Profits without investment

Across Europe, policymakers are turning to de-risking to finance the continent’s growing investment gap, which Mario Draghi’s 2024 report on European competitiveness identified to be around 800 billion. Derisking involves the public sector using government policy and funding, for instance through guarantees or regulation, to adjust the risks and returns of private investors to channel private finance into desirable areas. This approach is now embedded across EU and member state policy, including InvestEU, the proposed Competitiveness Fund, Germany’s Deutschlandfonds, and France’s France 2030 programme. Yet this approach is fundamtenally mismatched to the problem.

Take Shell for example. In 2023, the fossil fuel giant secured a €150m subsidy for its Holland Hydrogen I project. However, reporting by Follow the Money revealed that Shell was ineligible for the subsidy and only received it by exerting pressure on the Dutch government. Far from needing public support, the company was facing windfall profits from soaring fossil gas prices in the wake of Russia’s invasion of Ukraine. Shell channelled these profits to shareholders, distributing an extraordinary 97% of net gains in 2023. At the same time, the company successfully overturned a landmark ruling that had required it to reduce emissions by 45% by 2030.

The example of Shell is not an exception. Over the last two decades the financial reserves held by corporations have grown, shareholder distributions have increased. At the same time investment into new productive capacity has fallen. 

The constraint is not the availability of capital. It is the governance regime that determines what firms do with it. Without confronting this directly, through conditionality, capital discipline and a serious conversation about the accumulated financial reserves sitting on corporate balance sheets and paid out to shareholders, Europe will not be able to build a stronger, more resilient and prosperous economy. 

How are European firms spending their money

Using capital expenditure (CAPEX) relative to property, plant and equipment (PPE) as a measure of how quickly firms renew and expand their productive base, EU-27 listed firms invested at around 28% in 2007, falling to 17% by 20211. This means that firms are allowing their physical capital stock, such as machinery, factories and equipment, to age rather than replacing or expanding it. 

Figure 1: EU-listed firms have been decreasing their investments in physical capital stock since 2008

CAPEX as % of PPE of all non-financial EU-27 listed firms from 2005 to 2024

At the same time, between 2005 and 2023, EU-27 listed firms increased their total financial assets, so their holdings in cash, short-term securities, equity and debt investments, from 12% in 2005 to 18% in 2024 (Figure 2). Shareholder payouts (Figure 3) have also grown steadily as a share of revenues especially since 2012. This comes at the expense of investments in the real economy and other cashflows such as taxation and wages, as recent firm-level evidence and analysis of the most carbon-intensive companies in Europe show. Firms are not starved of capital, rather they are choosing not to invest it productively.

Figure 2: EU-listed firms have been increasing their financial assets over the last two decades

Total financial assets as % of sales of all non-financial EU-27 listed firms from 2005 to 2024 in € bn

Figure 3: EU-listed firms have been increasing shareholder payouts since 2010

Shareholder payouts as % of sales of all non-financial EU-27 listed firms from 2005 to 2024

The dynamics of financialisation can explain the paradox of rising profitability alongside falling capital formation, also coined the ​“investment-profit puzzle”. Financialisation means the increasing engagement of non-financial firms with financial markets both as investors and as subjects to investor discipline. This shifts firms’ business model from ​“retain and reinvest”, in which earnings are invested back into productive capacity, workers and innovation, to ​“downsize and distribute” in which the priority is returning cash to shareholders. Our analysis shows this, as EU listed firms distributed 68% of all net income generated between 2005 and 2024 to shareholders through dividends and share buybacks (Figure 4), leaving little room for productive investment.

Figure 4: EU-listed firms distributed 68% of their income to shareholders between 2005 and 2024

Shareholder payouts as % of net income of all non-financial EU-27 listed firms from 2005 to 2024

This trend was also observed in recent research commissioned by the European Trade Union Confederation. A panel of Europe’s largest firms showed median retained earnings rose 322% in real terms between 2000 and 2024, while EU national accounts show the non-financial corporate sector swinging to a record €158 billion net share buyback in 2023. As the report puts it, listed equity markets now function less as a source of productive capital than as ​“a distribution channel” for accumulated surpluses. The same report highlights the cost to workers. Between 2000 and 2024, compensation per employee grew 87% in real terms while non-financial corporate profits grew 151%, leaving labour’s share of income lower in 2024 than at the start of the century.

This shift was not inevitable. It was a political choice, embedded in changes to corporate governance, executive pay structures, and the institutional rise of asset managers as dominant shareholders. These choices hollowed out firms, widened income inequality, increased financial instability and weakened workers bargaining power. Now, they’re undermining Europe’s productivity and ability to cope with decarbonisation in a rapidly changing politicial context.

Why derisking cannot plug the investment gap

It rests on what NEF has called the Private Finance Myth: the assumption that fiscal constraints make outsourcing investment to the private sector the best option. Private finance carries higher borrowing costs and return expectations, often resulting in increased consumer bills or public spending, while evidence consistently shows that private delivery underperforms on service quality, employment, and cost efficiency. 

European firms are already sitting on record profits and financial reserves. The problem is not that investment is too risky or too costly. It is that firms are actively choosing not to invest. The derisking logic fails for a number of reasons.

First, the cost of borrowing is not the binding constraint. Attempts at derisking are premised on the idea that lowering the cost of finance will unlock investment, but the evidence suggests otherwise. Even through the period of historically low interest rates after 2008, financial assets as a percentage of sales rise from 12% in 2005 to 18% in 2024, while capital expenditure remained stagnant at around 7%, as Figure 5 shows. Recent research shows that firms declined investment behaviour can be linked to dividend payouts rather than external financing conditions. The challenge is thus not simply the amount of finance available, but where private capital decides to allocate its surpluses.

Figure 5: EU-listed firms increased their financial assets, while capital expenditure remained largely stagnant over the last two decades

Financial assets and capital expenditure as % of sales of all non-financial EU-27 listed firms from 2005 to 2024

Second, public derisking instruments are likely to be least effective for the largest and most well-capitalised firms, yet the architecture of EU derisking is oriented toward precisely those. For example, the Centre for European Reform has noted that state aid tends to protect incumbents rather than support promising budding industries. Similarly, Food and Water Action Europe found that all hydrogen transmission projects due to receive priority status and eligibility for EU public funds under the 2023 TEN‑E revision were proposed by fossil fuel companies. The same companies which have generated some of the largest profits in Europe in recent years and have consistently prioritised returning those profits to shareholders rather than investing them in the transition. As Figure 6 shows, net income among the top 1% and top 10% of EU-27 listed firms has surged to record levels since 2020. Firms receiving EU public support are thus not starved of capital.

Figure 6: Net income among the top 1% and top 10% of EU listed firms has surged to record levels since 2020

Total net income of all non-financial EU-27 listed firms by bucket size in € bn from 2005 to 2024

Third, derisking cannot resolve the structural investment problem facing incumbent firms in carbon-intensive sectors. For a chemical company or an oil and gas major, the obstacle is not that green investment is too risky to contemplate. It is that existing fossil infrastructure generates returns that new clean capacity cannot match. The constraint is not risk in the conventional sense, but relative profitability. For incumbent firms, existing assets continue to generate higher and more predictable returns than new investment opportunities, so firms rationally prioritise extracting value from what they already own, extending asset lifetimes and delaying phase-out.

Beyond incumbents, many necessary transition investments generate no commercial return at all. A Finance Watch report found that even with a fully developed Savings and Investment Union, private finance could cover only around a third of the EU’s transition investment needs. The majority of necessary green investments simply are not commercially viable and trying to make them so risks poor climate outcomes while wasting public resources.

Fourth, derisking transfers public objectives into private hands which erodes democratic oversight and control. A recent study of InvestEU, which serves as the model for the new Competitiveness Fund, shows that its institutional design delegates strategic allocation decisions to financial intermediaries, without meaningful reporting requirements. The result is a double failure. Public money is used to pursue objectives the market will not fully deliver, while the power to define and enforce those objectives is handed to actors with no democratic mandate. 

Governments need to go beyond incentives and shape markets 

Under the conditions of financialisation, marginal incentives are unlikely to reverse firms’ preference for distributing profits over investment. What is missing is not more incentives, but mechanisms that shape the market and give governments more scope to invest themselves. 

In a market shaping approach the state would not merely offer incentives but actively set the direction and terms on which private capital operates. This means governments steering the economy through regulation, including mandatory transition plans, phase-outs of fossil infrastructure, and binding reinvestment requirements. Yet the EU’s current deregulation push is moving in precisely the opposite direction.

Within that broader framework, conditionality should be the minimum requirement for any public support. So far this has largely been absent, with recent analysis revealing that roughly €3.5 trillion in EU state aid since 2000 carried almost no binding conditions on its usage. Public funds distributed through state aid, procurement, or derisking instruments should be tied to clear, tangible commitments, including transformation plans, collective bargaining requirements, responsible tax behaviour, restrictions on relocating to lower-standard jurisdictions, and limits on dividend payments and share buybacks. This kind of conditionality can help ensure that public funds given to firms change corporate behaviour towards societally desirable objectives rather than being a mere addition in the firms available funds without touching their investmentstrategy.There is precedent for this. During the COVID-19 pandemic, France, Belgium, Denmark and Poland barred large recipients of state aid from paying dividends or buying back shares, and US corporations receiving support through the CARES Act were prohibited from using funds for buybacks. Moreover, where the state deploys public money, it should also seek a share of the reward. This means taking public stakes in strategic industries, as the United States government has done through the CHIPS Act and, most recently, through the Trump administration’s decision to convert federal grants into a 10% equity stake in Intel. These are not radical departures from market logic but recognitions that public money should generate public returns.

At the same time, taxation can also help change the calculus. Taxation of dividends, share buybacks and wealth can help rebalance incentives while also expanding the fiscal space available for public investment. Restricting and taxing share buybacks is a necessary condition for reversing the shift toward short-term shareholder distribution and redirecting corporate surpluses toward productive investment. 

Finally, the state must invest directly. The Recovery and Resilience Facility provided a first iteration of that capacity at a European level, but it runs out this year with no political majority to replace it. What is needed is a successor facility, financed through common debt. It must be focused on clear industrial priorities and genuine European public goods, such as cross-border infrastructure, railways, and clean industrial capacity, with binding conditionality and a wiliness for governments to take equity stakes in companies they support. The recent geopolitical crises have made this more urgent. Europe’s renewed exposure to fossil fuel price shocks is a direct consequence of underinvestment in grids, storage, and clean energy infrastructure.

The current approach fundamentally misunderstands the risk at hand. The real risk lies in leaving it to unchecked private investors to close Europe’s €800bn investment gap. A policy architecture built around making investments attractive leaves the underlying logic of capital allocation untouched. Moving beyond the derisking state requires institutional mechanisms that continuously align economic activity with strategic public priorities, rather than the unconditional corporate welfare that currently characterises EU industrial policy. Rather than adjusting incentives at the margins, structural change requires a fundamental transformation of the current macro-financial regime.

Image: iStock