UniCredit - Ecodesign: a regulation for designing sustainable products

The public consultation on the European Commission’s Ecodesign Regulation proposal came to an end on the 12th of May. The new regulation (the “Regulation”) is scheduled to come into force in the first quarter of 2024 and will extend the scope of the existing Ecodesign legislation to a broader group of products. Only few exclusions are anticipated. Textile products, cosmetics, semifinished products such as aluminum and steel are but a few of the products covered by the Regulation.

Many market participants were expecting the new regulation. The reason for this is twofold. Firstly, the Commission had previously observed that approximately 80% of a product’s environmental impact can be traced back to its design phase. This led the market to expect swift remediation actions. Secondly, the Regulation appears to be a natural progression of the efforts made by the Commission to advance macro-European environmental policy objectives and the notorious five dimensions of decarbonization, subsequently also referred to in the Italian Integrated Plan for Energy and Climate (Piano Integrato per l’Energia e il Clima). The Regulation is an enabler for energy efficiency and a valuable tool to encourage innovation and address energy poverty. The Commission has estimated that for products in scope the existing Ecodesign directive saved consumers EUR 120 billion in energy expenditure and lowered the annual energy consumption by 10% in 2021 alone.

The new Regulation’s targets are ambitious: primary energy savings for 132 mtoe (million tons of oil equivalent) by 2030, in the context of a broader set of initiatives guiding the Union towards 2050 Net-Zero strategy. According to the European Environmental Bureau and Cambridge Econometrics (Nov 2022), the regulation has plenty of margin for improving the emissions’ control of specific product groups. They believe the existing Ecodesign regulation is covering 49% of product-related GHG emissions in the EU and the Regulation will account for an additional 16%, leaving a residual 35% unregulated.

Going forward firms will be confronted with new sustainability requirements relating to minimum product life, recyclability, reparability and recycled material contents. The debate on planned obsolescence and all its permutations is coming to the fore again and will continue to be a relevant factor affecting firms’ strategic decisions and investments. The envisaged Digital Product Passport is supposed to facilitate the sharing of key product information regarding sustainability and circularity. This of course leads to challenges and business opportunities. The intention is certainly there but the initial impact on the functioning of supply chains and products acceptance is yet to be assessed.

At the time of writing the text of the Regulation is yet to be reviewed. However, it has already become apparent that firms will have to assess the impact of the Regulation on their sustainability strategy, on their exposure to transition risk and on their ability to finance research and development and protect their inventions. There is a risk that we may start seeing stranded assets in new sectors, inventory write-downs and significant upward reviews of capex plans. Responsible and conscious financial institutions do not consider themselves immune from the Regulation. The need for strategic advice aimed at turning the provisions set out in the Regulation into opportunities for growth and tailored financing solutions will increase and banks will have to demonstrate their ability to remain relevant and willingness to support their clients’ climate transition.