# **I. Introduction**

Climate change is one of today’s most pressing global challenges. Despite ongoing activities to mitigate its worst effects, a further increase in the Earth’s surface temperature is inevitable. This will lead to adverse economic impacts due to changes in frequencies of extreme weather events and long-term shifts in weather patterns (IPCC, 2021). While many developed countries have already started with their decarbonization efforts and are working out the best mitigation strategies for reducing GHG emissions, most developing countries are lagging and their economic growth is still reliant on GHG emissions.

Recent trends in clean energy spending point to a widening gap between advanced economies and the developing world even though emissions reductions are far more cost-effective in the latter (IEA, 2021). Emerging markets and developing economies account for over two-thirds of the global population and approximately 70% of the global energy demand, but only one-fifth of global clean energy investment. By contrast, emissions in advanced economies are declining, despite an anticipated 4% rebound in 2021 owing to massive investment in clean technologies and the energy transformation of all economic sectors. This turns the attention to current measures taken in developing countries to decarbonize their activities, highlighting the need for these economies to step up their climate action.

Collective efforts across countries and actors of the economy are deemed necessary to tackle the worst effects of climate change. These direct climate change effects are expected to significantly impact the natural environment and society at different spatial and time levels. Within society, firms are important entities by which adaptation to climate change effects occur. How affected firms play their part in this climate transition, to a large extent, determines the nature and scale of impacts and possibly firms’ survival in the long run.

Existing research provides insight into firms’ mitigation efforts to respond to climate change, primarily in developed economies (see, for example, Kalantzis and Revoltella, 2019; Fleitera et al, 2012, Thollander et al, 2007). However, there is limited research in the developing countries’ context. Hence, while the existing literature investigates the determinants of climate-related investments in advanced economies located in the European Union and the United States, little is known about the factors influencing firms’ behavior in emerging economies, which adopt comparatively less green profiles. In addition, while some determinants of firms’ strategies of adapting to climate change and its policy-related impacts, such as their characteristics or green management practices, have been proposed (Fankhauser et al, 1999; Bleda and Shackley, 2008), they have not been investigated comprehensively. Yet, knowledge about these determinants is particularly important for policy makers to support favorable conditions for firms’ green investment strategies. Our work is closest to that by De Haas et al (2022), who show that both financial frictions and managerial constraints slow down firm investment in more energy efficient and less polluting technologies.

Based on the unique data from the joint European Bank for Reconstruction and Development (EBRD)European Investment Bank (EIB)-World Bank Group (WBG) Enterprise Surveys (ES), this paper empirically examines such determinants in a sample of almost 18,000 firms in 30 countries in Europe and Central Asia (ECA) and the Middle East and North Africa (MENA) regions. In this respect, the scope of firms’ green investment strategies (measured by the total number of mitigation measures) and measures that firms take to follow specific strategic directions of their business model (such as to protect the affected business) are analyzed. We consider the case of 10 climate-related measures, namely: heating and cooling improvements, type of on-site energy generation, machinery and equipment upgrades, energy 2