Balancing and integrating the twin imperatives of competitiveness and sustainability is one of the central challenges for EU policymakers as they confirm their new agenda in the wake of recent European elections. This reality was driven home in extensive detail by former Prime Minister of Italy, Mario Draghi, in his 328-page cautionary report on the state of the EU economy, ‘The Future of European Competitiveness,’ which was ordered by the President of the European Commission, Ursula von der Leyen. Since the report’s presentation, many of Draghi’s recommendations have been reflected in mission letters to the next College of Commissioners, setting the tone for the next five years of EU policy.
Although the headline for this new agenda is competitiveness, Draghi’s recommendations are based on an understanding that industrial policy and decarbonisation efforts need to be fully aligned to succeed. In this sense, the direction of EU industrial policy can be viewed as the next iteration of the EU’s approach to the European Green Deal, with Draghi’s recommendations amounting to another significant step in the mainstreaming of sustainability considerations into economic strategy, and, subsequently, for business and corporate strategies.
Whereas efforts to decarbonise may have been viewed as contrary to established industrial interests in the past, they are increasingly viewed as vital enablers of competitiveness, especially as the EU seeks to reduce energy dependencies and spur innovation in the high-growth cleantech sectors that are central to a successful transition to climate neutrality.
Indeed, the Clean Industrial Deal — which will seek to boost cleantech manufacturing and decarbonise energy-intensive industries — was a centrepiece of President von der Leyen’s pitch to win a second term as Commission President. It will build on the frameworks established under the Green Deal and will need to be aligned with a new 90% greenhouse gas (‘GHG’) emission-reduction target for 2040, which she has also stated her intention to confirm into law.
So, as we look towards the next five years, we must question what the Draghi report tells us about how the EU will approach the challenge of competitiveness, climate action and the wider sustainability transition. It is possible that a more profound change in thinking and strategy is happening, with the potential for a change in step for EU integration in areas such as industrial strategy, innovation and investment. Alternatively, a more orthodox and incremental approach might prevail. It is important to analyse how the Commissioner mission letters will translate Draghi’s recommendations into policy initiatives. Here we look at three key areas in which the EU’s approach is evolving.
New Industrial Strategy to Support Strategic Sectors
Concern around the EU industrial competitiveness increased rapidly after the Russian invasion of Ukraine, which drew Europe’s strategic dependencies into focus and highlighted the interconnected nature of decarbonisation and competitiveness. The Net Zero Industry Act (‘NZIA’) and the Critical Raw Materials Act (‘CRMA’) were hastily legislated in response, seeking to safeguard market share in future-facing industries, such as wind, solar, batteries, heat pumps and electrolysers, and reduce supply vulnerabilities by onshoring production.
The Draghi report assesses that the NZIA and CRMA were well-intended but insufficient, arguing that the EU must take a highly rational approach, only supporting sectors with a realistic chance of success, those that are strategic for domestic value chains to thrive or those that improve the economy’s wider resilience. He sees opportunities for sustainable growth in cleantech manufacturing for wind turbines, electrolysers and low-carbon fuels — sectors in which Europe holds a strong position. However, for sectors in which the EU has an insurmountable competitive disadvantage — such as first-generation solar photovoltaic (‘PV’) production — he suggested the EU should deprioritise.
In addition to cleantech manufacturing, there is a strong focus on decarbonising energy-intensive materials processing industries, such as steel, cement and chemicals, without significant losses to competitiveness. Draghi assesses that the introduction of the Carbon Border Adjustment Mechanism (‘CBAM’) will not be enough to save Europe’s industries in these sectors, who face far higher energy costs than competitors in the United States and Asia, given their dependence on expensive fossil fuel imports and lower levels of public support. He concludes that deindustrialisation has already started in some sectors in the EU, and that this trend will continue without targeted policies.
Draghi is clear that significant public funding will be needed to achieve these goals, and it is in this area that his recommendations are most ambitious. In his five key recommendations, he calls for ‘regular and sizable issuance by the EU of a common safe and liquid asset to enable joint investment projects among Member States’[1]. Politically, this looks set to be a big challenge for the EU over the coming years, given the tendency of key Member States, such as Germany, to shy away from pooled EU funding or higher levels of EU or national expenditures.
Commissioners-designate Stéphane Séjourné(Prosperity and Industrial Strategy) andTeresa Ribera(Clean, Just and Competitive Transition)will lead the EU’s work on industrial policy and the green transition in the coming five years and will need to work together to bring the many priorities to fruition. The Clean Industrial Deal, including an Industrial Decarbonisation Accelerator Act, will be the centrepiece of their work and should be complemented with a European Competitiveness Fund and a new approach to competition policy in line with the EU’s growth strategy. This will present difficult discussions and involve some politically sensitive trade-offs, in which there will inevitably be winners and losers, all of which may lead to final decisions ending up in the hands of President von der Leyen.
ESG Reporting Burden in to Focus on Innovation and Investment
Although the marrying of competitiveness and sustainability in Draghi’s report is based on a specific diagnosis of the of the EU economy, it is also indicative of a broader shift in discussions on sustainability. When the Green Deal was conceived five years ago, orthodoxy stated that merely requiring companies to report on ESG impacts would lead investors, consumers and employees towards businesses with sustainable practices. This belief has been disputed in recent years, with businesses questioning the complexity of the regulations and the value of spending large amounts to keep up with disclosure requirements, rather than investing and innovating.
Draghi is receptive to these arguments and states that reporting requirements for companies should be proportionate to the goal they pursue. He claims that the EU’s sustainability reporting and due diligence framework is a ‘major source of regulatory burden, magnified by a lack of guidance to facilitate the application of complex rules and clarify the interaction between various pieces of legislation’[2].
Last year, President von der Leyen tasked her Commissioners to cut reporting burdens for companies by at least 25% and at least 35% for small and medium-sized enterprises (‘SMEs’). Draghi agrees with President von der Leyen’s aim, but goes further by calling for a 50% reduction for smaller businesses. These targets apply to all forms of corporate reporting — going beyond sustainability and due diligence — but simplification and further calls for rollback of certain nonfinancial reporting requirements can be expected. Highlighting this trend, the Commission recently announced that it would delay the implementation of the Deforestation Regulation by a year. However, despite criticism, the EU’s main framework for non-financial reporting, the Corporate Sustainability Reporting Directive (CSRD) has been legislated and is being implemented.
Valdis Dombrovskis, Commissioner-designate for Economy and Productivity, will be responsible for much of the Commission’s work regarding the simplification of legislation, in particular the aims to reduce administrative and reporting burdens for companies. He will also be expected to develop a new Competitiveness Coordination Tool to support the implementation of the future European Competitiveness Fund. Dombrovskis will no longer be an Executive Vice President in the next College, but he will have a direct reporting line to President von der Leyen, an indication of the importance of his role.
Shift in Focus from Sustainability to Decarbonisation
Draghi’s recommendations reserve a central position for decarbonisation, but leave less space for the need to align competitiveness with other environmental considerations, such as impacts on nature. The report makes only a single reference to the term ‘biodiversity’, in the highly specific context of mine closure, and mentions ‘bioeconomy’ once. This marks a stark contrast from the Green Deal, which was designed to tackle all impacts to nature. The shift in focus can be partly attributed to rural concerns around the impact of sustainability regulation on agriculture, which culminated in protests in Brussels. The centre-right of the European People’s Party (‘EPP’) represents many of these voters, and with the group even more powerful following the institutional changes, there seems to be little political will to prioritise biodiversity concerns.
Draghi recommends that the EU should consider revising relevant EU environmental legislation — such as the Environmental Impact Assessment Directive and the Birds, Habitats and Water frameworks — to allow for exemptions until climate neutrality is achieved. Such an amendment would be welcomed by mining and renewable energy companies, but would be highly unpopular with many to the left of the EPP and with environmental groups.
If approved, Commissioner-designate for Environment, Water Resilience and a Competitive Circular Economy Jessika Roswall will be responsible for pursuing this agenda. In this case, the mission letter goes beyond Draghi’s recommendations, calling for an update to the bioeconomy strategy and the creation of incentives for private investment in nature-positive actions. She is also tasked with ensuring that the EU reaches its international biodiversity commitments. However, the feasibility of effective implementation of these initiatives is questionable, with her large portfolio presenting several competing priorities.
Preparing for Shifts in the EU’s Economic Strategy
In a context in which the EU faces an unprecedented set of geopolitical challenges, Draghi’s focus on productivity growth suggests that while he is seeking to push the EU out of any complacency, he remains economically orthodox in his approach to linking competitiveness with the sustainability agenda. But with the urgency and scale of the environmental crisis from climate impacts and biodiversity loss being experienced by more Europeans in real time, it will be interesting to see whether a more profound shift from pursuing ‘sustainable competitiveness’ to ‘competitive sustainability’ will also gain momentum in the EU.
As the new College of Commissioners is confirmed and the economic agenda for the coming five years takes shape, companies must be aware of these shifting priorities and must carefully evaluate potential risks and opportunities. Businesses that proactively engage in the policymaking process will be more successful in adapting and evolving to new realities, and the start of a new legislative term marks an opportune moment to assess how to do this most effectively.
Authors: Martin Porter, a Senior Advisor, Joe Berkhout, a Director – both work in our Energy & Industrials team in Brussels & Kerstin Duhme, a Senior Managing Director & Head of our Energy & Industrials practice in Brussels.
The views expressed in this article are those of the author(s) and not necessarily the views of FTI Consulting, its management, its subsidiaries, its affiliates, or its other professionals.
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[1] The future of European competitiveness, p 292
[2] The future of European competitiveness, p 318
