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Executive Summary - Global business in a changing Europe.

Europe’s competitiveness on the global stage

Historically, the EU’s competitive position stems from its common approach to organising – or socialising – free markets. Perhaps more importantly, the EU’s purpose has rested on a social contract between governments, businesses and citizens that has been built on high standards of consumer and environmental protections, measures to limit tax competition between member states, and the use of proportionate regulation to mitigate against risks and potential market failures.

These sands have started to shift in the run-up to the EU Parliamentary elections. With polls suggesting a more extreme-right leaning, nationalist assembly over the next five-year term, some analysts are predicting a change in approach at EU level, with Eurosceptic forces questioning the value of the shared economic and social ideals at the heart of the European project.

Our research showed that many businesses would favour a loosening of the EU’s strict regulatory rules, echoing wider calls – including from French President Emmanuel Macron – for an EU “regulatory break” around new green regulations to boost competitiveness.

Our study revealed that business leaders were generally positive about the future performance of their businesses within the EU, with the majority (56%) optimistic and 31% pessimistic. There was a further sign of confidence visible in our respondents’ views on M&A. Of the one in five whose businesses had acquired another company within the past two years, most had done so within the EU.

The EU’s energy market and its impact on competitiveness will be an area to watch in the coming years. Energy costs surged in the aftermath of Russia’s invasion of Ukraine, shining a spotlight on energy security and prompting EU legislators to launch a renewed push to build renewable capacity.

National laws and regulations play a significant role in Europe’s energy landscape. While the Lisbon Treaty includes solidarity in matters of energy supply, many competencies rest at member state level, with progress across the bloc relying on cooperation between national governments. To accelerate the construction of new renewable infrastructure, steps have been taken in some member states to streamline permitting and limit the rights of third parties to challenge projects through the courts.

Our interviewees were united in their calls for more coordinated EU energy policy to align Net Zero strategies across borders, foster the development of green energy supply chains and improve grid connections for offshore production facilities. But if more Eurosceptic voices enter Parliament it’s hard to see how this level of cooperation moves closer, with nationalist and far-right parties advocating for the return of more powers to national governments.

Europe, regulator of the world

Regulation and enforcement are the primary levers the EU uses to achieve its strategic goals and promote its values both within and outside its borders.

European regulations invariably set a high bar that requires extensive investment in disclosure and risk management. Yet this isn’t seen as a negative by businesses, with almost half (43%) of our survey respondents viewing the EU’s regulatory structures as “very favourable”, far higher than those of other global jurisdictions.

Our interviewees gave a more nuanced response, describing some of the EU’s frameworks as burdensome, even where they supported the regulations’ intentions. The business leaders we spoke to highlighted the fact that compliance is easier for larger organisations with more extensive resources, while smaller companies are at a disadvantage and could experience a regulatory drag on their ability to innovate.

Our interviewees described how they hire risk-management specialists from industries where European regulations bite hardest or from organisations that have a strong interest in particular issues – for example bringing in heads of sustainability from environmental charities and heads of data privacy from major tech companies.

Among some member state governments, there is a growing sense that there may be some regulatory overreach from Brussels, and in response, the European Commission President, Ursula von der Leyen, has acknowledged the need to reduce red tape “to make business easier”.

Our interviewees also noted that regulation can be a driver of innovation, pointing out that requiring businesses to track granular emissions data across their operations would potentially involve a technological solution, which could improve risk monitoring and agility.

Europe’s wave of new regulations and the rise in collaboration agreements between businesses developing innovative solutions to global challenges creates a heightened risk of anticompetitive information-sharing. With the European Commission keenly focused on tackling allegations of collusive behaviour – and the Private Damages Directive raising the possibility of significant damages claims – companies must tread carefully.

Charting a path through the EU’s sustainability landscape

Our interviewees identified Net Zero transition plans –which feature in regulatory regimes including the Corporate Sustainability Reporting Directive and the Sustainable Finance Disclosure Regulation – as a significant challenge.

The regulatory framework for guiding businesses along the path to Net Zero is expected to be a major focus of the 2024-2029 EU mandate, but whether we will see a continuation of the 2019-2024 trajectory towards ever-tighter sustainability regulation remains to be seen.

The stalling of the Corporate Sustainability Due Diligence Directive (CSDDD) as it moved through the legislative process could be a sign of things to come. After four years of negotiations, support began to unravel as the directive reached its final stages following criticism of the impact on business.

The Directive was eventually approved, but only after its turnover thresholds were raised significantly (taking all but the largest businesses out of scope), and removing provisions that would have enabled trades unions to launch civil actions against noncompliant businesses.

Our survey showed that global businesses recognise the strategic importance of sustainability and Net Zero, with 45% of respondents saying their organisations were devoting significant investment into planning and implementing sustainability initiatives, including climate disclosures and initiatives to reduce emissions.

Just over half (53%) of the business leaders we questioned were confident they would achieve their strategic aims, with only 29% saying they are very confident.

Overall, fewer than one in four (24%) of the leaders we questioned said their businesses were well prepared to meet the expected requirements of frameworks such as the CSDDD, possibly because of the difficulty in seeing through their supply chains to get an accurate picture of what’s going on, and, more fundamentally, mitigating any negative impacts at the furthest reaches of their operations. Additionally, fewer than one in seven (14%) of respondents felt well prepared to deliver environmental reporting between global regions that differed in their approach.

This is a potential risk given the anti-ESG backlash that has been growing in certain Republican U.S. states and is driving many global organisations to consider disclosing less about their sustainability activities at the same time as EU rules have been pushing them to publish more granular data. Any asymmetry in disclosures is a potential source of litigation, with plaintiffs pursuing businesses where they perceive inconsistencies in reporting.

The increase in sustainability data published under the EU’s Corporate Sustainability Reporting Directive is set to make Europe a more active destination for sustainability-related litigation in future.

Our survey revealed a global business community that is not only underprepared to track and disclose its environmental impact across the world, but also one lacking confidence in the systems it has in place to manage the risks associated with ESG activism and the uptick in sustainability-related class actions.

While 70% of global businesses report that they have measures in place to mitigate the risk of ESG activism and climate-related mass claims, fewer than three in five (57%) of our respondents were confident these systems mitigate those risks effectively – with only 27% very confident.

Seizing the AI opportunity

Nearly 4 in 5 (77%) respondents to our survey said their businesses viewed AI as a strategic priority over the next two years. Indeed, many are beyond the strategy phase and firmly into integration, with generative AI already being used to write code, support customer services and create content.

Our in-depth interviews revealed further detail on how AI is being applied across sectors, with businesses deploying AI models to boost operational efficiencies, mitigate disclosure risk, manage their contractual estate and support with M&A execution. Others were pursuing more disruptive applications, for example by applying AI to proprietary data sets to create more personalised and informed experiences for their clients.

However, of the 77% of businesses that saw AI as a strategic priority, only 26% were very confident they would achieve their aims. One in three were either not very – or not at all – confident.

Further, only 26% of our respondents said the governance of AI was a business risk that they currently have systems in place to mitigate. Even among the one in four businesses that had implemented risk mitigation systems, fewer than half (41%) were very or fairly confident that they worked effectively. And only one in five of our respondents felt fully aware of – and well prepared for – the evolving legal and regulatory landscape around AI.

Europe as an investment destination

Our survey results revealed a strong desire among global businesses to continue pursuing European acquisition targets. Of our respondents whose employers have completed an M&A transaction in the past two years, most had invested in the EU (41%) followed by the UK (35%) and North America (32%).

The numbers were reversed among those considering transactions over the next two years, with 41% expecting their deal activity to focus on North America compared to 31% on the EU.

Respondents whose businesses have completed an acquisition in the past two years listed cyber security due diligence as the biggest challenge they faced (73%), with managing the risk of leaks among the top five issues (67%). Our respondents whose businesses haven’t been active in M&A over the same period put leaks down in 10th place.

The latter point is interesting in the context of public takeovers, given the importance of maintaining confidentiality under the EU Market Abuse Regulation.

Our interviews revealed how businesses are managing regulatory and other risks in the context of M&A transactions. Many of the business leaders we spoke to said smaller deals involving targets that fall below the revenue thresholds for some of Europe’s more stringent regulatory regimes are more challenging than bigger acquisitions.

Regulatory risk management through M&A due diligence is particularly important for private equity buyers given their investment horizons, with regulatory investigations in Europe often taking years to resolve. If any issues identified are not addressed prior to completion they may eventually result in enforcement action, which in turn could impact the sponsor’s exit options.

Accessing Europe’s talent

Our survey shows that while recruiting and retaining talent was a challenge for businesses regardless of location, those based in the EU were particularly feeling the heat. Almost three-quarters of our survey respondents from EU-based organisations (74%) regarded labour shortages as an enterprise-wide challenge, compared to 45% of those in North America and Asia. One in three of our survey respondents did not view the EU favourably in relation to the availability of talent.

Foreign businesses often struggle with Europe’s fast-changing, worker-friendly regulatory regime. Here there is change on the horizon, with moves under way to reduce the reliance on flexible contracting models, including via the Directive on Transparent and Predictable Working Conditions and the Platform Work Directive.

The latter is designed to ensure the correct classification of employment status by introducing a presumption of an employment relationship (rather than self-employment). Once implemented into local law, the new rules are expected to have a material effect. According to the European Commission, almost 20% of platform workers ought to be reclassified from self-employed workers to employees.

Elsewhere the Pay Transparency Directive, which was approved in 2023 and is due to come into force in 2026, aims to tackle pay discrimination and close the gender pay gap across the bloc.

The new rules will require businesses with more than 250 employees to report annually their gender pay gap figures and take action if the differential is above 5%, while those with between 100 and 249 employees will need to report every three years.

The Pay Transparency Directive will provide employees with enhanced rights to challenge their employers on workplace discrimination or failures to disclose pay transparency.

Almost half (49%) of our respondents from businesses with operations in the EU identified employment law as a business risk that they currently do not have systems in place to mitigate. Of our respondents whose businesses have acquired another company in the past two years, over half (54%) found responding to cross-border employment laws a challenge through the process.

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