Insights
On 9 September 2024, former European Central Bank President and ex-Prime Minister of Italy, Mario Draghi, delivered his long-anticipated report on the future of European competitiveness to the President of the European Commission Ursula von der Leyen.
The lengthy report sets out a vision for a “new industrial strategy for Europe”.
Critically, the transition to net zero is identified as one of the central drivers of the EU’s future economic growth and competitiveness. But to capitalise on the opportunities presented by the transition, Draghi emphasises the need to pursue the goals of the Green Deal in tandem with innovation, re-industrialisation and boosting resilience.
The proposals provide a comprehensive basis for the development of a “Clean Industrial Deal”, which von der Leyen has committed to progressing in the first 100 days of her second mandate. Our recent insight covers those priorities in more detail.
The report – nearly 400 pages long – proposes a wide range of ‘horizontal’ recommendations to create the right conditions to stimulate flows of private finance and close investment gaps, alongside actions to address sector-specific issues.
We assess the key recommendations against IIGCC’s EU Call to Action, which sets out investor-led recommendations to accelerate progress against the EU’s climate goals across five thematic pillars.
Decarbonisation and competitiveness
‘The only way to ensure the long-term competitiveness of the EU is to shift away from fossil fuels and towards a clean and competitive economy’, President von der Leyen said at the report’s launch event.
Several of the recommendations set out in the Draghi report align closely with IIGCC’s call to reframe climate action in the context of greater industrial competitiveness. Decarbonising the energy system is highlighted as one of the central means through which the EU can do this.
Draghi states that a decarbonised energy system would ‘radically decrease import dependency’ – therefore increasing energy security and resilience – and accelerate the deployment of clean energy sources with low marginal generation costs.
It also offers an opportunity to address, at least in the medium-term, one of the key drags on European industry – energy prices that are systemically higher than those of the USA and China.
However, to capitalise on these opportunities, a joint plan for decarbonisation and competitiveness is essential.
Policy coordination for sectors
The report is critical of the narrow approach to policymaking that is currently the norm in the Commission, with one Directorate-General usually leading the development and execution of policies with little input or visibility from other departments.
Draghi calls for a more joined-up approach to policy coordination to mitigate the risk that ‘decarbonisation could run contrary to competitiveness and growth’.
To deliver on the Green Deal and underpin it with an effective industrial strategy, the EU will need to ensure a greater level of coordination across different actors, both at the EU-level and between Member States.
Breaking down silos and establishing a more holistic approach to policymaking should help to ‘join the dots’ between key initiatives. This includes the range of sectoral policies established under the Fit for 55 package and the EU’s sustainable finance framework, which IIGCC and our members have been engaging on extensively.
A priority action to support this should be the development of granular sector decarbonisation roadmaps. These roadmaps should set out a vision for how key sectors of the economy will decarbonise, by when, and associated policy measures to crowd-in private finance to support the transition of these sectors.
Scaling renewable deployment
To accelerate decarbonisation, the report calls for the EU to leverage all available solutions through a technology-neutral approach.
Scaling renewables will require the mobilisation of vast amounts of capital, both public and private. However, one of the main bottlenecks cited is the slow pace of permitting and administrative processes in the EU.
Draghi recommends that these processes should be simplified and streamlined to accelerate the roll out of renewables, grid upgrades and other infrastructure, such as batteries and storage. Supporting the continued rapid rollout of renewables with a continued focus on improving permitting procedures featured as a key recommendation in our EU Call to Action.
It will be vital to ensure that new renewable energy sources can plug in seamlessly to Europe’s power grid and effectively support the energy transition. For every euro spent on clean power in Europe over the 2022-2040 period, 90 cents of grid investment will be required to achieve the EU’s climate ambitions.
We welcome calls in the report for energy infrastructure planning to be taken up to the European level, as well as the proposals for the creation of a new EU-level planning coordinator, which could speed up the building of cross-border power links.
Investment needs for hard-to-abate sectors
The need to prioritise the decarbonisation of hard-to-abate sectors also features prominently in the report.
Draghi estimates that €340bn will be needed over the next 15 years to decarbonise the four largest carbon-intensive sectors in the EU (chemicals, metals, non-metallic minerals and pulp and paper products), and €500bn over the period 2025-2040.
Despite the massive investment needs and challenging business case, public policy support remains limited.
The report explicitly recommends the mobilisation of policy tools – including de-risking and finance mechanisms – to support hard-to-abate sectors in meeting EU decarbonisation targets and reap the opportunities of being a ‘first mover’ in emissions reduction solutions.
This aligns with our call to ensure the right financing mechanisms are in place to support transitioning assets, particularly for energy-intensive sectors. However, the precise nature of these mechanisms, and how they can be deployed most effectively, is not elaborated on in detail.
Sustainable finance – boon or burden?
The report calls on the EU to raise investment by an additional €800bn (c.5% of EU GDP in 2023) per year to boost Europe’s competitiveness and resilience.
It is estimated that €450bn of this additional investment will be needed between 2025 and 2030 to finance the Green Deal and the EU’s goal to reduce emissions by at least 55% by 2030. It is well known that the vast majority of this additional capital will need to come from the markets.
The report repeats the calls made in the Letta Report (published in April) for the full implementation of the EU single market, including a Savings and Investment Union to enable the free movement of capital across the bloc.
But one of the most eye-catching and widely talked about elements of the report relates to the EU’s sustainable finance framework.
Draghi raises concerns that the EU’s sustainability reporting and due diligence frameworks are a major source of regulatory burden for firms. The report notes that this is exacerbated by a lack of guidance and lack of clarity surrounding the interaction between different pieces of sustainable finance legislation.
Where initiatives are deemed to be 'particularly problematic from a competitiveness or innovation standpoint', Draghi recommends that they should be postponed.
The report also takes aim at the sector-specific disclosure standards being developed by the European Financial Reporting and Advisory Group (EFRAG). The standards are cited as an example of an additional incoming burden for firms and have already been delayed by two years as part of the previous Commission’s efforts to reduce reporting obligations.
Most of the legislation underpinning the EU’s sustainable finance framework has already been implemented, leaving little room to “postpone” initiatives (the Corporate Sustainability Due Diligence Directive is a notable exception).
IIGCC has called for the need to ensure that sustainable finance regulation is coherent, with usability issues swiftly addressed. Simplification and streamlining of the rules could help to make the regime more workable in practice, but as noted by Patrick de Cambourg, chair of EFRAG's Sustainability Reporting Board, ’standardisation is simplification, not burden’.
Robust sustainable finance regulation is essential to provide investors with the data they need to assess climate-related risks and opportunities and the transition efforts of their holdings.
In particular, the implementation of sector-specific standards is essential for helping investors understand specific climate-related risks and opportunities they are exposed to across individual sectors, as well as for companies seeking to better navigate their own exposures and impacts.
IIGCC will continue to advocate for coherent and comprehensive sustainable finance regulation that informs investment decisions. The focus must be on addressing usability and implementation issues, rather than delaying – or worse, rolling back – the standards in place.
Role of public financing mechanisms
Private finance will form the bulk of the capital needed for the transition, but public finance will need to continue to play a critical role in de-risking investments and scaling up new and emerging climate solutions.
Controversially, Draghi suggests that additional common EU debt is needed to enable targeted investment in common EU public goods.
This call has already provoked backlash in fiscally conservative Member States and is destined for intense political debate ahead of the next European Multiannual Financial Framework (MFF), which sets the EU’s annual budget, and which will run from 2028-2034.
In line with the EU Call to Action, Draghi sees the European Investment Bank (EIB) as having an important role to play in making it easier for investors to finance these investments.
The report recommends the enlargement of the EIB’s mandate and increasing its capacity to take on more risk, alongside proposals to increase the EU budget guarantee component of InvestEU to reduce risks for public and private investors.
We are also pleased to see recommendations in the report calling for easier and less fragmented access to public funding to support the development of cleantech solutions.
What’s missing?
While the report provides a useful blueprint for linking the climate and competitiveness agendas, there are some notable gaps. Draghi recognises that the European Green Deal was ‘premised on the creation of new green jobs’, and the report notes that competitiveness should not be predicated on reducing labour costs and must support social inclusion.
However, there is little detail on how the EU’s policy framework can be strengthened to support a just transition.
While economic resilience is at the core of the report, measures to increase Europe’s resilience to a changing climate are not discussed (although von der Leyen highlights the development of a Europe-wide Climate Adaptation Plan in her own priorities). The narrow focus on measures to support investment in renewables fails to consider the need to tackle the nature and biodiversity crises together with the transition to net zero.
In fact, environmental protections and legislation are often cited as a barrier to competitiveness in the report, rather than an essential component of the wider policy framework for tackling climate change.
Next steps
The recommendations set out in the Draghi Report are not legally binding. Ultimately, it will be up to von der Leyen and the new Commission to decide how many of them will be taken forward. However, the “mission letters” for the new Commissioners-designate, which were released on 17 September 2024, make it clear that all Members of the College should draw on the recommendations of the Draghi Report in the context of their individual missions.
In the coming months, the Policy team will continue to engage with stakeholders in Brussels to promote an enabling policy environment to finance the transition to a low-carbon economy. We hope that the Draghi report will provide significant momentum across several of our key priorities, including those highlighted in this briefing.
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