Industrial-Scale Decarbonization in the EU: Stewardship Field Notes From Germany, France and Spain

Key Insights:

• EU companies face structural barriers to their decarbonization efforts, including those related to EU subsidies, high interest rates, lack of customer commitment, and lack of manufacturing capacity.

• Despite these obstacles, the companies engaged with on this trip, such as BASF, Iberdrola, Air Liquide, and Acerinox, have remained committed to their net zero ambitions -- investing in low-carbon technologies and projects, engaging with policymakers, and strategically positioning themselves within low-carbon value chains.

• Bold and coordinated action from policymakers, industry leaders, and investors is needed to address these challenges, if the goal of a sustainable and resilient energy system in the EU is to be achieved.

As the EU’s energy transition continues, addressing climate change has evolved to become both an engineering and financial challenge, with energy security and geopolitical factors also in the mix. Coordinated action from EU policymakers, a long-term strategy, and investment from industry and investors will be needed to secure resilient supply chains and accelerate decarbonization.

Unfortunately, things have turned in the opposite direction. In 2024, many high-emitting companies across the EU scaled back or delayed deadlines for achieving carbon reduction targets through 2030. Many early-stage projects intended to scale low-carbon technologies commercially (e.g., green hydrogen, carbon capture, and biofuels) were scrapped, despite strong interest in these solutions. Morningstar Sustainalytics’ Stewardship Team were keen to get to the bottom of what was going on in the region. So last November, we embarked on a field trip to learn how EU industry leaders were navigating the complex challenges of the energy transition. 

Spanning Germany, France, and Spain, we engaged with utilities, chemicals, steel, industrial gases, and construction companies, to understand their decarbonization strategies and see the energy transition in action. Highlights included a tour of BASF’s e-furnace technology at the Ludwigshafen chemical park in Germany and Iberdrola’s industrial-scale green hydrogen plant in the Spanish city of Puertollano, which supports green ammonia production (see Figure 2). Both facilities focus on replacing often imported fossil fuels in industrial-scale applications with domestically produced clean alternatives. 

EU Subsidies: EU subsidies primarily aim to increase the availability of low-carbon technologies and products, but fail to sufficiently lower prices or offer incentives that make them attractive for businesses. As a result, both commercial and individual customers remain reluctant to pay a premium for green products, limiting demand.

High Interest Rates: Persistently high interest rates in major EU economies and inflation have increased borrowing and production costs, driving up prices of critical raw materials for the energy transition, such as lithium, cobalt, and nickel.

Lack of Customer Commitment: Many low-carbon projects, particularly green hydrogen, lack customer commitment, which prevents industrial companies from making final investment decisions.

Manufacturing Capacity: The EU’s lack of manufacturing capacity for critical components, equipment, and machinery has been starkly exposed by China’s near-total dominance in key low-carbon and renewable technology supply chains.

Despite these obstacles, the companies we engaged with, such as BASF, Iberdrola, Air Liquide, and Acerinox, have remained committed to their net zero ambitions. They are investing in low-carbon technologies and projects, engaging with policymakers, and strategically positioning themselves within low-carbon value chains as markets mature. For example, following the 2024 US election results, Iberdrola reaffirmed its commitment to expanding renewable energy projects in the US, demonstrating resilience amid global uncertainties.

The Road Ahead to Accelerate the Energy Transition in Europe

The EU is at a critical juncture in its energy transition to meet its global climate commitments. And the urgency is higher than ever. Today, climate action isn’t just about cutting carbon emissions, but also about ensuring the EU's energy security and resilience. The EU has long relied on energy imports, but now it’s stepping up with policies and funding to accelerate the large-scale deployment of decarbonization technologies.¹

For example, renewable energy sources and energy storage systems strengthen energy security by reducing dependence on imports and are less affected by geopolitical disruptions. The Russia-Ukraine war and China’s dominance in critical clean energy supply chains have exposed vulnerabilities in the EU’s energy system, elevating the urgency of climate action from an energy security perspective even further.

Bold and coordinated action from policymakers, industry leaders, and investors is needed to address these challenges. We believe the following important step would be needed from each group.

1. Policymakers would need to implement additional incentives to stimulate demand for low-carbon technologies such as electric vehicles. Clear mandates and supportive policies, like putting a real price on carbon, will also drive adoption, encourage investments, and mature markets.
2. Despite current economic headwinds, industry leaders need to prioritize long-term investments in resilient supply chains and viable low-carbon technologies such as EU-wide green hydrogen infrastructure and biofuel hubs. Collaboration with policymakers and value chain partnerships can further unlock the full potential of decarbonization technologies.
3. Investors need to prioritize transition finance to accelerate decarbonization in high-emitting sectors, enabling systemic change and ensuring no industry is left behind on the path to net zero.

Each group has a critical role to play if the goal of a sustainable and resilient energy system in the EU is to be achieved.

Figure 1. Iberdrola Solar Park - Puertollano, Spain

_{Image: Amar Causevic. Nov. 6, 2024.}

Figure 2. Iberdrola Hydrogen Plant - Puertollano, Spain

_{Image: Amar Causevic. Nov. 6, 2024.}

Figure 3. Iberdrola Renewable Energy Storage - Puertollano, Spain

_{Image: Amar Causevic. Nov. 6, 2024.}

---

References

1. Anderon, B. 2025. “The EU Renewable Energy Sector: Leveraging ESG Factors to Assess Coming Legislation.” Morningstar Sustainalytics. January 16, 2025. https://www.sustainalytics.com/esg-research/resource/investors-esg-blog/the-eu-renewable-energy-sector--leveraging-esg-factors-to-assess-coming-legislation.