What's holding back the green transition?

New research from Imperial College Business School reveals what’s stopping businesses from taking action to protect our overheated planet. 

A wide commitment to reach net zero climate goals by 2050 requires a concerted effort from industry and business to make drastic cuts to emissions, consume less and introduce cleaner ways of producing. But this comes at a massive cost.

While multinationals such as Apple have already set zero emissions goals, smaller companies can find it harder to commit. Modest as their individual impact is, combined, they make a substantial difference.

Switching to cleaner ways of doing business requires money and expertise – and we wanted to discover what exactly is hampering progress. How easy is it for smaller firms to find the funds for cleaner technology and methods? How crucial are managers when implementing greener strategies? How important is it for firms to set goals to limit their use of energy and water, and reduce pollution?

Better environmental investments

Our early analysis revealed that firms differ significantly in how much money they can borrow, and the competence of their environmental leadership. Both these factors affect corporate carbon footprints: less money means fewer green investments and better management makes for better environmental investments. 

We’ve looked in depth at nearly 11,000 companies in 22 European emerging economies, collaborating with the European Bank for Reconstruction and Development. Our information came from a vast wealth of records including the European Pollutant Release and Transfer Register, which holds information on emissions and pollution for industrial facilities, as well as bank data. Crucially, face-to-face surveys with business managers yielded detailed insights into firms’ investments in green technology, the quality of environmental management and availability of credit. 

We delved deep into the data and used econometric tools to show that it was indeed credit access and green management practices that prompted a shift in environmental performance. 

Nearly all growth in energy demand and greenhouse gas emissions in the coming three decades will come from less developed economies

In order to measure the availability of finance at the level of individual firms, we looked at where banks’ branches are located, and what constraints they were placed under, particularly during the credit squeeze that followed the 2008 global financial crisis. 

We also looked at whether corporate knowhow about greener practices tends to spread within regions. Managers in areas that have experienced extreme weather such as flooding, heatwaves and fierce storms tend to be more switched on about the need to improve their businesses’ climate performance. They are also more open to better management, and these insights trickle down among firms. 

This work reinforced our initial findings. If businesses can’t borrow the money, they’re less likely to invest in more climate-friendly, but costly, green machinery and vehicles, our analysis shows, or in more efficient heating, lighting and cooling. Only 12 per cent of businesses invested in generating their own green energy.  We found too that access to finance is less crucial for “low-hanging fruit” improvements such as energy-efficiency measures. 

Weak and ineffective green management appears to hamper most types of green investments. 

Why focus on emerging markets?    

Nearly all growth in energy demand and greenhouse gas emissions in the coming three decades will come from less developed economies, research shows. These are the countries that desperately need investment to clean up their polluting industries – green investment at this stage could ensure a cleaner transition in the future. It’s a cost-effective way to help fight climate change.

Our analysis also warns against false hope. Although economic decline can herald a short-term drop in emissions, thanks to less activity, the picture is bleaker in the longer term. This is true of the global financial crisis and also of the pandemic – the economic fallout from the crisis damaged longer term green investments because cash was hard to find.

Firms differ significantly in how much money they can borrow, and the competence of their environmental leadership

In areas where banks were hardest hit by the global financial crisis, we showed that carbon emissions were 5.6 per cent higher than they would have been, had banks not deleveraged in the wake of the event. We also find that companies’ weak green management has resulted in emissions 2.3 per cent higher than they might have been with better expertise. And the scarcity of credit in some areas means emissions have been 4.5 per cent above where they would be, had they been able to borrow more cash. 

Investing in the environment

Our analysis promises glimmers of hope. Some actions are relatively cheap but could help businesses cut emissions – if they set out and stick to an environmental strategy, for instance, and fix clear green targets. Competent managers can also help raise their firms’ green investments and have an impact across a wide range of issues such as emissions, pollution and cleaner practices.

Weak and ineffective green management appears to hamper most types of green investments

These results offer environmental policy makers a broader mix of options beyond the established carbon taxes and carbon markets. Targeted policies could include further requirements to measure and declare emissions and environmental impacts. Development banks could boost credit lines for green investments – more access to finance ensures that businesses invest significantly in the green transition.

Not only should businesses invest in innovative new tech, but also adopt cleaner production technologies that already exist. And stronger environmental leadership within companies would help businesses make more progress towards green goals. These are opportunities that developing economies can’t afford to miss.

This article draws on findings from "Managerial and Financial Barriers to the Green Transition" by Ralph De Haas (European Bank for Reconstruction and Development), Ralf Martin (Imperial College London), Mirabelle Muûls (Imperial College London) Helena Schweiger (European Bank for Reconstruction and Development).