EY: How to Boost Investment in Europe With Sustainability

Investment in Europe has dropped by 4% for the first time since 2020, according to a report by EY.

Foreign direct investment (FDI) is crucial to the green transition – it can drive technology and supply chains to become sustainable, diversify and strengthen economies and raise social and environmental standards. 

The latest EY Europe Attractiveness Survey gathered insights from 500 global executives and completed detailed analysis of 5,694 FDI projects in 45 countries across Europe. 

A report detailing the results of the survey gives recommendations for the continent to reinvigorate FDI. 

Hermann Sidhu, EMEIA Assurance Leader at EY, says: “The latest EY Europe Attractiveness Survey outlines a nine-point strategy to reignite Europe's economy. 

“It highlights the need for consistent regulations and a push for innovation, which are vital for progress. 

“To attract global investment, Europe must demonstrate a strong commitment to growth and readiness for business. Our report details key steps to affirm this commitment.”

Results from EY’s Europe Attractiveness Survey 

FDI is 14% below the record high of 2017 and 11% below the level in 2019 before the COVID-19 pandemic. 

The number of jobs created by FDI projects in 2023 fell 7% from 2022.

Investment from the US into Europe declined by 15% in 2023 compared to 2022 and the number of projects announced by Asian businesses was 9% below that of 2023. 

On top of this, the United Nations Conference on Trade and Development (UNCTAD) estimates that European greenfield value fell 20% in 2023 despite increasing in other continents. 

Despite these declines, the executives surveyed remain optimistic, with 75% expecting Europe’s attractiveness to improve in the next three years.

72% of executives also plan to expand or establish operations in Europe in the next 12 months. 

Why has FDI decreased in Europe?

EY’s report shows that overregulation is now seen as the top risk to FDI in Europe.

The continent has pioneered new initiatives encompassing carbon disclosure, data protection and the safe use of AI, but investors are worried more regulatory framework will stifle European business growth and agility. 

Andrew Hobbs, EMEIA Center for Board Matters Leader and EMEIA Public Policy Leader at EY, says: “EU policymakers could do more to anticipate and understand the likely impact of new regulation on investment attractiveness. 

“They could do this through more probing impact assessments. Post implementation reviews should also happen more routinely to ensure that the relevant regulation is working as intended.”

Following close behind are energy prices and supply issues and political instability, both of which 33% of executives cited as main risks to the continent’s attractiveness.

Europe’s energy prices have been high since 2021, impacted by the COVID-19 pandemic which increased demand for liquefied natural gas.

Russia’s invasion of Ukraine and its decision to cut gas supplies to some EU countries also caused uncertainty and rocketing gas prices.

The impact of sustainability on FDI

23% of leaders surveyed by EY said that policy approach to climate change and sustainability is one of the three most important factors when choosing a country to invest in. 

Matthew Bell, Global Climate Change and Sustainability Services Leader at EY, says: “We need to see sustainability as the longer-term economic driver it should be for those who lead, not a short-term compliance obligation.

“Any implementation of new regulation brings additional burden and cost, but the EU has clearly forecasted what they believe the costs are associated with legislation such as CSRD and others. 

“The compliance process also brings huge benefits. It drives collaboration between senior executives that were previously isolated and encourages them to think about the risks and opportunities associated with climate change.”

When asked if Europe is better or worse than other regions at helping businesses achieve sustainability plans, 67% reported it is better. 

How to increase Europe’s attractiveness

EY’s report gives nine areas from foreign investors where policymakers should focus to improve Europe’s attractiveness:

• Find the right regulatory balance between protection and innovation
• Maintain manufacturing competitiveness 
• Create a fertile environment for innovation
• Restore confidence in energy prices and supply
• Unlock private investment with a full capital markets union
• Unify to respond rapidly to global trade wars
• Focus on the economic benefits of sustainability
• Boost workforce productivity and promote Europe’s critical skills
• Balance tax competitiveness and revenue growth

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