European firms tend to consider transition risks more important than physical risks

• The ECB recently published the results of a pilot round of the Survey on the Access to Finance of Enterprises (SAFE). For the first time, the survey included questions regarding climate change

• The results indicate that 60% of firms attach more importance to transition risks than to physical risks

• Physical risks tend to be of higher importance to regions, which have recently experienced wildfires or other physical threats

• Only 24% of firms intend to invest in the next five years to reduce their climate footprint

• Firms indicate that subsided loans tend to be the preferred option to finance the green transition

The European Central Bank (ECB) recently published the results of a pilot round of the Survey on the Access to Finance of Enterprises (SAFE), which took place between 25 May and 26 June this year (see here). For the first time, the survey included questions regarding the impact of climate change on euro area firms. The questions related to:

• The importance that euro area firms attach to the consequences of physical and transition risks;

• Euro area firms’ behaviour to mitigate risks or reduce the negative environmental impact of their economic activities;

• Different financing sources chosen to fund climate change-related investments;

• Potential impediments to the necessary financing.

Regarding answers to the first question, 60% of all firms indicated that transition risks related to stricter climate standards (e.g., regulation, carbon pricing) are very important for them, while only 39% of the respondents are very concerned about the physical risks of climate change, (e.g., natural hazards). This might be related to the fact that it is easier for firms to assess and quantify the costs were governments to introduce (further) measures to stem climate change, than to calculate the likelihood and consequences of a natural disaster hitting their firms.

Furthermore, physical risks were perceived as being of higher importance for coastal areas or regions where the occurrence of wildfires has been more frequent. Moreover, regions that heavily rely on tourism, or heavy industries, are also among those that consider physical risk as being of high importance. On the other hand, transition risk is more uniformly distributed across euro area regions.

Meanwhile, in a response to the second question, half of euro area firms judged that they had already sufficiently invested to reduce their climate footprint, with 24% of firms planning to invest within the next five years. This comes a bit as a surprise, given recent reports indicating how companies are falling short of their goals – including needed investment - in order to comply with an emission pathway consistent with the 1.5 degrees Celsius goal of the Paris Agreement. It also compares strangely with the amounts needed to meet the climate objectives. In any case, it suggests that many companies might be rather complacent on this matter.

Finally, concerning the sources of financing that firms use to fund the green transition, subsidised loans seem to be the most relevant source of funding, next to non-subsidised loans and retained earnings. This is particularly true for SMEs. Among the obstacles of climate-related investments, euro area firms mentioned high interest rates and financing costs as the most relevant ones. Furthermore, investors also pointed out to the high environmental reporting costs and a lack of investors’ willingness to finance green investments. These obstacles are even more exacerbated for SMEs. However, this issue could probably partly be solved by an increase in public guarantees, which will likely accelerate the climate transition process for firms.

This article is part of the SustainaWeekly op 16 October 2023