3. Development of questions

This chapter provides the concepts and rationale for developing questions to measure the green transition with business tendency surveys.

3.1 Population

The green transition is relevant to all business sectors and to both large enterprises as well as small and medium sized enterprises (SMEs). First, the green transition offers opportunities both in employment as well as income for all businesses. Second, although policy may be focused on the business sectors or enterprises with the largest environmental footprint, SMEs and other business sectors have a significant aggregate environmental footprint. Third, emerging regulation (such as the CSRD) requires large enterprises and financial institutions to report on the environmental performance of their entire value chain or financed portfolios. In this way, SMEs and all business sectors are affected by their participation in value chains or their search for finance (OECD, 2022). And fourth, the impact of climate change is expected to fall disproportionately on SMEs (EC, 2023c). Thus, questions should be relevant for enterprises of all sizes and business sectors.

3.2 Characterisations

There are several, not mutually exclusive, typologies to distinguish types of enterprises and their (economic) role in the green transition. For instance, one typology distinguishes how enterprises reduce the environmental footprint of their production process. Do they adopt “end-of-pipe technologies” or eliminate the environmental impact of the production process itself (adopt “clean technologies”)? Another typology is whether the enterprise is a sustainability enabler or not. Enablers devise and offer (innovative) green solutions to other enterprises, institutions or consumers. Yet another typology focuses on differences in the motivation of enterprises to become greener. For some enterprises, greening consists of being compliant with environmental regulations. For other enterprises sustainability or well-being may be a distinctive value (OECD, 2019).

Although such typologies can be useful for policy development and policy instrument design, the characterisation of an enterprise is not expected to change much in a short period of time. Therefore, the BTS is not an appropriate instrument to measure them.

3.3 Investments: change, type planned, constraints

In essence, the green transition requires enterprises to make different investment, procurement and resource-efficient decisions. Enterprises are encouraged by legislation and policy instruments to develop and/or adopt low-carbon technologies and purchase greener energy, greener materials and so. Questions could thus reflect topics relating to investment, procurement and limiting factors therein.

Question development

In a way, the EU BCS programme provides a tested and implemented question-template to investigate investments in qualitative terms (see 3.3.1). This template can be applied to enquire about investments by the enterprise to be(come) climate neutral. This template can also be applied and merged with a tested and implemented question-template on procurement to enquire about sustainable purchasing.

Change in investments and procurement

The question about the change in investment of the enterprise from year t-1 to year t is found to be the most appropriate. In this case, the question is asked twice a year. As such, it offers the possibility to timely capture developments. Also, respondents are asked about the present and the most recent past. Asking about the present reduces uncertainty associated with questions about the future. And also asking about the most recent past may be easier for respondents to remember, compared to questions about longer ago. This type of question is also suitable to ask about changes in procurement.

Type of investment planned

For similar reasons as described above, a question on the type of investment in year t is found to be most appropriate. In this case, the question is asked once, at the beginning of the year. The list of types of investment is based on (Dutch) policy goals instead of types of assets. The type of investments include: emission reduction, renewable energy, energy efficiency and saving, circular production and water saving.

Constraints

For questions on factors limiting enterprises to become climate neutral, a list of possible factors is proposed. These include:

• High prices or cost of capital of sustainable alternatives. In general, investments are partly dependent on costs of capital such as depreciation and interest. Low-carbon technologies and equipment can be capital-intensive and associated with high costs and execution risks (OECD, 2022a:4). Also, limited demand or limited supply of green products and services may result in higher prices. This may make it expensive for businesses to implement low-carbon solutions.
• Lack of more sustainable alternatives. The extent to which businesses can make greener choices depends on the development and diffusion of green technologies. Also a lack of information and awareness of opportunities may limit the greening of enterprises (OECD, 2021b).
• Limited access to finance. As investments in low-carbon technologies can be capital-intensive, access to finance is essential, especially for SMEs (OECD, 2022b:1).
• Shortage of (skilled and knowledgeable) labour force. Implementing sustainable practices can be a time-consuming process, requiring specialized knowledge or skills that may not be available in-house (OECD, 2021b).
• Energy infrastructure shortages. Infrastructure shortages such as a lack of electric charging points, netcongestion on the power grid, or lack of hydrogen infrastructure may hinder the greening of business activities.
• (Market) uncertainty. In general, investments are partly dependent on favourable expectations about the economic climate in relation to profits or sales. Policy and regulatory uncertainty can also contribute to market uncertainty (OECD, 2021b).

In this case, the question is asked twice a year.

3.4 Energy use, waste and greenhouse gas emissions

Business activity and production generally require some form of material and energy use as inputs. Besides products and services, the results of these activities include some form of waste and greenhouse gas emissions. To follow the progress in the green transition, managers could be asked about (expected) developments in the energy use, waste and emissions levels of their enterprise. In the spirit of the BTS a question could be whether these are expected to increase, remain unchanged or decrease in the coming months. However, energy efficiency, waste and emission reduction often advances in ‘steps’, related to investments in more efficient technology or processes. If one would measure (expected) developments in energy use, waste and emission levels on the short term, the measurement would generally be directly related to developments in the business activity, production or investments. As investments can be measured directly (see 3.3) and developments in business activity or production are already measured by the BTS, adding additional questions on energy use, waste and emissions developments would be superfluous. Gathering data from (smart) meters might, in this case, be more suitable.

Another way to follow the progress in the green transition, is to let managers assess the extent to which the business activity is climate neutral.

Question development

A self-assessment question about the extent to which the business activity is climate neutral has some caveats relating to response bias. A couple of techniques can be used to lower the risk of response bias. These techniques are additional to already implemented¹⁾ techniques. Response alternatives should contain both percentage-range categories, as well as words to describe the category labels. This provides a consistent frame of reference for all respondents. The use of solely words to describe category labels, comes with the risk of having different meanings for different respondents. Whereas the use of solely percentage-range categories may imply that the respondents are expected to compute an estimate.

Also, the response alternatives should include the option ‘Don’t know’ for those respondents who are unable to provide an answer.

Directing the question at the business sector rather than the business activity of the enterprise, may reduce the pressure to give a more favourable answer. On the other hand, respondents may be less informed about the state of the business sector. Therefore, this technique is not recommended.

As the question in general may be difficult for respondents to answer, it should be placed late in the sequence. In this case, the question is asked once a year, at the beginning of the year.

3.5 Effects of climate change

Another aspect relevant to enterprises and the economic environment are the effects of climate change on business activity or production. Due to climate change (e.g., higher temperatures, increase or lack of precipitation, severer storms and related wildfires, drought, floods) enterprises may face higher risks of reduced productivity. Examples of reduced productivity may be a result of (EC, 2023c):

• damage to crops, livestock, buildings and infrastructure;
• reduced workforce availability due to occupational constraints (higher temperature at work, more frequent and intense natural hazards keeping people from working);
• (fresh) water shortages influencing the availability of irrigation for agriculture, cooling water for industrial and energy plants and water levels of rivers and canals for inland shipping;

This may in turn cause disruptions in supply chains leading to delays, increased costs of maintenance, increased costs of materials and labour, higher prices, increased demand for weather insurance and unemployment benefits for inclement weather⁶⁾.

Also due to climate change, the suitability of geographical areas may change for those economic activities (such as tourism, agriculture and forestry) which are more dependent on climate conditions or phenology⁷⁾ and ecosystems than others. This may result in sectoral production shifts (EC, 2023b).

Finally, climate change may lead to investments in climate adaptation (e.g. building resilient buildings and infrastructure). In turn, this may impact the competitiveness of enterprises (OECD, 2019:7)

With regard to the guiding principles mentioned in 2.2, not all of these effects are suitable to be measured within the framework of the BTS. However, the general impact of weather conditions on business activity or production is a simple and intuitive question for respondents to complete. It is also possible to add ad hoc enquiries about the effect of severe weather conditions and natural disasters on business activity when such conditions have occurred.

Question development

In the construction survey of the EU BCS programme , “weather conditions” is already one of the response alternatives to the question “What main factors are currently limiting your building activity?”. This response alternative could be added to a similar question (i.e. “What main factors are currently limiting your business?”) in the manufacturing industry and services surveys of the EU BCS programme. This addition would increase the response burden marginally. Concerning the retail survey of the EU BCS programme, the entire question “What main factors are currently limiting your business?” needs to be added. Although this increases the response burden, it also yields useful information about economic developments in those business activities, improving comparability with the other surveys.