By Francesco Curto, Global Head of Research, DWS
Europe has transformed itself often in times of crisis. With current cyclical and structural challenges such as the war in Ukraine, climate change, an aging population, the health and energy crises and the continent’s strategic dependence on Asia for key materials the foundation of European prosperity and security is no longer fit for the future.
European companies have yet to recognise and start addressing the structural challenges which lie ahead, made worse by a stagflationary rising interest rate environment. Investors have a role to play in addressing these multiple challenges, particularly as most investors claim to pursue a long-term investment horizon. European financial regulations are also key stakeholders driven by the recognition that capital has detrimental impacts on the environment and society.
However, in publicly listed markets, incentives tend to be geared towards short-term, relative financial performance. Europe’s vast pools of savings are also not finding their way into productive, sustainable and transformational activities and are also earning below-inflation returns.
In addition, an investor who wants their capital to have a sustainable, transformative role in society is discriminated against, facing higher costs compared to traditional investment funds. Many existing solutions are also largely divesting carbon intensive companies or are acquiring real estate assets that are already relatively green, instead of using investor capital and influence to drive real world social and environmental improvements.
If Europe wishes to maintain the same (or ideally better) level of sustainable prosperity achieved in the last few decades, a deep transformational journey by policymakers, financial institutions and companies is required now. Specifically, the transformation of Europe requires a framework that puts the sustainable investor at least on a par to the financial investor. To help in this regard, we recommend for example, that infrastructure and real estate investments adapting towards tax efficient financing structures which are used frequently in the United States.
However, investors and corporates should not hide behind regulation as an excuse for inaction.
To ensure Europe delivers a high level of sustainable prosperity, it must strengthen its foundations in 2023 to be fit for the future. The transformation of Europe may appear political in nature, but investors have a decisive role to play. Europe must once again transform itself.