The recent EU Competitiveness Report, spearheaded by former European Central Bank President Mario Draghi and commissioned by the European Commission, emerges as the EU seeks to address challenges posed by global competition, geopolitical uncertainties, and climate change while pursuing a sustainable and inclusive growth model. Alex Bernhardt reviews the report.
The report highlights the EU’s sustainability reporting1 and due diligence framework2 as “a major source of regulatory burden, magnified by a lack of guidance to facilitate the application of complex rules and to clarify the interaction between various pieces of legislation”3. Indeed, different elements of existing and forthcoming sustainability-related regulation in the EU overlap, creating inconsistencies, while other elements have gaps requiring clarification.
However, we believe that Sustainable Finance Disclosures Regulation (SFDR) and related rules are a major step in the right direction for the European and global financial communities. And while the report’s recommendation to streamline existing regulation are welcome, any changes to existing rules should be made with care as they impact the sustainability goals which the EU is attempting to meet as well as the significant related compliance effort made already by the European finance industry.
Beyond the regulatory topic, the report identified key opportunities for integrating private sustainable finance into the broader European economic strategy. It underlines that the future of EU competitiveness lies in balancing economic growth with sustainability, underscoring the importance of creating conditions that enable businesses to thrive while protecting the environment.
One of the main pillars discussed in the report is the importance of green technologies and sustainable finance. The EU aims to lead in the global green transition by supporting industries and businesses that invest in clean energy and sustainable practices. It encourages further development of the European Green Deal and the Circular Economy Action Plan, which aim to transform industries and make European businesses more resilient, efficient, and sustainable.
Opportunities for scaling sustainable finance
Sustainable finance is a critical enabler of this transition. By mobilising capital towards green and climate-friendly investments, the EU can ensure that industries align with environmental goals while remaining competitive. The report notes several areas where sustainable finance can unlock opportunities:
Green technologies and innovation
One of the key drivers of EU competitiveness is technological innovation, particularly in the fields of green energy, electrification, and digitalisation. The report calls for increased private and public investment in research & development (R&D) to boost innovation in these areas. Sustainable finance can play a pivotal role by channelling funds into green tech startups and large-scale renewable energy projects, thus helping Europe stay at the forefront of global green innovation.
Climate action and infrastructure
The Draghi report ties competitiveness to climate resilience, urging member states to prioritise investments in green infrastructure and energy efficiency. Sustainable finance, through instruments such as green bonds and sustainability-linked loans, offers a way to fund these large-scale infrastructure projects. By supporting the development of smart grids, electric vehicle (EV) charging networks, and renewable energy sources, sustainable finance can help the EU meet its climate targets and reduce its dependency on fossil fuels.
The circular economy
Another area highlighted is the circular economy, where sustainable finance can back initiatives that reduce waste and promote resource efficiency. This can be achieved by providing capital for businesses developing technologies for recycling, waste-to-energy projects, and sustainable manufacturing. The transition to a circular economy is not only environmentally beneficial but also enhances Europe’s industrial competitiveness by creating new markets and reducing raw material dependency.
EU taxonomy and investment transparency
The EU has been at the forefront of creating frameworks such as the EU Taxonomy for sustainable activities, which aims to provide clear guidelines for what can constitute a sustainable investment. The report suggests expanding and refining these frameworks to ensure that they support competitiveness and foster more sustainable finance activities. We agree that clearer definitions and regulations will better enable investors to allocate funds to genuinely sustainable projects, thus promoting transparency and long-term environmental benefits. Though any investor restrictions based solely on the EU Taxonomy will also need to be weighed against the size of the investible market – current EU Taxonomy alignment rates are quite low in Europe as EU companies tend to underestimate their alignment, when reporting any, and companies in non-EU jurisdictions generally are not producing EU Taxonomy alignment reports. Therefore, allowances need to be made for international companies as well as companies in transition to more sustainable business models.
Strategic autonomy and financial resilience
A key theme in the report is the EU’s need for ‘open strategic autonomy’, which implies a degree of economic independence from global supply chains without resorting to protectionism. Sustainable finance can aid in this effort by financing domestic industries that contribute to strategic goals such as renewable energy independence, advanced manufacturing, and green technologies. Additionally, strengthening Europe’s capital markets, especially in the context of the Capital Markets Union (CMU), can facilitate cross-border sustainable investments and enhance the overall resilience of the financial system.
Challenges for scaling sustainable finance
To achieve the objectives outlined in the report, the EU needs to mobilise at least an additional EUR 750-800 billon of productive investment capital per annum, or 4.4%-4.7% of EU GDP (at 2023 levels). Unlocking private investment of this magnitude would likely require a substantial reduction in the private cost of capital via investment subsidies, risk sharing arrangements or corporate tax cuts as well as an increase in direct public investment.
To achieve this increased spending, the EU will need to adopt a more unified approach to rules, especially regarding green investments.
Other barriers to scaling productive investment identified in the report include:
- Capital markets fragmentation
- An overreliance on bank financing in the region (and an accordant under-reliance on venture capital and other forms of higher-risk equity capital)
- The relatively small size of the EU budget
- The small scope and scale of EU-wide investment projects
- The lack of a common safe asset denominated in euros (e.g., a larger market for EU-issued bonds).
To address these barriers, the report recommends:
- Achieve a true Capital Markets Union (CMU)
- Changes to bank capital regimes to incentivise increased securitisation of bank assets while completing a ‘banking union’
- Increase the size and prioritisation of the EU budget and enhance the role of the EIB
- A marked increase in EU bond issuance to support the financing of transcontinental projects.
Many of these suggested reforms are common sense and would indeed lead to increases in productive investment mobilisation. However, the period for their implementation is short given the urgency of the global climate crisis and the competitive positioning of the EU versus the US and China in particular.
Private investors will need to act independently in the meantime to identify and scale up investment in the abovementioned opportunities.
A competitive and green Europe
The EU Competitiveness Report lays a clear roadmap for how the bloc can remain competitive in an increasingly challenging global environment.
It also outlines multiple opportunities where sustainable finance, even within the context of existing sustainability regulation, can help to ensure the future is green, competitive, and resilient, and that the EU continues to lead the way in global efforts to combat climate change.
Specifically sustainable investors have opportunities to increasingly channel their capital towards industries which can support the dual goals of European competitiveness and the necessary global low-carbon transition.
They can engage with the EU and national governments to support their implementation of related industrial financing strategies. This can be done in the context of sovereign green bond issuance, but also in discussions with public agencies around their infrastructure development plans and industrial policy.
Additionally, it will be important for private investors to develop more creative approaches to financing which leverage public and private capital sources (e.g., blended finance).
We are committed to continuing to play a constructive role in using sustainable investment to support a resilient, sustainable European economy.
[1] EU rules require large companies and listed companies to publish regular reports on the social and environmental risks they face, and on how their activities impact people and the environment; see https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_en
[3] In this context, the report talks about the EU Taxonomy and the corporate sustainability reporting directive (CSRD); source: EU competitiveness: Looking ahead – European Commission (europa.eu)
