When it comes to vital policy and legislative developments, the EU has always been somewhat of an institutional black box. It has often been seen to act as a standard and precedent-setting beacon to policy experts and to those already within the EU institutional policy-sphere.
Whilst for the majority of businesses and those working in other fields that fall outside that specific bubble, the reality of the situation is often less clear. Pivotal EU policy and regulatory developments that hold far-reaching business consequences are often underreported, hard to digest and the conclusions left intangible.
Knowing what these developments mean in a concrete and practical sense is extremely important. Especially for companies that are currently undergoing or that plan to shift towards more sustainable and climate-friendly business models and strategies.
This makes having and sharing expertise on these developments even more relevant for us at Nexio Projects, considering the multi-dimensional and cross-sector nature of ESG and sustainability consulting.
The last year is characterized by multiple unprecedented events. Many governments, businesses, and people have been severely affected economically, socially and consequently, many governance systems have been pushed to their limits. This has also caused many sustainable development initiatives and their progress thus far to be negatively affected or put on pause.
Traditionally, the go-to policy that largely addressed economic social and territorial development issues within the EU has been the Cohesion Policy (also known as the Regional Policy).
The general mission of the Cohesion Policy as defined in the Treaty on the European Union (TEU) is:
To promote long-term sustainable growth and development throughout the regions of the EU, by making structural adjustments and removing any barriers that may be in place.
Now halfway into 2021, the focus has begun to shift to not only recovery but also to building back better and more sustainably. The new EU policy cycle has been introduced for the period 2021-2027, coming just in time to try and address these global challenges we face.
Along with it, comes a new and more ambitious Cohesion Policy, that seeks to focus on a green and digital transition. Before diving into the new 2021-2027 Cohesion Policy, it’s important to establish some context on the mechanism and principles that underpin this very influential policy.
2021-2027 Multi-annual financial framework
Coming into force at a very opportune time, the introduction of the new EU long-term budget and recovery package was adopted in December 2020. This long-term budget defines the specific spending that will be undertaken in the years to come as part of the annual budgets, as well as breaking it down across specific themes, concentrations and priority spending areas.
These priority areas are:
The good news is that the two most relevant priority areas for sustainability and sustainable development are also the two that will receive the most budgetary allocation. Cohesion, resilience and values and natural resources and the environment, receive €377.8 billion and €356.4 billion respectively. To add to these positive developments, all expenditure under the MFF needs to be consistent with and contribute where possible to three overarching objectives:
- EU’s goal of carbon neutrality by 2050
- Climate Targets set by the EU for 2030
- The Paris Agreement
And the cherry on top? 30% of the total spending coming from the MFF and the Next Generation EU (The post-COVID19 recovery plan for job stimulation and immediate damage repair) is to contribute to climate-related projects. Everyone would like to see this number even higher, but it is most definitely a step in the right direction.
While this all sounds promising, the devil is often in the details, so let’s jump right into the modernized 2021-2027 cohesion policy.
The new and improved 2021-2027 Cohesion Policy
The Cohesion Policy acts as the main investment policy of the EU. Many have high expectations for it to cover a wide range of pertinent issues across the vastly different regions of the Union. The Cohesion Policy will aim to strengthen socio-economic and territorial cohesion by addressing imbalances and discrepancies between regions and EU member states across five priority objectives being:
- A more innovative, digital and competitive Europe
- A greener, low-carbon transition towards a net-zero carbon economy
- A more connected Europe focusing on clean and sustainable urban mobility
- A more socially inclusive Europe, providing equal access to health care
- A more citizen-centric Europe led by local strategies and sustainable urban development initiatives
The Cohesion Policy acts as a main driving force behind achieving the political goals of the European Union, of which the European Green Deal and Digital Transition hold top priority.
The 2021-2027 Cohesion Policy differs from its predecessor in a multitude of ways.
- This Cohesion Policy has aimed to cut as much bureaucratic red tape and unnecessary complexity as possible. It has established only one standardized set of rules for the policy itself and the various funds that support it;
- It has also sought to establish relative simplicity by cutting the amount of secondary legislation needed. This should make it easier for legislation to be interpreted and understood by all stakeholders affected. Additionally, it will also streamline reporting and increase the efficiency of fund allocation to cohesion policy programs allowing for faster and more flexible program delivery.
- Particularly relevant are the increased inclusion, importance and overall weight of climate and environmental issue investments that are spread throughout the funds that constitute it. Many of the funds also have minimum targets set to prevent climate and environmental issues from being the first to be sacrificed when investment and budget amounts are switched around.
So, on that note, let’s talk about funding.
The European Regional Development Fund (ERDF):
This fund focuses on promoting development and correcting imbalances and inequalities between EU regions. The ERDF utilizes a mechanism known as ‘Thematic Concentration’, which means that its funds aim to directly contribute to the first two overarching priority objectives identified in the previous section. These are once again:
- A more innovative, digital and competitive Europe
- A greener, low-carbon transition towards a net-zero carbon economy
All member states based on their determined level of prosperity and development will contribute to investing in these areas. There have been some rules in place to assure fair support is given and that member states contribute what they can.
For starters, all member states must allocate at least 30% of their support to contributing towards programs that further prioritise objective two. Whilst the more developed EU regions must dedicate at least 85% of their allocation to both priority objectives one and two. Transition regions must allocate at least 40% to priority objective one and the least developed regions at least 25% to priority objective one. This allocation will have potentially large effects in non-urban areas.
The European Regional Development Fund Map (Source: EU Commission)In addition, at least 8% of member state allocation must contribute to urban and local development. Finally, all operations and fund usage under the ERDF must contribute 30% of the overall fund amount to further the overarching EU climate objectives in one way or another.
We realize that these are a lot of percentages, and they might not add up at first glance. What’s important to remember is that these contribution rules aren’t mutually exclusive. How the member states allocate and contribute to specific programs is also partly a collaborative process with the European Commission and various national and regional member state authorities. However, member states largely take responsibility for day-to-day implementation and operations.
Cohesion Fund (CF)
First and foremost, the cohesion fund should not be confused with the Cohesion Policy. To clarify, the cohesion fund acts in parallel with the other listed funds to help deliver the aims and objectives of the Cohesion Policy.
The Cohesion Fund supports member states with a Gross National Income per capita of lower than 90% of the EU-27 average. This fund focuses on promoting social, economic cohesion and European Integration and making sure regions aren’t left behind. The EU countries for the 2021-2027 period that will benefit from this fund are the countries highlighted in blue.
Once again, the EU has set a rule that at least 37% of overall financial allocations made from the Cohesion Fund should contribute to EU climate objectives.
European Social Fund Plus (ESF+)
Unlike the previous funds who target larger national and regional level aspects within the EU, the ESF+ is the fund focusing on the people of the Union.
With around €99.3 billion allocated for 2021-2027, the ESF+ seeks to contribute to supporting and facilitating structural reforms across the areas of employment and skills and education policies. This fund is also the main part of the EU’s COVID-19 recovery, by addressing the increased inequalities that have resulted from the effects of the virus on the labour force, education and health care systems.
Just Transition Fund (JTF)
In line with achieving and reinforcing alignment across the various strategies of the EU, the JTF has been created as a new financial instrument. It also acts as the first pillar of the Just Transition Mechanism of the European Green Deal looking to achieve a climate-neutral continent by 2050.
The JTF seeks to support those regions most affected by the changes that come from the transition towards climate neutrality. In more concrete terms, this fund aims to act as a counterbalance to the people and industries affected by implementing new greener means of production and ways of working. Many people will require support from the JTF to adapt to the future changing labour market that looks to become more climate-friendly.
In order for member states to gain access to this fund, ‘Territorial Just Transition Plans’ (TJTP) must be drafted and discussed. This is done with the relevant national stakeholders along with the Commission, to identify the key territories that will be worst impacted by the climate transition. Importantly, the TJTP must also be created to align with the National Energy and Climate Plans.
That’s great, but why should this matter to me?
You have now reached the end of this article much wiser about the inner workings and technicalities of EU Cohesion Policy. However, you may be left wondering: Okay but what does this mean for businesses, ESG and even sustainability as a whole?
The honest answer? It’s far too early to say anything for sure. However, this certainly doesn’t prevent us from making informed predictions that can help your business prepare and identify relevant challenges and opportunities to address.
What we can say for certain is that there are likely a few possibilities that will emerge once the ‘legislative dust’ settles. Only then will it reveal the aftereffects of these large-scale inter-governmental and supra-national institutional changes, all of which are likely to occur in their own timeframes and manifest to varying degrees.
Businesses need to be prepared to adopt necessary changes
There will likely be cycles of criticism on program creation and implementation, budget and funding allocation and disparities in member state involvement. As is the usual case with inter-governmental and multi-stakeholder cooperation and policy creation within the EU. Despite having firmly set funding recommendations and requirements, there will likely be member states that lag behind in contributing and adopting programs.
There is an important parallel to be drawn here for the private sector. This trend is also likely to show for businesses that act as laggards. Some companies will fall behind in adapting their strategies, action plans and policies to these new changes. They will either have to play catch up or be left behind.
Creating a sustainability strategy is a key advantage
With that being said, however, whilst these policies and programs have been set in motion very recently, visible and tangible changes will likely not appear immediately. The creation, implementation and dispersal of funding to programs will take time. However, we urge businesses to not wait but take action as soon as possible. That way your organisation can be ahead of the sustainability curve by assessing performance and direction now rather than later.
Our advice to businesses:
- Create sustainability plans;
- Integrate sustainability and climate-conscious objectives into your business strategies;
- Seek new public-private partnerships and
- Contribute to new national initiatives that will appear as a result of these new policy changes
These are all steps that businesses can and should consider looking forward to.
View these changes as opportunities as opposed to challenges
These new ranges of policy and budgetary changes at the EU level should not be viewed as a hurdle that will be imposed on your business nor another unwelcome challenge to conform to. Rather see it as an opportunity to achieve positive change.
The large scale and top-down policy changes may often mean a lot of adapting, uncertainty and growing pains for all stakeholders involved. It does also allow for an ‘opening up’ of the policy space, especially in terms of all of the new attention and funding for sustainability and climate action coming in.
Many changes are taking place, new programs are popping up and funding is expected to start flowing strongly. That’s why now is the time for businesses to take advantage of the increasingly workable and manoeuvrable space. Organisations can use these developments to push sustainability initiatives. In the past, these might have been difficult due to:
- internal resistance
- bureaucratic red tape
- or a variety of other reasons.
With these developments lies the opportunity to successfully ride the oncoming waves of change.
Much of this change will first be top-down. It’s up to all of us to take advantage of these shifts to help guide and further light the sustainability fire and transform these into valuable opportunities moving forward.