As reported previously, in December 2019 the European Commission (EC) outlined a plan to make the EU block ‘net-zero’ in terms of greenhouse gas (GHG) emissions by 2050 – the so-called ‘European Green Deal’.  In order to meet this target, the EU economy must decarbonise rapidly, at a rate of nearly 8% per year.  The investment decisions taken by European companies will play a critical role in either making or breaking this commitment.

While it is clear that European companies are indeed taking bold action, are their current investment patterns consistent with achieving the EC’s net-zero target?

A report published in February by not-for-profit environmental impact reporting charity CDP (formerly known as the Carbon Disclosure Project) and international management consultancy firm Oliver Wyman highlights the need for Europe’s top companies to more than double their capital investment in low-carbon technologies.

The report – ‘Doubling down: Europe’s low-carbon investment opportunity’ – analyses the low-carbon investments of some 882 companies in 2019 (together representing approximately 76% of European market capitalisation).

The report finds that these companies – responsible for over 2.3 gigatonnes of CO₂ (equivalent) of GHG emissions – reported €124 billion of new, low-carbon investment through CDP in 2019, representing some 12% of overall capital expenditure (CAPEX).  Over 90% of these investments were from companies in the carbon-intensive transport, energy and materials sectors – 50%, 38% and 5% respectively.

The report states that capital investment was driven by electricity utility investments of €45 billion in renewable energy, infrastructure and enabling technologies, such as demand-side response programmes and digitalisation.  Meanwhile, R&D investment totalled €65 billion, of which €43 billion was reported by the transport sector (primarily in electrification and autonomous vehicle technologies).

However, in order to meet the EC’s new targets, the report concludes that investment would have to more than double to around 25% of overall CAPEX.  While this represents a significant uplift, the costs of inaction are far greater.  Furthermore, for companies undertaking emissions reduction initiatives, the economic benefits are clear: Current company investments are expected to add €40 billion to their corporate ‘bottom lines’.

From new, green infrastructure projects, to electric vehicle fleets and renewable electricity generation projects, companies are identifying new business opportunities in developing low-carbon products and services valued at over €1.2 trillion – over six times the cost of the investment needed to realise them.

However, more investment is needed in transformational breakthrough technologies – particularly in the materials sector, which, as indicated above only accounts for 5% of new low-carbon investment despite being the source of 35% of reported ‘Scope 1 and 2’ GHG emissions (i.e. direct emissions from owned or controlled sources, and indirect emissions from the generation of purchased energy, respectively).

Closing this investment gap and getting on track to achieve the EC’s net-zero target will require action on all fronts.

As the report title states, it’s a matter of ‘doubling down’ on CAPEX and R&D investment.  Thankfully, as the title also indicates, there is a real opportunity here – the business case is clear.  “Across many types of investment, the business case for transitioning businesses onto a low-carbon pathway is clear, and the opportunities vast,” says Steven Tebbe, Managing Director, CDP Europe.  “But overall current investment levels are still short of putting European firms on track for net-zero emissions.”

Ambitious, wide-ranging and effective policy and regulation must go hand-in-hand with smart corporate disclosure and action.