Overview
Europe is facing a significant investment gap, estimated to be around €800 billion according to Mario Draghi’s 2024 report. In response, policymakers are employing “de-risking” strategies, which involve using public sector resources to encourage private investments.
The Derisking Strategy
De-risking entails the public sector mitigating risks for private investors through policies, funding, or guarantees to attract private finance toward critical areas. This approach has become embedded in EU policies such as InvestEU and national programs in Germany and France. However, there are concerns that this method is fundamentally misaligned with the investment challenges facing Europe.
Case Study: Shell
A prominent example is Shell, which received a €150 million subsidy for its hydrogen project in 2023, despite being ineligible for it and pressuring the Dutch government for support. Shell reported considerable profits amid rising fossil fuel prices and distributed 97% of its net gains to shareholders, even overturning a ruling that mandated emission reductions.
The Investment Landscape
Data demonstrates a troubling trend: EU-listed companies have significantly reduced capital expenditure relative to their physical assets, dropping from 28% in 2007 to 17% in 2021. Meanwhile, total financial assets have risen, and shareholder payouts have increased, indicating that firms are choosing not to reinvest profits.
Critique of Derisking
The critique rests on several key points:
-
Cost of Capital: The assumption that lowering borrowing costs will spur investment is flawed. Evidence shows capital expenditure has stagnated despite favorable financial conditions.
-
Ineffectiveness for Established Firms: De-risking measures may favor larger, well-capitalized firms, failing to focus on innovative, emerging sectors that need support.
-
Structural Investment Problems: Established firms in carbon-intensive sectors find it more profitable to exploit existing assets than to invest in greener alternatives, leading to inertia.
-
Erosion of Democratic Oversight: De-risking transfers public objectives to private entities, eroding accountability and democratic control.
A New Approach: Government Market Shaping
Instead of merely providing incentives, governments should actively shape markets by:
- Implementing regulations that mandate transition plans and reinvestment strategies.
- Instituting binding conditions on public funds to ensure companies align with societal goals (e.g., limiting dividends and share buybacks).
- Creating mechanisms that allow the state to take equity stakes in strategic industries.
Conclusion
The current de-risking framework may perpetuate existing issues rather than solve them. A more structural approach is needed to ensure that investment aligns with public priorities and effectively addresses the pressing challenges of decarbonization and economic growth in Europe.
