Sustainability can drive European competitiveness

Europe has a competitiveness problem. It has experienced weak growth over two decades with capital, labour and skills often locked into low-growth industries. There are many underlying reasons for this. Europe has a partially harmonised political system, but the single capital market remains incomplete in several ways. Companies face different regulations, tax regimes, and standards across member states. Consequently, scaling a business across Europe is more burdensome and costly than scaling it within the US or China.

High energy costs have added to the challenge, especially since the 2022 disruption to the energy markets caused by Russia’s invasion of Ukraine. This means that energy-intensive industries such as chemicals, steel and automotives face declining competitiveness. An ageing population increases the welfare burden.

Europe’s sustainability ambitions

Some argue that Europe’s sustainability agenda has also increased costs, harming competitiveness. Compliance and permitting costs often apply in Europe before equivalent measures exist elsewhere. Permitting delays – at least partly driven by environmental constraints – can slow development. Grid bottlenecks, not helped by an insufficiently agile regulatory and policy framework, can also deter growth as Europe adapts to the energy transition.

However, other evidence suggests that Europe has benefited from its sustainability ambition. By setting the rules that companies operating in Europe must follow, European regulators can shape the environment that global firms must operate within. This gives European companies a first‑mover advantage.

Sustainability can also reduce economic and geopolitical risk. By cutting reliance on imported fossil fuels, improving energy efficiency, and promoting the circular use of materials, Europe is insulating its economy from volatile commodity prices and supply‑chain shocks, such as the Strait of Hormuz crisis.

There is some evidence that over the long term, Europe’s sustainability ambitions will reinforce, rather than hinder, competitiveness. Much of the focus over the last decade has been on driving sustainability standards through regulation. However, Europe’s approach is now shifting from green regulation to its green industrial strategy.

By setting the rules that companies operating in Europe must follow, European regulators can shape the environment that global firms must operate within. This gives European companies a first‑mover advantage.

The role of investors

Many European companies are already transitioning to more sustainable operating models, presenting opportunities for investors. Investor stewardship can help to strengthen European companies’ transition plans through ongoing oversight, dialogue and challenge. Stewardship helps companies understand investors’ perspectives, reducing the financial and execution risks from transitioning.

Strong stewardship can also improve the visibility of the progress being made in the transition by encouraging companies to report on their own activities. Positive outcomes can attract additional capital, reinforcing a cycle of investment, stewardship and improvement – all of which can drive competitiveness at the company level, and across the region.

To find out more, read the full article in our Q2 2026 Public Engagement Report.