Solutions to drive Europe’s transformation

At the end of last year, we outlined the structural factors impeding European economic growth and investment returns. In this article, we showcase solutions that can drive Europe’s transformation
We view energy efficiency and sustainable technologies across the building, transportation and industrial sectors as offering attractive investment opportunities. These measures will strengthen energy security, power greenhouse gas emissions’ reduction and deliver employment growth across the European continent
Energy efficiency is a cross-asset class opportunity with private markets currently offering the greatest impact in terms of contributing to Europe’s transformation
To solidify Europe’s role in the e-mobility sector, investment opportunities also exist in electric vehicle charging infrastructure and in the area of innovation funding for batteries. This will facilitate decarbonization, which has been absent in the European road transportation sector over the past three decades
To finance Europe’s transformation, the direct lending market is set to become an ever more important financing source for Europe’s small and medium sized enterprises (SMEs). This is welcome since bank financing channels have struggled since the global financial and euro sovereign debt crises
We see SMEs playing an important role in the digitalization of the European economy, facilitating the climate transition, securing resilient supply chains as well as addressing aging demographics and associated healthcare costs

1 / Introduction

To address the structural forces holding back European growth and investment returns requires a significant transformation of the European economy. This will include transforming not just the continent’s transportation, building and energy sectors, but also how companies are accessing finance. In this article, we show how investments in energy efficiency and transportation infrastructure can deliver significant benefits not just in terms of advancing the continent’s ambitious environmental and climate goals, but also in terms of job creation. From a financial perspective, the transformation will require significant investments, which are likely to fall heavily on the private sector given the constraints on public sector balance sheets. We explain why direct lending to small to medium sized enterprises has the potential to become an important financing vehicle. We believe these recommendations will support the European Commission’s green digital growth ambitions^[1]which are based on two pillars: investments and reforms.

2 / Energy efficiency investments

The International Energy Agency^[2] has concluded that energy efficiency such as insulation, heat pumps, LED lighting, waste heat recovery and other technologies can be particuarly effective in strenghtening Europe’s energy security. For example, between 2016 and 2021 global energy final demand grew by 6%, but, in the absence of energy efficiency measures, energy demand would have been 13% higher.^[3]

Since buildings represent 40% of Europe’s energy use and create around 36% of Europe’s greenhouse gas emissions,^[4] the widespread acceleration of energy efficiency measures to green existing European buildings and infrastructure is essential. Indeed, even though the European Commission has proposed that by 2030 all new buildings must be zero emission, this still leaves the existing building stock, 85% of which will still be standing in 2050.

Energy efficiency and building retrofitting have added benefits since they can improve air quality, boost productivity and support health and well being. In addition, building retrofits can increase asset valuations, reduce financial risks and deliver significant economic stimulus benefits. For example. sustainably certified office buildings have a lower vacancy rate compared to non-certified buildings in major European cities. When the effects of building size, location, age and renovation history are taken into account, offices with certifications gain a 6% rental premium.^[5] When it comes to residential mortgages, a study of over 800,000 mortages across Finland, Germany and the UK founds that customers with high and medium energy efficient properties are around 20% less likely to default that low energy efficient mortages, “all other things equal”.