Do Energy Efficient Firms Have Better Access to Finance?

• Author: Brutscher, Philipp-Bastian

1. INTRODUCTION

   Greater energy efficiency is a key projected contribution to mitigating climate change. In particular, it is seen as essential for performing the near-term change in the trend of greenhouse gas emissions. The International Energy Agency (henceforth IEA) projects that more than 40% of the reduction in global C[O.sub.2] emissions until 2040 relative to baseline could be met with higher energy efficiency (IEA, 2018a). The most recent IPCC report shows that in order to limit average temperature increases to 1.5[degrees]C above pre-industrial average, there will need to be an absolute decoupling of economic growth from both primary and final energy demand between 2020 and 2030 that would require large additional investments into energy efficiency (McCollum et al., 2018; Semieniuk et al., 2020). Complementary to these scenarios, national governments and international organizations have set ambitious targets for energy intensity reductions. (1) For instance, the UK's clean growth strategy aims to reduce industrial energy intensity by 20% in the period 2018-2030 relative to the baseline (BEIS, 2017), and the United Nations Sustainable Development Goals call for a doubling in the rate of decline of energy intensity relative to historical averages. More recently, Europe's Green Deal put forward by the EU Commission aims for a carbon-neutral continent by 2050 (European Commission, 2019).

   While targets are important, a large part of the actual efficiency investments must ultimately be implemented in firms. In the European Union, only 26% of final energy is consumed by households, and even excluding transport (33%), at least part of which must be attributed to firms, 41% of final energy is directly consumed in industry (25%), services (13%) and agriculture (3%) (EEA, 2018). Globally, an even greater 38% of the final energy is used directly in industry (IEA, 2018b). It is therefore important to understand how aggregate targets and scenarios can be translated into company action at the micro-level. Incentives are a key mechanism to do so.

   One area that has achieved insufficient attention in the energy efficiency debate is access to external finance to pay for these investments. As we review below, only 10 out of 28 European countries have policies in place that explicitly target improving the access to finance for efficiency investments, even though it is well known that such access is limited, especially for small and medium-sized enterprises (Berger & Udell, 1998). Therefore, ensuring good access to finance should be an important component of energy efficiency policies. Moreover, access to finance is also an important determinant of firm growth (Beck and Demirguc-Kunt, 2006; Lee, 2019). As such, easy access to finance for energy efficient firms or those that want to become more efficient would be a natural way of helping increase the market share of energy efficient firms. Clearly, the relatively better is access to finance for firms that implement energy efficiency, the more likely it is that the economy as a whole improves its energy efficiency. One step that has been made in that direction is the increasing Environmental, Social and Governance (henceforth ESG) performance reports and ratings provided by major agencies to inform financial institutions and other stakeholders. However, as we review below, ESG is so far insufficient in terms of depth and coverage to fill the gap.

   In theory, more energy efficient firms should be more competitive and have better collateral, so their access to finance should be better. The advantage of high energy efficiency for collateral value is especially salient given the stringent climate change mitigation plans just reviewed. Former Bank of England governor Mark Carney recently translated this to clear terms: "Companies that don't adapt--including companies in the financial system--will go bankrupt without question" (Carney, quoted in Busby, 2019). However, market failure theory advances good reasons why such improved access may not be forthcoming. Information asymmetries may prevent lenders from including energy efficiency into their lending assessment, even if it makes a firm more cost-competitive and its collateral worth more. This ultimately implies rationing loans for these less risky borrowers (Stiglitz & Weiss, 1981). Appropriate signals could help resolve this problem if it exists. Yet, we found no empirical evidence that could corroborate or challenge the salience of these theoretical propositions for real world markets.

   This paper is a first attempt to elucidate the relationship between a firm's energy efficiency and its access to credit using quantitative methods for a large firm sample. Making use of a unique dataset from the European Investment Bank, we examine whether firms that are more energy efficient have better access to external finance. To carry out the analysis, this paper uses a comprehensive dataset that matches ORBIS financial and ownership data with the European Investment Bank's Investment Survey (henceforth EIBIS). The data covers three years (2016, 2017 and 2018), the only ones during which this survey has been conducted. Each year includes some 12,500 firms from all EU countries, of all sizes, and from the sectors of manufacturing, construction, infrastructure, and services. The dataset contains two types of barriers to access to finance, which we use to examine the borrowing conditions for energy efficient firms, and a firm's share of building stock that satisfies high or the highest energy efficiency standards, which we use as an indicator of a firm's energy efficiency. We also use a rich set of financial, operational and ownership variables, as well as information on the firms' characteristics (i.e. size, sector, age), as controls.

   To the best of our knowledge, this paper is the first to examine systematically whether lenders consider the energy efficiency of companies in their lending criteria. The findings are particularly important due to the salience of the question for current climate change mitigation, and we spell out policy implications. We rely on a unique proxy to measure energy efficiency that is available for all EU countries. Although this measure has limitations, it is good enough and complemented by a rich dataset that allows for robustness checks for a credible first analysis of this problem.

   The next section briefly reviews energy efficiency policy in the EU and the literature on energy efficiency and access to finance. We then present our method of analysis and data, the latter with some detail about the summary statistics of the matched EIBIS-ORBIS database. The penultimate part presents our results. In our conclusion, we highlight policy implications.

2. LITERATURE REVIEW

   2.1 EU efforts at energy efficiency

   The EU has set ambitious targets for energy efficiency. In 2012, Directive 2012/27/EU mandated 20% energy savings relative to a baseline without additional efficiency measures in 2020, and 32.5% savings in 2030. However, in 2019, just a year away from the first benchmark, most countries were far removed from reaching their energy efficiency targets for 2020, as Figure 1 shows. In all areas, whether residential, industrial or tertiary, EU countries are lagging behind their 2020 energy efficiency targets (2) in 2019.

   The only countries where at least one quarter of the targets have been met are Denmark, Spain and Germany. By contrast, most other countries reach a lower score, with Belgium and Sweden showing no improvement over the baseline of their energy efficiency potential. This lack of progress demonstrates the need for further measures.

   Amongst existing policies supporting efficiency, the problem of financing has received limited attention. Ten countries have implemented financial measures incentivizing firms to make energy efficiency investments. Table 1 is based on data from ODYSSEE-MURE and shows details of these measures for EU countries. Financial measures here mean either grants and subsidies, or soft loans for energy efficiency, renewables and Combined Heat and Power (CHP). Each EU country is indicated on the left-hand column. The column on the very right hand-side gives the code of the specific policy as is used in the ODYSSEE-MURE database. For instance, in 2010, (3) France introduced an eco-energy loan aimed at financing equipment eligible for the white certificate schemes (i.e. documents proving that the targeted level of energy consumption has been reached following energy efficiency measures) and their installation costs in the industrial and tertiary sectors at a preferential rate, without a guarantee, and repayable over five years, with one year deferred. The loan can vary between 10k euros and 100k euros. By the end of 2016, over 267 of these loans had been granted to very small firms. While there is thus some support for energy efficiency financing, the fact that financial measures targeting energy efficiency in industry concern only about a third of the EU countries (i.e. 10 out of 28 Member States) reflects that these measures are far from mainstream.

   Interestingly, a new measure possibly relevant for credit access has been introduced at the level of the European Union (European Commission, 2016). Since 2012, under Article 8 of the Energy Efficiency Directive, energy audits are compulsory for large EU firms. In 2012, large firms were subject to a compulsory energy audit by December 2015 and at least every four years thereafter. We return to this policy in our following discussion of how financing and energy efficiency at the firm level hang together.

   2.2 Energy efficiency, competitiveness, and creditworthiness

   The literature presents evidence that more energy efficient firms are also more competitive, as their energy costs are lower. This is particularly the case for EU firms in "resource intensive" sectors such as food and drinks, chemicals, steel, automotive etc. (Rademaekers...