Investing sustainably

EU cuts red tape to go green faster

06 March 2023

Damian Payiatakis, London UK, Head of Sustainable & Impact Investing

Key points

  • Green stimulus initiatives are no longer just about saving the environment – politicians are using climate legislation to reshape economies and profit from the shift to a low-carbon world
  • International rivalry is also driving policy – the latest is the European Union’s Green Deal Industrial Plan (GDIP). The plan looks to cut red tape and otherwise support existing green measures to counter last year’s landmark US Inflation Reduction Act (IRA)
  • The sheer scale of the IRA has challenged European policymakers to match and surpass the US – adding another gear to the bloc’s sustainability vision
  • For investors, ambitious climate policies are only likely to speed up the growth of clean-tech industries – attracting green investment and businesses – and the potential to capture long-term growth opportunities

With its recent announcement of the Green Deal Industrial Plan, the EU responds to the US green stimulus package to accelerate its own net-zero ambitions.

Climate change is no longer principally an environmental issue. Governments also see climate change now as a way to boost their economies and compete with other nations to attract and encourage business investment.

Last August, the US passed the Inflation Reduction Act, the country’s most ambitious attempt to create the groundwork through which to cut greenhouse gas emissions by 30% by 2030. Over the next decade, a stimulus worth more than a third-of-a-billion dollars has been committed to advance climate and clean energy goals.  

The European Union responded to the US plans by announcing its Green Deal Industrial Plan in February. The plan should accelerate the growth in the industrial capacity for the clean technologies needed in the EU.

So, what is the bloc’s plan and what are the signals savvy investors should be looking for from governments’ initiatives to accelerate the green transition while growing their economies?

The latest green EU initiative

The Green Deal Industrial Plan (GDIP) builds on, and supports, prior initiatives designed to aid the transition of the EU to a low-carbon economy.

Setting an overall vision at the end of 2019, the EU Green Deal aimed to make Europe the first climate-neutral continent by 2050. Following this, the bloc enacted a series of regulatory packages, for example NextGenerationEU, REPowerEU, InvestEU, Innovation Fund, or Fit for 55, to underpin the EU’s green ambition.

The GDIP seeks to create a more supportive environment for building and deploying clean-tech manufacturing capacity. It’s based on four complementary pillars1:

  • Making the regulatory environment more predictable and simpler.
  • Providing faster access to funding by streaming state aid rules.
  • Boosting training and developing skills to create a green workforce.
  • Opening and enhancing trade agreements for more resilient supply chains.

Together these pillars do not primarily add new capital, rather they seek to remove challenges in deploying it.

How does it differ from the US Inflation Reduction Act? 

The GDIP is EU policymakers’ initial response to last August’s US Inflation Reduction Act2 (IRA) and, to an extent, Chinese subsidies contained in its Five-Year Plan.

The landmark IRA provides an estimated $369 billion in federal tax credits, tax breaks and direct subsidies to companies operating in pre-defined sectors around climate and clean energy. Additionally, its “Made in America” provisions encourage manufacturing on US soil, helping to build domestic green industrial capabilities. The initiative is attracting companies from outside the country to consider expanding in the US, whether by relocating existing facilities or through international expansion.

For Europe, the simplicity and scale of the IRA has challenged its efforts to be a pre-eminent leader in sustainability and the transition to net zero.

The EU cannot replicate the US approach given that tax policy is determined at national, rather than federal, level and that subsidies can be administered at regional, national and EU levels. Nor can it match the ten-year time horizon, given the bloc’s budget cycles are ratified and disbursed over shorter time horizons.

A focus on increasing competitiveness

The GDIP aims to “simplify, accelerate and align incentives to preserve competitiveness and attractiveness of the EU”3 . Without adding common financing, it aims to free and increase the flow of existing capital and to repurpose, not fully utilised, existing funding streams, such as the €250 billion available in the Resilience and Recovery Fund4.

The plan also aims to streamline bureaucracy, such as speeding up time to permitting renewable project timelines, to help encourage  private investments.

Seeing the initial progress of the IRA, the economic growth and environmental transition benefits could be substantial. New manufacturing and service projects in wind, solar, batteries, electric vehicles and energy storage projects have blossomed across the US, since the act was passed in August. By one count, since then over 90 new clean energy projects have been announced, totalling nearly $90 billion in new investments and 100,000 new green jobs5

Where should investors look?

The GDIP is another government initiative that provides significant incentives designed to attract capital for, and investment opportunities in, the transition to clean economy. While each geography has its own nuances and priorities, the overarching theme of addressing climate change and energy needs remains. For example, the GDIP highlights batteries, wind-power, heat pumps, solar energy, hydrogen electrolysers, and carbon capture, utilisation and storage (CCUS).

Most of the industries highlighted in the GDIP fall into growth sectors. In recent times, these have been out of favour with investors, weighing on performance. In addition, challenges around supply chains, increased interest rates, and political efforts to keep energy affordable have been headwinds. However, this could potentially provide more attractive entry points for investors.

Early-stage companies are leading the development of next-generation decarbonisation technologies. They offer exciting and unique opportunities to invest in innovation and future disruptors, either directly into ventures or via funds. Of course, investors need to accept higher risks and lower liquidity, as explained in Trends in private markets.

Start-ups are not the only ones that will benefit from the competition in green stimulus measures. Many listed companies are adapting their business operations and pivoting their business lines for the green transition.

In Europe, a mix of higher spending and greater integration will support sectors such as energy, mining, autos, utilities, or construction. Notably, not all could be considered “green” today. However, they are likely to be key in transitioning to a net-zero world. As such, to avoid green surprises lurking in their portfolios, investors should be aware of their own sustainability preferences and the investment philosophy of their investment managers.

Moving up a gear  

The Green Deal Industrial Plan adds another gear to the EU’s sustainability momentum. Through faster permitting, more subsidies, improved skills and better trade agreements, the aim is to speed up the growth of Europe’s clean-tech industries.

The increased geopolitical competition to attract green investment and businesses is likely to gather momentum and help to reshape economies. As policymakers, businesses and investors seek to capture long-term growth opportunities, they all point to the same direction - to a cleaner, greener world.

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