BRUSSELS — When cocoa farmer Leticia Yankey came to Brussels last October, she had a simple message for the EU: Think about the mess your simplification agenda is creating for companies and communities. It was just weeks after the European Commission said it might delay the EU’s anti-deforestation law, which requires companies to prove the goods they import into the region are not produced on deforested land, for the second time. But in Yankey’s Ghana, cocoa farmers were ready for the rules, known as the EU Deforestation Regulation or EUDR, to kick in. “How are we going to be taken serious the next time we move to our communities, our farmers, and even the [Licensed Buying Companies] to tell them that EUDR is … coming back?” Yankey asked.  Since then, the Commission has kept making changes to the plan. First by floating the delay, then backtracking but proposing tweaks to the law — only for EU governments and lawmakers to reinstate the postponement, pile on additional carve-outs and then leave open the door for further changes in the spring. All within three months. It’s not just smaller companies and remote communities that are rankled by the EU’s will-they-won’t-they approach to lawmaking. Bart Vandewaetere, a VP for government relations and ESG engagement at Nestlé, says that when he reports on European legislative developments to the company board, they “[look] a little bit at me like: ‘Okay, what’s next? Will you come next week with something else, or do we need to implement it this way, or we wait?’” Since the start of Ursula von der Leyen’s second term as European Commission President, the EU has been rolling back dozens of rules in a bid to make it easier for businesses to make money and create jobs.   Encouraged by EU leaders to hack back regulations quickly and without fuss, the Commission presented 10 simplification packages last year — on top of its plan to loosen the anti-deforestation law — to water down rules in the agricultural, environment, tech, defense and automotive sectors as well as on access to EU funding. COMPLICATION AGENDA Brussels says it is answering the wishes of business for less paperwork and fewer legislative constraints, which companies claim prevent them from competing with their U.S. and Chinese rivals. It also promises billions in savings as a result. “We will accelerate the work, as a matter of utmost priority, on all proposals with a simplification and competitiveness dimension,” the EU institutions wrote this month in a joint declaration of priorities for the year ahead. The ones who got ready to implement the laws already even go as far as to say the EU is losing one of its key appeals: being a regulatory powerhouse with policies that encourage companies to transition towards more sustainable business models. | Nicolas Economou/NurPhoto via Getty Images But for many businesses, the frequent introduction, pausing and rewriting of EU rules is, just making life more complicated. “What we constantly hear from clients is that regulatory uncertainty makes it difficult to plan ahead,” said Thomas Delille, a partner at global law firm Squire Patton Boggs, even though they generally support the simplification agenda. The ones who got ready to implement the laws already even go as far as to say the EU is losing one of its key appeals: being a regulatory powerhouse with policies that encourage companies to transition towards more sustainable business models. “The European Union unfortunately has lost some trust in the boardrooms by making simplifications that are maybe undermining predictability,” said Nestlé’s Vandewaetere. The risk is that the EU will shoot itself in the foot by making it harder for companies to invest in the region, which is essential for competitiveness.  “This approach rewards the laggards,” said Tsvetelina Kuzmanova, senior project manager as the Cambridge Institute for Sustainability Leadership, adding that it “lowers expectations at the very moment when companies need clarity and policy stability to invest.” INEVITABLE TURBULENCE Many of Europe’s decision-makers are convinced that undoing business rules is a necessary step in boosting economic growth.  The simplification measures “were needed and they are needed,” said Danish Environment Minister Magnus Heunicke, confirming that he believes the EU regulatory environment is clearer now for businesses than it was a year ago. Denmark, which held the rotating presidency of the Council of the EU for the last six months, had led much of the negotiations on the simplification packages, or “omnibuses” in Brussels parlance. Brussels is also receiving as many calls from businesses to speed up its deregulation drive as those urging caution. For example, European agriculture and food chain lobbies like Copa-Cogeca and FoodDrink Europe said in a joint appeal that the EU should “address the regulatory, administrative, legal, practical and reporting burdens that agri-food operators are facing.” These, they added, are major obstacles to investing in sustainability and productivity. Successive omnibus packages should, meanwhile, be “proposed whenever necessary.” But undoing laws requires as much work and time as drafting them. Over the past year, lawmakers and EU governments have been enthralled in deeply political negotiations over these packages. Entire teams of diplomats, elected officials, assistants, translators and legal experts have been mobilized to argue over technical detail that many were engaged in drafting just a couple of years earlier.   Of the 10 omnibus proposals, three have already been finalized. The EU has also paused the implementation of the rules it’s currently reviewing so that companies don’t have to comply while the process is ongoing. “If you look at this from an industry perspective, there will be some turbulence before there is simplification, it’s inevitable,” said Gerard McElwee, another partner at Squire Patton Boggs.  Ironically, the EU has also faced criticism for making cuts too quickly — particularly to rules on environmental protection — and without properly studying the effect they would have on Europe’s economy and communities. Yankey, the cocoa farmer, said she understands the Commission’s quandary. “They just want to listen to both sides,” she said. “Somebody is ready, somebody is not ready.” But her community will need more EU support to help understand and adapt to legislative tweaks that impact them. The constant changes do not “help us to build confidence in the rules or the game that we are playing,” she said.

With the European Green Deal and the Clean Industrial Deal, the EU set a clear course for the economic transition, serving Europe’s strategic interests of competitiveness and growth while also tackling climate change. For the EU to reach its industrial decarbonization and competitiveness objectives, the Draghi report identifies an annual investment gap of up to €800 billion. High-quality, reliable and comparable corporate disclosures, including on sustainability risks and impacts, are key to inform investment decisions and channel financing for the transition. EU rules on corporate sustainability reporting have been expected to fill the existing data gap. While simplification as such is a helpful aim, it looks like the Omnibus initiative is going too far. With the current direction of travel, confirmed by the Council in its agreement on 24 June, the Omnibus is likely to severely hinder the availability of comparable environmental, social and governance (ESG) data, which investors need to scale up investment for industrial decarbonization and sustainable growth, thus impairing their capacity to support the just transition. > The Omnibus is likely to severely hinder the availability of comparable > environmental, social and governance (ESG) data, which investors need to scale > up investment for industrial decarbonization and sustainable growth. The European Commission introduced the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CSDDD) and the EU Taxonomy to respond to real needs, voiced over the years by investors and businesses alike. These rules were intended to close the ESG data gap, bring clarity and structure to the disclosures needed to allocate capital effectively for a just transition, and foster long-term value creation. These frameworks were not meant as ‘tick-box compliance exercises’, but as practical tools, designed to inform capital allocation, and better manage risks and opportunities. Now, the Omnibus proposal risks steering these rules of course. Although investors have repeatedly shown support for maintaining these rules and their fundamentals, we are now witnessing a broad-scale weakening of their core substance. Far from delivering clarity, the Omnibus initiative introduces uncertainty, penalizes first movers, who are likely to face higher costs due to adjusting the systems they put in place, and undermines the foundations of Europe’s sustainable finance architecture at a time when certainty is most needed to scale up investment for a just transition to a low-carbon economy. THE COST OF DOWNGRADING SUSTAINABILITY DATA The EU’s reporting framework is a critical enabler of investor confidence, for them to support the clean transition, and resilience building of our economy. It aims to replace a fragmented patchwork of voluntary disclosures with reliable, comparable data, giving both companies and investors the clarity they need to navigate the future. Let’s be clear: streamlining corporate reporting is a goal that is shared by investors and businesses alike. But simplification must be smart: by cutting duplications, not cutting corners. The Omnibus is likely to result in excluding up to 90 percent of companies from the scope of CSRD and EU Taxonomy reporting, if not more, should the council’s position, which includes a €450 million turnover threshold, be retained. This would significantly restrict the availability of reliable data that investors need to make investment decisions, manage risks, identify opportunities and comply with their own legal requirements. Voluntary reporting is unlikely to bridge this data gap, both in terms of the number of companies that will effectively report and regarding the quality of information reported. Using basic, voluntary questionnaires that were designed for very small entities would result in piecemeal disclosures, downgrading data quality, comparability and reliability. Market feedback has already demonstrated that it is necessary to go beyond voluntary reporting to avoid these shortcomings. This is precisely why EU regulators designed the CSRD in the first place. As a result of the Omnibus initiative, investors will likely focus on a limited number of investee companies that are in scope of CSRD and provide reliable information — limiting the financing opportunities for smaller, out-of-scope companies, including mid-caps. This will also restrict the offer and diversity of sustainable financial products — despite the clear appetite of end investors, including EU citizens, for these investments. This runs counter to the objectives of scaling-up sustainable growth laid down in the Clean Industrial Deal, and of mobilizing retail savings to help bridge the EU’s investment gap as proposed in the Savings and Investments Union. CUTTING DUE DILIGENCE BLINDS INVESTORS The CSDDD is also facing significant risks in the current institutional discussions. Originally, the introduction of a meaningful framework to help companies identify, prevent and address serious human rights and environmental risks across their value chains marked an important step to accelerate the just transition to industrial decarbonization and sustainable value creation. For investors, the CSDDD provides a structured approach that improves transparency and enables a more accurate assessment of material environmental and human rights risks across portfolios. This fills long     standing gaps in due diligence data and supports better-informed decisions. In addition, the CSDDD provisions to adopt and implement corporate transition plans including science-based climate targets, in line with CSRD disclosures, are providing an essential forward-looking tool for investors to support industrial decarbonization, consistent with the EU’s Clean Industrial Deal’s objectives. By limiting due diligence obligations to direct suppliers (so-called Tier 1), the Omnibus proposal risks turning the directive into a compliance formality, diminishing its value for businesses and investors alike. The original CSDDD got the fundamentals right: it allowed companies to focus on the most salient risks across their entire value chain where harm is most likely to occur. A supplier-based model would miss precisely the meaningful information and material risks that investors need visibility on. It would also diverge from widely adopted international standards such as the OECD guidelines for Multinational Companies and the UN Guiding Principles. The requirement for companies to adopt and implement their climate transition plans is also at risk, being seen as overly stringent. However, the obligation to adopt and act on transition plans was designed as an obligation of means, not results, giving businesses flexibility while providing investors with a clearer view of corporate alignment with climate targets. Watering down or downright removing these provisions could effectively turn transition plans into paperwork with no follow-through and negatively impact the trust that investors can put in corporate decarbonization pledges. Additionally, the council proposal to set the CSDDD threshold to companies above 5,000 employees, if adopted, will result in fewer than 1,000 companies from a few EU member states being covered. Weakening the CSDDD would add confusion and leave companies and investors navigating a patchwork of diverging legal interpretations across member states. A SMARTER PATH TO SIMPLIFICATION IS NEEDED How the EU handles this moment will speak volumes. Over the past decade, the EU has become a global reference point in sustainable finance, shaping policies and practices worldwide. This is proof that competitiveness and sustainability can reinforce, not contradict, one another. But that leadership is now at risk. > How the EU handles this moment will speak volumes. Over the past decade, the > EU has become a global reference point in sustainable finance, shaping > policies and practices worldwide. The position taken by the council last week does not address some of the major concerns from investors highlighted above and would lead to even more fragmentation in reporting and due diligence requirements across companies and member states. While the window for change is narrowing, the European Parliament retains the capacity to steer policy back on track. The recipe for success and striking the right balance between stakeholders’ concerns is to streamline rules while preserving what makes Europe’s sustainability framework effective, workable and credible, across both sustainability reporting and due diligence. Simplify where it adds value, but don’t dismantle the tools that investors rely on to assess risk, allocate capital and support the transition. What the market needs now is not another reset, but consistency, continuity and stable implementation: technical adjustments, clear guidance, proportionate regimes and legal stability. The EU must stand by the rules it has put in place, not pull the rug out from under those using them to finance Europe’s future. --------------------------------------------------------------------------------

All 27 European Union member countries have agreed to push for radical cuts to ethical supply chain rules, setting the stage for tense negotiations with other EU institutions later this year. It continues a growing trend of cutting back environmental laws to reduce the regulatory burden on business and boost the bloc’s sluggish economy. On Monday evening, EU ambassadors endorsed the Council of the EU’s position on the first omnibus simplification bill, a proposal for sweeping cuts to EU green rules that is one of the first major bills of Ursula von der Leyen’s second term as European Commission president. Green groups and some European lawmakers already considered the Commission’s original proposal too weak — now, member countries want it to be even laxer. The Council’s final position adopts a French proposal to just ask companies with more than 5,000 employees and €1.5 billion in net turnover to police their supply chains for environmental and human rights abuses. The threshold on the current proposal is 1,000 employees and turnover of €450 million. If endorsed by the EU as a whole, this would mean that fewer than 1,000 European companies would be subject to the law, called the Corporate Sustainability Due Diligence Directive. EU countries in the Council also agreed that companies should only have to assess their direct suppliers — and not their entire supply chain, as originally stipulated. They also want to postpone the deadline by which EU countries must transpose the directive into national law by a year. Denmark, which will take on the presidency of the Council of the EU in July, will run negotiations with the European Parliament and Commission on this. It comes just days after the Commission announced it would kill anti-greenwashing legislation days before negotiations on the law with Parliament and Council were due to conclude, causing uproar among some groups in Parliament.

Europe is at a pivotal crossroads. Geopolitical instability and economic anxiety dominate the headlines and risk leading politicians into neglecting, or worse, actively dismantling, the continent’s climate leadership. This must not happen. Rather than turning their backs in a time of crisis, EU leaders should seek to accelerate climate action as a path to both security and prosperity.   In the face of rampant disinformation and constant undermining by vested interests in the fossil fuel industry, some now talk of diluting Europe’s climate goals to appease lobby groups and climate-skeptic politicians. This would be a big mistake. Climate ambition cannot be diminished or dismissed for short-term political goals or vested interests. It must be long-sighted, future-proofed and transformational. Europe must now, more than ever, double down and show that climate action delivers for people, particularly those who have lost faith that climate action can benefit their everyday lives.  A commitment to reducing net emissions by at least 90 percent by 2040, phasing out fossil fuels and a strong Clean Industrial Deal that puts cities at the center of its delivery is as important to the health and well-being of Europeans as a strong defense policy, trade relationships or social safety net. If done well, with workers and families’ needs at the center, it will be essential to building a resilient, competitive and secure Europe.   If Europe wants to win hearts, minds and markets, it must prove how the climate transition delivers not just long-term targets, but also tangible benefits — and this all begins in cities with good green jobs, security, healthier places to live, work and play and lower bills.  Europe cannot achieve industrial competitiveness without decarbonization, and it cannot meet its climate commitments without transforming industry. Cities are hubs of economic activity, innovation and workforce development that will determine whether Europe succeeds in achieving both goals.   City leaders understand how EU policies land on the ground. Empowered cities can turn high-level climate ambition into real economic transformation.  Today, Europe’s 18 C40 cities, representing approximately 48 million residents and contributing €3.51 trillion to the global economy, already support 2.3 million green jobs — 8 percent of their total employment — including over 1.3 million in sectors like clean energy, waste and transport. That number will only grow as key sectors decarbonize. With the right support, cities can accelerate the creation of good, green jobs and better access to them: jobs that are safe, secure and future-proof.   > Europe’s 18 C40 cities, representing approximately 48 million residents and > contributing €3.51 trillion to the global economy, already support 2.3 million > good, green jobs   The examples are everywhere: London’s Green Skills Academy is reskilling thousands for low-carbon careers. Rotterdam, where construction materials and buildings account for 25 percent of the city’s €1.3 billion annual spend, is using procurement to scale the circular economy, and through the Circular Materials Purchasing Strategy, strives for a 50 percent reduction in primary resource consumption by 2030. Considering that C40’s European cities have reduced per-capita emissions by 23 percent between 2015 and 2024, these are not just local initiatives — they are scalable models of the industrial transformation Europe needs.   Cities also control powerful economic levers. Strategic procurement can shape markets, drive clean-tech adoption and support local small and medium-sized enterprises (SMEs). For example, Oslo mandates zero-emission construction in public projects, and five years on, 77 percent of municipal building sites are emission-free, a great example of procurement driving industry-wide changes. With direct access to funding and streamlined EU instruments, cities can go further and faster, creating demand for clean innovation and building thriving local economies from the ground up.  Yet today, only 13 percent of the global workforce is ready for these future careers, and Europe faces urgent skills shortages in high-emitting sectors. Cities are ideally placed to bridge that gap. Madrid and London, for instance, are already training workers in retrofitting, heat pumps and renewables. Paris streamlines business registration to support start-ups, while Lisbon provides free ESG training to SMEs, ensuring they meet evolving climate standards. But this needs serious investment at the EU level and real collaboration. Without structured EU-city collaboration, industrial policies risk being disconnected from economic realities and workforce needs.  A just transition also means ensuring that new green jobs are high-quality, inclusive and secure. The green economy has the potential to create 30 percent more jobs compared with a business-as-usual approach, but only if inclusion and fairness are built in from the start so these jobs will go to those who need them the most. Cities, in partnership with unions, businesses and workers, can ensure that industrial shifts translate into widespread job opportunities, particularly for marginalized communities. Projects such as ‘Boss Ladies’ in Copenhagen are championing the inclusion of women in the building sector.   A Clean Industrial Deal that excludes cities will fall short. One that recognizes them as co-creators — alongside businesses, unions and communities — can build the industrial, climate and social transition Europe urgently needs in a time of crisis. Cities must be full partners, with direct access to the tools, funding and policy frameworks needed to drive this transition.   To translate ambition into action, the Clean Industrial Deal must include clear national frameworks for sustainable investment, early business engagement and market-shaping tools like grants, innovation hubs and procurement. With strong public-private partnerships and targeted investments in cities, we can create the conditions for green jobs, resilient industries and lower energy bills.  This unpredictable decade has presented a once-in-a-generation opportunity for Europe to create a future that works for everyone. Europe’s clean industrial strategy must prioritize city-led innovation, invest in workforce transformation and deliver for those who feel most left behind. That is how Europe can regain global leadership — not by pulling back, but by proving how climate action can be the surest path to economic resilience, energy independence and shared prosperity.  > This unpredictable decade has presented a once-in-a-generation opportunity for > Europe to create a future that works for everyone.  

In times of urgency, national promotional bank institutions (NPBIs) are the optimal solution to complement the role of the European Investment Bank (EIB) and other alternatives. NPBIs are best suited to set up European or regional financial vehicles with strong control from member states and the best access to capital markets. Europe is on the path to implementing the Polish presidency’s slogan, ‘Security, Europe!’ Recent geopolitical shifts have not disrupted the prevailing trends in European capital markets or shaken confidence in our own capabilities. The president of the European Commission announced the creation of a new defense financial instrument with an allocation of €150 billion in the form of loans for member states. The Commission is proposing amendments to the Stability and Growth Pact, allowing military expenditure to be excluded from the excessive deficit clause and enabling transfers within existing EU financial programs — e.g. cohesion policy. EIB is also exploring ways to further increase its support for so-called dual-use expenditure. External pressure for swift economies of scale in financing European defense spending strengthens the argument for utilizing financial institutions trusted by governments that are capable of both the EU’s and national defense initiatives. In Poland, Bank Gospodarstwa Krajowego (BGK) has been implementing EU financial instruments since the country joined the EU. With its experience in financing the ever-growing number of EU policies, BGK has reinforced its flexibility and efficiency alongside the ability to swiftly adapt to new challenges. The agility of BGK and NPBI to absorb ‘special assignments’ — even on short notice — derives from the status of a public financial institution and a long-term investment horizon. Poland’s defense financing model BGK has notable experience in securing funds for defense expenditure. Poland leads NATO in defense spending relative to GDP, with projections for 2025 indicating that this share will stand at 4.7 percent of GDP — higher than the United States, at 3.4 percent, and the United Kingdom’s planned increase to 2.5 percent by 2027. In nominal terms, Poland ranks fourth in Europe, following Germany, the United Kingdom and France. Poland’s efforts are financed through the state budget and the Armed Forces Support Fund (AFSF). This fund, established under the relevant act, is managed by BGK and is de facto anchored in the state budget. In 2025, 66 percent of defense expenditure is expected to come from the state budget, with 34 percent allocated from the AFSF. BGK is responsible for managing the fund’s financial liquidity, securing debt financing — primarily via loans and borrowings, supplemented by bond issuance — and distributing funds. To date, BGK has secured approximately €40 billion for AFSF from international markets, benefiting from guarantees from the Polish State Treasury and export credit agencies, resulting in favorable financial conditions. BGK’s track record as a borrower demonstrates that concerns about the impact of military spending on ESG ratings are not an obstacle to obtaining financing. This is particularly relevant in light of ongoing EU negotiations for the Capital Markets Union, a matter yet to be settled. Toward a European defense financing architecture EU institutions already have a variety of advanced financing tools at their disposal. The EIB’s role in financing dual-use projects, including support for small and medium-sized enterprises in the defense sector, will be crucial for various activities, including financing new technologies, or so-called defense tech. BGK’s experience in managing the AFSF could be leveraged to finance strictly military expenditure, which the EIB is currently unable to support. This could serve as a foundation for creating a European Defense Fund, which could be set up and co-managed with other banks. Creating a new fund through NPBIs offers several advantages. NPBIs possess in-depth knowledge of regional industrial ecosystems, enabling more tailored funding solutions for local companies and research institutions. They also facilitate faster and more efficient allocation of funds. Leveraging their experience with EU funding programs, such as InvestEU, NPBIs are well positioned to implement defense projects efficiently. NPBIs can combine EU, national and private funds, creating significant financial leverage, and integrating various instruments like defense bonds, preferential loans or investment guarantees. Their regional perspective also makes them adept at identifying and supporting strategic companies in the defense supply chain, including research and development initiatives. Creation of armaments fund(s) Given the urgency of addressing the armaments gap, we propose that the first step toward implementing the ReArm Europe Plan should involve creating regional or task-based armaments funds , such as one dedicated to the eastern flank of NATO. Such a vehicle could quickly meet the funding needs of countries looking to accelerate defense procurement spending and increase financing for their manufacturing capacity. A regional defense fund would provide new funding opportunities to member states where military modernization efforts are constrained by limited access to financing. Projects agreed upon at the EU, NATO and member states levels could be financed by a fund, similar to the structure of Poland’s AFSF. The selected NPBI would manage the fund, securing financing with a guarantee from the European Commission and, in some cases, member states too. Such a fund could be anchored in the EU budget, mirroring the setup of the AFSF within the Polish budget, with the Commission providing grants or other resources, including the issuance of defense bonds if necessary. In terms of financing the expansion of production capacities, the private sector could play a key role, with appropriate incentives such as financing guarantees. In conclusion, we believe that the European discussion on financing its defense capabilities has now shifted from ‘whether’ to ‘how?’ And NPBIs are the answer, emphasizing the crucial role in managing and raising funds for European financial programs. The advantage of NPBIs, such as BGK, is their ability to quickly absorb new tasks. To us, the EU defense policy represents another assignment, and leveraging such trusted partners offers the fastest route to building an effective and open financing architecture. This approach complements the role of other financial institutions, EIB or potentially a new armament bank modeled on the European Bank for Reconstruction and Development. Modifying a public bank’s mandate is a much simpler process, and given the time-sensitive nature of the current defense investments, regional procurement funds managed by NPBIs offer the most efficient solution.

BORITI, Georgia — Two neighbors, Murman and Natela, sit together sipping coffee as the early autumn sun sets over the village of Boriti, in Georgia. Just a few kilometers away, the newly built East-West Highway roars with traffic. The question — whether the new highway is European or Chinese — is met with confusion. “The road is built by those who pay, so it’s European,” argues Murman, 47, who has been working on the construction of the road since day one. “But it’s built by the Chinese, so it’s Chinese,” replies Natela, 52. The debate may be a local one, but it has international implications.  As Brussels gears up to challenge Beijing in the funding and construction of global infrastructure, it’s running up against an uncomfortable truth: Not only do its efforts sometimes overlap with its rival’s; many of the projects it is funding are being built by Chinese state-owned companies. Since the beginning of 2019, Chinese companies have been awarded more than €1 billion worth of contracts for EIB-funded projects in countries outside the EU, such as Georgia, Senegal, and Tunisia. This represents roughly 13.1 percent of the total value of third-country contracts attributed to the EIB on the EU’s Tenders Electronic Daily (TED) portal. By comparison, companies from the EU have won 15.7 percent of the total value of contracts, including tenders won by consortiums that involve EU companies.  In some years, such as 2019 and 2024, Chinese firms won a greater share of EIB-funded contract value than EU companies. Chinese firms win around a third as many contracts as EU companies, but these contracts are typically high-value. Take the road outside Boriti, part of the E60 European Transit Road which links Europe with Asia. The stretch near the village, known as the Rikoti Road, navigates steep, mountainous terrain and is one of the most challenging sections of the highway.  Funding for its construction came from the Asian Development Bank, the World Bank and the EIB, which contributed €399 million. But the contracts went to five construction firms — all of them Chinese state-owned enterprises. In 2018, for example, the China Road and Bridge Corporation (CRBC) signed a €300 million contract to build the Ubisa-Shorapani section near Boriti, which is almost entirely funded by an EIB loan. The numbers above do not reflect the full scope of EIB-funded contracts. For instance, a €154 million contract secured by CRBC earlier this year for an EIB-funded rail bypass in Serbia is listed on the TED portal, but not included in TED’s aggregated data for EIB-funded contracts.  “There’s a tension between the rhetoric that this is a European offer and the fact that Chinese companies are building some of these projects,” said Chloe Teevan, the head of digital economy and governance at the European Centre for Development Policy Management, a think tank. The CRBC did not respond to a request for comment. GLOBAL GATEWAY VS. BELT AND ROAD INITIATIVE When European Commission President Ursula von der Leyen unveiled Global Gateway in September 2021, it was a direct response to China’s international infrastructure ambitions. Beijing’s effort, the Belt and Road Initiative, had set off alarm bells in the West, where it was seen as locking in Chinese strategic interests and creating debt dependence in the countries where the infrastructure was being built. “We want to create links and not dependencies!” von der Leyen announced during her 2021 State of the Union address. “We are good at financing roads,” she added. “But it does not make sense for Europe to build a perfect road between a Chinese-owned copper mine and a Chinese-owned harbor.” Today, the bigger challenge is that it’s very often Chinese firms that are building the roads the EU is paying for. In addition to the EIB, the EU funds infrastructure through the bloc’s national governments, as well as the European Bank for Reconstruction and Development (EBRD). While the EBRD isn’t technically a part of the EU, 54 percent of its shares are held by the EU, the EIB and EU national governments. The rest is divided among 44 other countries. The U.S., the U.K., Japan, and Switzerland combined hold 33 percent. Russia holds 4 percent, and China less than 0.1 percent. Over the last five years, however, Chinese firms have won 13 percent of the total value of public-sector projects funded by the EBRD. EU contractors were awarded 35 percent of total value across the 38 countries in which the EBRD operates, 13 of which are EU member states.  In addition to this, Chinese firms have been awarded contracts for private-sector development projects funded by the EBRD.  In Uzbekistan, for example, the EBRD is providing at least €500 million in financing for seven wind and solar projects being developed by Saudi ACWA Power or Emirati firm Masdar, but which have been contracted to Chinese state-owned enterprises. Though the majority of EBRD’s operations are geared toward the private sector, the development bank does not publish the results for these tenders. “The EBRD permits participants from all countries to provide on equal terms goods, works, services or consultancy services for an EBRD-financed public sector project regardless of whether such country is a member,” the EBRD’s Balkan office said in a statement to POLITICO.  UNLEVEL PLAYING FIELD  China’s involvement in EU-funded projects hasn’t gone unnoticed by the European construction industry.  In 2020, the European Chamber of Commerce in China highlighted a “profound lack of European involvement” in Chinese-financed Belt and Road projects, which are often contracted to Chinese firms without tender. The EIB, on the other hand, requires its promoters to award contracts through a competitive procurement process.  “We are not afraid of competition on a level playing field,” said Frank Kehlenbach, director of European International Contractors, an industry group. “But we will never be able to compete with these huge state-owned enterprises that work under the control and with the funds of the Chinese Communist government.” In a statement, the EIB said “all companies, irrespective of their geography and without discrimination, are eligible and free to participate in EIB-led tender processes, which award contracts on the basis of a number of criteria, such as price offer and quality for end users.” The EU has developed several instruments to address unfair competition in procurement. One of these is the Foreign Subsidies Regulation (FSR), which empowers the European Commission to investigate public procurement bids by foreign companies suspected of benefiting from state aid. Since the regulation entered into force at the beginning of 2023, it has been used four times, all but one targeting Chinese companies. One of the major catalysts for the development of the FSR was the awarding of a contract in 2018 to CRBC for the construction of the EU-funded Pelješac bridge in Croatia. “The Pelješac Bridge scenario was one of the key moments for evolving the EU’s thinking about its competitiveness and economic security vis-à-vis China,” says Matej Šimalčík, executive director of the Central European Institute of Asian Studies. The Austrian firm Strabag, which also bid for the contract, accused CRBC of price dumping and filed a complaint, but courts found no proof of illegal subsidies.  However, experts argue that state-owned firms like CRBC benefit from indirect state subsidies. CRBC, for example, has established a large portfolio of projects in Europe that are tied to loans from the Export-Import Bank of China. The introduction of the FSR makes a repeat of the Pelješac case unlikely within the EU, but the regulation does not extend to EU-funded projects outside of the EU, including those that might be built as part of the Global Gateway. A Commission spokesperson said there was a recognition of the issue. “The EU is a firm supporter of equal opportunities and open competition,” the spokesperson said in a statement. “However there is a need to ensure a level playing field.” “The European Commission is discussing these issues with the EIB and is working actively — also in the context of the Global Gateway initiative — to increase the engagement of European companies,” the spokesperson said. They added that the Commission was “exploring” options that would “ensure best price/quality ratio instead of a lowest price as an award criterion.” However, Teevan cautioned that simply raising the bar may not be enough to deter Chinese companies. “There’s an effort to make it more complicated for Chinese companies to comply, but Chinese companies are getting better and they are investing a lot in ESG,” she said.  Meanwhile, said Teevan, the visible involvement of Chinese companies in the construction of its infrastructure project is undermining the bloc’s ability to take credit for the project it funds. The Pelješac Bridge is once again a good example. While Brussels saw the bridge as an EU-driven development, Beijing advertised it as a “key strategic project” of the Belt and Road Initiative.  Chinese Premier Li Keqiang, attended the project’s opening ceremony virtually to describe it as “a new bridge to promote friendship between [China and Croatia].” The confusion, as to whether the bridge was built thanks to Brussels or Beijing, would be instantly recognizable to villagers of Boriti in Georgia.  “How is this road European?” asks Omar, 67, who is being paid €11 per day to control traffic on the soon-to-be-finished East-West highway.  “Everything here is Chinese,” he adds. “The Europeans are paying, but the Chinese are building it.” Reporting for this article was supported by a grant from Investigative Journalism for Europe (IJ4EU).

Brace for the latest round of the never-ending culture wars — this time with bombs. Britain’s financial powerhouse, the City of London, is pushing to label money flowing into weapons-makers as eco-friendly. It risks igniting another debate about “woke” culture at the top of finance — and the role of environmental, social and governance (ESG) goals in the global economy. As Ukraine continues to fight Russia on the battlefield, the cash-strapped U.K. government wants the private sector to help bolster financing for the country’s defense industry. But the top of the City of London says there’s a serious barrier: environmental, social and governance (ESG) exclusions that can prevent money from reaching gun manufacturers and bomb-makers. And, it argues, the war in Ukraine shows weapons now serve a real social good in defending democracy — and so should win recognition as environmentally and socially friendly investments. “We would argue there is a social value in defense that needs to be properly recognized amongst the sustainability community,” said Miles Celic, chief executive of TheCityUK, a leading trade lobby. EXPLOSIVE ARGUMENT While there are no explicit rules preventing these investments, the square mile wants the Labour government to use its major review into the U.K.’s approach to defense to do away with any disincentives that arise in the name of eco-friendly investing. But it’s a discussion that risks enraging both left and right, importing culture wars from the U.S. over “woke capitalism” — and creating a political minefield for the U.K.’s new government. On the right, ESG has become a dirty word, with Republicans in the U.S. attacking business for prioritizing progressive values over money-making.  And the previous Conservative government, ousted in July’s general election, pushed the issue in its dealings with the City. “As City minister I saw first hand the damage done by ‘blanket’ ESG policies defunding British defense companies because the eco-warriors coming up with the indices happened to also be personally opposed to them,” said Andrew Griffith, a Conservative MP who was City minister between 2022 and 2023.  As Ukraine continues to fight Russia on the battlefield, the cash-strapped U.K. government wants the private sector to help bolster financing for the country’s defense industry. | Paul Ellis/AFP via Getty Images “Patriotic pensioners and investors who had invested their money in funds were horrified to discover that whilst their freedoms were being defended against Russian invasion, some in the City were sabotaging the companies behind that defense,” he added. Former Tory MP and ex-defense minister, Grant Shapps, blasted insurer Aviva for its ethical investment policies in November last year, after making a statement to MPs that “there is nothing contradictory between the principles within ESG and the defense industry.” And the Treasury teamed up with the Investment Association, which represents the U.K.’s fund industry, in April to state defense companies are “compatible with ESG considerations as long-term sustainable investment.” ‘NOTHING ETHICAL’ At the same time, the City has come under fire from the left for driving too much money into polluting or harmful companies. That comes with reputational risks. Fund house Baillie Gifford, for instance, was blasted by activists this summer over its links with Israel defense companies and fossil fuels — and was dropped as a sponsor of a prestigious literary festival. Barclays bank has also come under pressure for its business with the Israeli government. Campaigners would fiercely resist any attempt to label defense as ethical. “Including investments in arms companies in environmental, social and governance funds would make a mockery of the entire concept,” said Emily Apple, media coordinator for the Campaign Against Arms Trade (CAAT). “There is nothing sustainable or ethical about arms trade, and we should be encouraging divestment rather than finding loopholes for shareholders to make even more money from devastating people’s lives,” she said. All the same, the Labour government needs private cash. Launching his party’s defense review in July, Prime Minister Keir Starmer gave a “serious commitment” to spending 2.5 percent of GDP on defense amid “multiplied and diversified” threats to the U.K.’s security. While traditional defense spending, for example on planes and tanks, comes directly from the government, private sector funding could play a bigger role in helping companies that supply defense firms, but whose products have dual uses and can be used in other industries, like cybersecurity, in their search for cash. And that’s where ESG restrictions come in. Launching his party’s defense review in July, Prime Minister Keir Starmer gave a “serious commitment” to spending 2.5 percent of GDP on defense amid “multiplied and diversified” threats to the U.K.’s security. | Dan Kitwood/Getty Images There are no outright rules against European and U.K. ESG funds including defense stocks, but that hasn’t stopped the City being wary. TheCityUK, in its submission to the government’s ongoing strategic defense review, warned when money managers apply exclusions across their businesses — such as for companies involved in “controversial weapons” like landmines, nuclear weapons or civilian firearms — that can hamper investment directly in defense companies, and also in any business associated with their supply chains. “It’s about making sure that we’re taking what is a national advantage in the strength of the financial and professional services industry that exists here in the U.K. and applying it to another public policy challenge,” said Celic — arguing there is cross-party agreement that defense spending needs to increase. The government should “act to ensure that there are no inadvertent disincentives to invest in defence firms,” the response said. “A transparent dialogue between government, the defence industry and private finance around ESG and ethical challenges to mobilising private capital is essential.” ‘INVESTOR FREEDOM MUST REMAIN’ There’s a lot of money at stake. Over the last five years, sustainable funds have grown from only 5 percent of the European market in 2018, to 20 percent at the end of 2023, according to data from Morningstar, standing at more than €2.4 trillion at the end of June this year. While European ESG funds, including the U.K., do invest in defense stocks, and have upped their exposures since the war in Ukraine began in February 2022, according to data from Morningstar, it’s still a small slice of the pie with the average increasing from 0.37 percent in 2022 to 0.5 percent in June 2024. Plus, there’s huge variety, with a small minority of funds holding more than 10 percent in aerospace and defence, while almost 70 percent invest nothing in the sector. The City’s eco-minded investors say that shows it’s driven by consumers’ choices. James Alexander, chief executive of the UK Sustainable Investment and Finance Association (UKSIF), which represents green investors, said there shouldn’t be pressure from industry or government to relax exclusions. “There is no doubt that global geopolitical tensions necessitate strong national defenses, but we believe investor freedom must remain central to protect sustainable investors,” he said. A spokesperson for the U.K.’s Ministry of Defence said planned reforms of ESG company ratings would “help deliver a cleaner economy and ensure that companies in critical sectors like defence are not penalised by opaque ratings,” but did not comment on broader ESG restrictions. “As part of the Strategic Defence Review we are engaging widely with our industry partners, and we are clear on the need to ensure we have a strong defence sector and resilient supply chains across the whole of the UK,” the spokesperson said.