The Twin Transition Paradox

For years, Brussels has been repeating the same mantra: the future of the European economy lies in a “twin transition” — the digital and green transitions. On one hand, Artificial Intelligence, the cloud and data analytics; on the other, energy efficiency, the circular economy and emissions reduction. Together, they should make businesses more innovative, resilient and competitive. On paper, it seems like a perfect combination, but what happens when this theory meets the day-to-day reality of European small- and medium-sized enterprises?

The answer comes from a new study by Nicoletta Corrocher (ICRIOS – Invernizzi Center for Research on Innovation, Organization, Strategy, and Entrepreneurship, Bocconi University) and Maria Luisa Mancusi (Department of Economics and Finance, Università Cattolica del Sacro Cuore), published in Industry and Innovation. By analyzing more than 13,500 SMEs across 27 European countries, the authors tested one of the most widespread beliefs in contemporary industrial policy: that digital transformation and sustainability, when adopted together, generate superior economic results.

The verdict is, perhaps, different from what one might expect, because digital transformation works, but sustainability — at least in the short term — does so to a much lesser extent. And above all, the two approaches do not seem to reinforce one another.

This is at the heart of what the authors call the “twin transition paradox.”

Europe’s Promise of the Twin Transition

In recent years, the European Commission has built a significant part of its industrial strategy around the idea that digital technologies and sustainability are two sides of the same coin. Smart sensors, cloud platforms, blockchain and Artificial Intelligence are expected to help businesses consume less energy, reduce waste and better monitor the environmental impact of their activities. The underlying idea is that digital technology accelerates sustainability, and sustainability makes digital technology more competitive.

Corrocher and Mancusi acknowledge that this vision has now become central to the European economic debate: “These two processes — often referred to as the twin transition — are increasingly viewed as interdependent engines of competitiveness and sustainability.”

Yet, when we move from strategies to corporate financial statements, the picture changes.

What the Data Really Reveals

The study uses data from the European Commission’s Flash Eurobarometer 486, one of the most comprehensive surveys dedicated to SMEs, startups and entrepreneurship. The authors examined the relationship between three factors: level of digitalization, commitment to environmental sustainability and revenue growth. The first finding comes as no surprise: companies that invest in digital technologies grow more.

As the authors summarize: “…digitalization is consistently and positively associated with revenue growth, supporting the view that digital capabilities are an important driver of performance in the SME sector.”

Behind this evidence lie well-known phenomena: greater operational efficiency, better information management, faster processes, new business models and a greater ability to reach customers and markets.

In other words, digital technology continues to be one of the most powerful growth accelerators for European SMEs.

Sustainability Is Not Enough

While the findings on digital transformation confirm expectations, those on sustainability are decidedly less clear-cut. In fact, companies that invest in environmental practices — from energy conservation to material recycling to the development of sustainable products — do not show significantly higher revenue growth than others.

The authors do not mince words: “…the adoption of sustainability practices does not appear to exert a significant effect on revenue growth.”

But there is an important caveat: this does not mean that sustainability has no value. Rather, it means that the economic benefits seem to materialize over longer time spans. A better reputation, greater stakeholder trust, lower regulatory risks and greater resilience are real advantages, but they rarely translate into an immediate increase in revenue.

Furthermore, for many SMEs, sustainability remains separate from the core of corporate strategy: something to be done to comply with regulations, meet customer demands or improve the company’s image, rather than a true driver of growth.

The Real Paradox: The “Twins” Don’t Work Together

The most interesting finding emerges when observing companies that invest simultaneously in digital transformation and sustainability.

If the twin transition theory were fully confirmed, these companies should achieve the best results. But that is not what the analysis reveals. “We find no evidence of significant complementarities: pursuing both strategies simultaneously does not translate into superior performance.”

In practice, a company that combines digital and environmental investments does not grow any faster than one that focuses primarily on digital.

A Matter of Resources and Skills

The study identifies several structural barriers to implementing both strategies. Smaller companies grow less. Companies that face difficulties accessing financing perform worse. And many entrepreneurs must contend with shortages of technical and managerial skills precisely when they are called upon to manage two complex changes simultaneously.

For an SME with limited resources, investing in the cloud, cybersecurity, artificial intelligence, energy efficiency and new sustainable products can mean facing enormous organizational challenges. It is therefore not surprising that many companies choose to prioritize investments with more immediate economic returns. And today, according to the data, these investments are primarily digital ones.

Implications for Businesses and Policymakers

Digitalization continues to be a key driver of business growth. But for the digital-sustainability combination to truly create value, we must move beyond a mindset of separate initiatives and build integrated strategies.

For European policymakers, however, the need for greater realism is becoming apparent. The dual transition does not happen automatically. It requires specific skills, infrastructure, funding and support tools — especially for smaller businesses.

The real challenge is not convincing companies to become digital or sustainable. It is helping them become both at the same time. For now, the study concludes, the two twins of European transformation still seem to be walking parallel paths. And until they truly begin to collaborate, the promise of the twin transition risks remaining stronger in strategic documents than in companies’ economic results.