of European businesses are comprised of SMEs, and they are not yet equally involved in the transition to a decarbonized economy.
For the European industries to remain competitive in the clean tech markets, the whole economy should be engaged in the transition process.
Can the imperative to transition be further mainstreamed into business practices?
Available money and subsidies alone will not be enough. The GDIP recognises the need for private finance to be further leveraged, although the text does not fully articulate how this can be done.
For example, one crucial incentive is linking public financial stimulus to the climate and environmental performance of private sector beneficiaries. Beyond available finance however, legislative and regulatory measures will be critical to encouraging transition thinking and practices among the private sector by promoting enhanced transparency, compliance requirements and access to targeted finance.
On this front, much is already underway in Europe. The EU has taken legislative steps establishing a reporting framework for entity-based transition plans. The Corporate Sustainability Reporting Directive (CSRD) creates a legal obligation for private actors to disclose their transition plans, if they have one.
While it will initially be applicable to large companies only, transition plans are expected to become an important reporting requirement and a key risk management tool.
However, if an entity has no transition plan, it leaves room for legal uncertainty and the company risks lagging behind others who have planned better for their decarbonisation.
The proposed Corporate Sustainability Due Diligence Directive (CSDDD) could address this by making transition plan disclosure mandatory.
There are still gaps, however. In view of the transition journey envisioned by the EU Net Zero Industry Act, time-bound transition targets for industries should be identified and disclosed to better assess risks and opportunities and identify investment needs.
Public funding mechanisms could then be better tailored to target strategic sectors and businesses. Moreover, as global economies are shifting from short- to long-term financial incentives for industries, the accompanying company-level measures should also be internalised by the private sector.
Here, the CSDDD, currently under negotiation in the European Parliament, provides an opportunity to strengthen incentives, if it is designed right.
In particular, it could:
- Require corporate executives to integrate long-term companies’ goals in their business models. Boards of directors would be accountable for and incentivised to meet those targets, approaching the company’s transition on an equal footing as revenues for the entity’s financial and economic sustainability.
- Ensure a coherent whole-of-economy approach to the transition and due diligence process by requiring transition plans for both financial and non-financial entities. In addition to closing key data gaps, the proposed CSDDD could embed climate risk assessment in financial operations. Financial data will enhance sectoral competitiveness by identifying critical bottlenecks for transitioning towards climate neutrality, as well as innovation and investment opportunities.
While the first regulatory steps in requiring the private sector to prepare and disclose transition plans are already underway, further work would be needed to prepare European businesses for the process, and the CSDDD is an important part of this picture.
More broadly, a robust transition finance framework at the EU level would not only map out the gaps, needs and funding opportunities, but would also support companies in building capacity, planning for the long run, and truly benefiting from the industrial transformation of Europe.