Rising energy and raw material prices, inflation and rising interest rates – cost pressure not only puts a strain on companies in their day-to-day business, but also makes the climate-neutral transformation more difficult. The annual investment required in the climate-neutral transformation, estimated at 45 - 55 billion euros, will possibly increase to 65 - 79 billion euros due to higher costs - and with this the challenges for companies will also increase.
According to the Federal Statistical Office in Germany, the inflation rate was 6.2 percent in July 2023. Although this is lower than in October 2022, when it was at a high of 8.8 percent, it is still well above the European Central Bank's (ECB) inflation target of 2 percent, which is considered a benchmark for price stability. Even if producer prices are more relevant as a cost indicator for the transformation than consumer prices, their development is particularly relevant for the development of financing conditions. The ECB must pursue a tight monetary policy if the inflation rate in the euro area moves above its inflation target in the medium term. At 5.5 percent, the inflation rate in the euro area is lower than in Germany. However, it does not yet indicate that the ECB can take a break in its interest rate hike cycle. Current communication from the ECB also suggests that further interest rate increases are likely.
Financing costs have increased
The ECB reacted quite late, but strongly, to the rise in inflation, so that interest rates on the capital market also rose sharply after a very long phase of low interest rates. The key monetary policy interest rate, more precisely the main refinancing interest rate, rose from 0 percent in June 2022 to 4.25 percent in August 2023. The corporate bond markets had already expected the interest rate increase and yields had already risen in advance. The interest rates on bank loans in new business for companies also reacted quite quickly. The interest rates for loans with a loan volume of up to 250,000 euros in Germany rose from 2.1 percent in June 2022 to 5.7 percent in May 2023. Interest on loans with a volume of over one million euros rose from 2.2 percent to 4.5 percent.
Capital goods have become more expensive
It is not only the higher financing costs that make the transformation more difficult, but also the ongoing price increases for capital goods. Their prices rose by 6.3 percent compared to June 2022. Here, the prices for machines in particular increased at a rate of 7.8 percent and for motor vehicles and vehicle parts at a rate of 5.6 percent. However, prices for intermediate goods fell. In June 2023, metal was 10.6 percent cheaper than in the same month of the previous year. However, lime and gypsum rose in price by 41.3 percent, cement by 31.5 percent and industrial gases by 21.3 percent. Even if the prices have risen, especially for “non-green” materials, one must remember that these materials are also necessary for environmental protection investments and these price increases make investments in environmental protection more expensive.
Skilled workers are harder to find
What makes matters worse is that staff are scarce and difficult to find. This also applies to professions that are relevant to the transformation and that require special specialization, such as those employed in the field of renewable energies (RE). According to a study by the German Economic Institute, more than every second renewable energy worker works in the manufacturing sector. This means that the proportion of production-oriented professional profiles among renewable energy workers is above average. This is reflected in the fact that around 73 percent of those employed in renewable energy have a production-oriented profession. Their share is therefore almost three times as high as the share of employees in production-oriented professions across all employed people. Technical expertise is required by those employed in the renewable energy sector in 71 percent of cases, which is more than twice as common as in other jobs. In addition, these employees work in an environment that is particularly characterized by technological innovations, such as the use of new machines, systems and products. Skilled labor shortages in renewable energy professions therefore primarily affect production-oriented companies and make their transformation more difficult. Since finding personnel is difficult in many areas even without climate targets, the insufficient availability of skilled workers can slow down the transformation and lead to high cost pressure for companies because the shortage of specialized workers is reflected in high wage costs.
Another study by the German Economic Institute calculates a shortage rate as a quotient of the number of reported positions in bottleneck occupations and the number of reported positions in relevant occupations. In North Rhine-Westphalia this is 55 percent, still below the German average of 66 percent. Significantly higher values can be seen in Baden-Württemberg with 83 percent, in Thuringia with 79 percent, Rhineland-Palatinate with 78 percent and in Bavaria with 77 percent. Nevertheless, the shortage of skilled workers is an obstacle to transformation that should not be underestimated, also for North Rhine-Westphalia.
Financing costs and shortages of skilled workers are obstacles to innovation
In 2020, the Institute for Labor Market and Vocational Research evaluated SMEs on their reasons for not innovating. High investment costs are the most important reason, followed by organizational problems and a lack of skilled personnel. This is followed by long approval processes, the procurement of outside capital and a lack of customer acceptance, also with high proportions of companies reporting these obstacles. In 2007, 23.3 percent of companies reported difficulties in obtaining outside capital and in 2019 only 12.2 percent of companies reported them. However, the interest rate level in 2007 was also significantly higher than in 2019. Due to the current sharp rise in interest rates, it can be assumed that this obstacle will again affect more companies. The proportion of companies that cite a lack of skilled personnel as a reason for not implementing innovations has increased from 21.5 percent in 2007 to 31.1 percent in 2019. Based on demographic developments alone, it can be deduced that this proportion remains high or is even increasing. The proportion of companies that cited high investment costs as an obstacle to innovation fell from 46.4 percent to 36.3 percent during this period. However, the development of raw material prices since 2019 is not very optimistic, so it can be expected that investment costs will continue to be an obstacle.
Networking initiatives must address the barriers to innovation
Especially when there are barriers to innovation and investment - such as a lack of skilled workers and a lack of financing - a networking initiative such as Fin.Connect.NRW can be used to enable companies to innovate and invest:
- The transformation must not be slowed down by financing bottlenecks, which is to be feared in times of rising interest rates. That's why reducing financing barriers is crucial for Fin.Connect.NRW. SMEs in particular are confronted with higher interest rates, which is also due to the fact that they have a smaller range of financing alternatives than large companies. Due to their size alone, a green bond is not available to them as a financing instrument for the transformation. For large private equity companies, many hidden champions from medium-sized companies are not visible enough compared to large companies. Therefore, NRW needs a strong networking initiative that can help reduce search and matching costs for capital providers and companies seeking capital.
- Large companies are further along in the transformation than SMEs. They are also more familiar with topics such as sustainable finance, EU taxonomy and sustainability reports. This is also because large companies are active on the capital market and investors have long placed importance on sustainability in their financing decisions. SMEs that finance themselves through their banks have a lot of catching up to do, but they have to catch up quickly. On the one hand, banks are increasingly attaching importance to sustainability in lending because they also want to reduce their own CO2 footprint. In addition, large companies will increasingly demand sustainability reports from their suppliers. Fin.Connect.NRW can provide support here by preparing the topics of sustainable finance, EU taxonomy and sustainability reports specifically with an SME focus.
Inflation and interest rate changes will make the transformation more difficult, which is precisely why the work of Fin.Connect.NRW is relevant: bringing know-how about transformation financing to companies, reducing search and matching costs and creating financing alternatives for the transformation.
