In a survey conducted in November 2020, McKinsey & Co. found that roughly 80% of European small and medium-sized enterprises (SMEs) viewed their economy as “somewhat to extremely weak”. While the sentiment varied across national economies, SMEs in Italy and Spain were the least optimistic, while Germany had the most optimistic.

Nearly two years later, many of the challenges that informed this SME stance are still unresolved or have worsened in some instances. Businesses across the EU continue to experience difficulties owing to congested supply chains, rising energy costs, and stretched finances.

Likewise, the industries most affected by the pandemic, including hospitality, cultural, creative, food and drinks – which account for a majority of SMEs – are still on a sluggish path to recovery.

Commentators in some quarters suggest that regulatory bodies, such as the European Commission, are not doing enough to help EU SMEs survive and thrive.

Small businesses badly hit in Europe

I doubt that anyone can deny the overwhelming and far-reaching effects of the COVID-19 pandemic, especially in the SME sector. For a sector that is mostly labor-intensive and dependent on liquidity generated from a steady cadence of demand and supply, the SME sector was amongst the least prepared for the pandemic. Their higher focus on physical selling, coupled with the low rates of digitalization in the sector, meant that when COVID hit, it hit hardest for small companies, including those in Europe.

Explaining why this was the case, Anna Fusari, the European Investment Bank’s head of Banks and Corporates division in the Adriatic Sea region, noted the “thinner liquidity reserves” that SMEs often have. Additionally, “they have limited financial alternatives, and they mostly rely on support from local banks,” says Fusari. “In the majority of cases they lack assets that can be disposed of, or that can be used as collateral for new credit lines.”

While the EU swung into action in passing comprehensive financial and economic measures to broadly support businesses, including SMEs, the situation remains challenging for these companies.

Further, as Christine Lagarde, head of the European Central Bank, admitted in a 2021 speech at the “Jahresimpuls Mittelstand 2021” in Frankfurt, “[the] reality is currently hard for many [SME] firms and the future remains uncertain.”

Yet, this was before the crippling supply chain squeezes recorded from mid-2021 and the energy crisis that has plagued households and businesses since then. Since then, business has gotten much tougher for SMEs who have to contend with runaway business costs while demand has remained static or below pre-pandemic levels in the sectors hardest hit in 2020.

What does the future hold for EU SMEs?

SMEs are a critical component of any economy, particularly in the EU where they contribute 66.6% of jobs and 56.4% of total added value. As I see it, the EU must act with even greater commitment to ensure micro, small, and medium companies in the region experience relief from the highly volatile and uncertain business environment they have endured for the past two plus years.

While the EU has weighed in with unprecedented financial and economic outlays since the pandemic, the sentiment from SMEs is that the aid is either insufficient or only serves as a temporary salve to deeper injuries. Speaking to Financial Times in 2021, Maxime Lemerle, the head of sector and insolvency research at Euler Hermes, highlighted the risk of “zombified companies” that receive just enough liquidity that keeps them on the brink of failure. “These zombified companies in hospitality, retail, transport, leisure and events could go bust very quickly even if the support measures are wound down quite slowly,” says Lemerle.

With the rise of robo advisors, automated portfolios, and intelligent algorithms, artificial intelligence (AI) is making an effective (and intimidating) incursion into the financial sector. Tasks that would have previously fallen to hordes of analysts are increasingly being turned over to digital processes, with remarkably efficient results. And unsurprisingly, this reality is fuelling a growing sense that finance jobs may soon fall to the implacable advance of AI.

Buttressing these fears, a recent study predicted that 230,000 jobs in the financial sector could vanish by 2025, swallowed by “artificial intelligence agents”.

The shift seems to have begun already as the Bank for International Settlements reports. An increasing number of high-profile financial institutions are moving routine processes to digital workflows and cutting down on staff sizes to support a leaner, smarter operation.

But is AI here to take all the finance jobs away? I think not. While it’s unquestionable that AI helps refine, accelerate, and improve certain previously manual processes, it’s equally important to recognise that human agents bring indispensable qualities to financial relationships, and this is what digital transformation and AI experts call the “Human Factor”.

The Human Factor in financial relationships

I believe that the increasing presence of AI in finance is primarily attributable to the sector’s specific characteristics. For instance, accounting, audit, and finance are largely focused on numbers and rationality, and these are qualities that AI currently replicates with little difficulty. Consequently, studies conducted up to a decade ago – when AI had not reached the developmental stage it currently occupies – projected that up to 54% of jobs in finance could be lost to AI.

But concerns that AI will replace human financial advisors are premature, due to the unique and indispensable value-add that people bring to the financial sector. Yes, accounting and finance are mostly numbers-led, but they also require non-linear attributes, such as the gut instincts that precede placing a winning bet on a losing stock or the imagination to try an original approach and succeed where no one else has. And this, in my opinion, is the Human Factor that AI does not possess.

As described by AI experts SAP Insights, “AI is brilliant at automating routine knowledge work and generating new insights from existing data. What it can’t do is deduce the existence, or even the possibility, of information it isn’t already aware of. It can’t imagine radical new business models. Or ask previously unconceptualized questions. Or envision unimagined opportunities and achievements.”

AI lacks what physicist Michio Kaku describes as “intellectual capitalism” – “activities that involve creativity, imagination, leadership, analysis, humor, and original thought,” and this creates a world of difference between what AI and humans can do.

AI makes finance better, but only when combined with the Human Factor

Like most industries, AI has facilitated the financial sector’s most valuable and influential advancements in recent years. For an industry struggling beneath the weight of billions of daily transactions, all with hundreds of spinoff processes, the addition of automation has unburdened and liberated many financial operations. Resultantly, AI unleashed greater possibilities in the sector and is potentially leading finance into the future.

But it would be a mistake to assume that AI can do it all on its own. As one expert puts it, “AI can make decisions, but not subjective choices. Humans, on the other hand, are still the best at judging intangibles and superlatives amongst options that are objectively equal.” Therefore, combining the mechanical efficiency of AI with the intellectual capitalism of human agents presents the best opportunities to unlock the possibilities in the financial industry.

After a minor COVID-induced drop, global energy investments rebounded to pre-pandemic levels in 2021 ($1.9 trillion) – an increase of 10% over 2020 – reports the International Energy Association (IEA). And in what will be music to the ears of policymakers and green energy advocates, much of the investment attention shifted from traditional fuel production to power generation and end-use sectors, with electricity attracting the lion’s share of renewable energy funding.

Amidst the tumult and uncertainty of the global pandemic, a strong theme advocated by governments and international agencies was the opportunity the crisis provided to “build back better.”

Indications from 2021 energy investments suggest that has been the case, at least as it concerns renewables. Here, I briefly discuss the extent of those investments and how they augur for a move towards net-zero and green economy.

Performance of global investments in renewable energy

Following projections that global energy demand would increase by 4.6% in 2021, energy financing experienced a general uptick as interest in infrastructure, and new projects surged during the year. Noting the upward trend in financing mid-2021, the IEA proposed that “the anticipated upswing in investments in 2021 is a mixture of a cyclical response to recovery and a structural shift in capital flows towards cleaner technologies.”

The IEA reports that global power sector investment accounted for a large chunk of 2021 energy spending, increasing by 5% to over $820 billion in 2021. Most of that financing ($530 billion) was directed toward new power generation; renewables accounted for over 70% of this amount. Asides from this, investors also saw more bang for their buck, with a dollar spent on wind and solar photovoltaic installations producing four times more electricity than ten years ago.

“Electrification was also a major driver of investment spending by final consumers,” says the IEA. “Electric vehicle sales continue to surge along with a proliferation of new model offerings by automakers, supported by fuel economy targets and zero-emissions vehicle mandates.”

In the same vein, BloombergNEF reported in January 2022 that the previous year saw a 27% rise in low carbon energy investments, with nearly half emanating from renewables investment in Asia. As a result, total yearly spend on energy transition was $755 billion, a new record in sustainable energy spending.

However, I must say that despite the encouraging short-term news, global energy investment has yet to breach the levels required to forestall climate disaster. The IEA also agrees, noting that “clean energy investment would need to double in the 2020s to maintain temperatures well below a 2°C rise and more than triple in order to keep the door open for a 1.5°C stabilisation.”

The big question, though, is where will that money come from? Blended finance might provide an answer.

Blended finance in green energy projects

Blended finance, a type of public-private partnership, combines public concessional funding with private investment to de-risk certain project types. As the World Bank puts it, “blended finance, which combines concessional public funds with commercial funds, can be a powerful means to direct more commercial finance toward impactful investments that are unable to proceed on strictly commercial terms.”

Renewable energy projects are frequently “constrained by investors’ perception of high risk and low returns,” Consequently, the flow of private capital into these projects is often halting. However, concessional financing in the form of debt, equity, or grants, appropriate risk-mitigation measures, and suitable seniority in terms of loss protection and the security of returns can make these projects attractive to investors.

The World Bank reports that blended finance could be vital in attracting larger investments in clean energy, and sub-Saharan Africa provides a model for how these partnerships can work.