There has been an increasing emphasis on net zero in the UK in recent months. Following the COP26 in October, the government pledged to reduce emissions, with a target of net-zero globally by 2050.
For these climate goals to be met, everyone needs to do their part – including businesses. As such, businesses of all types have been called upon to reduce their eco-footprint, with a specific focus on SMEs who account for around a third of total UK emissions.
However, meeting net-zero targets come at a cost for businesses. A lack of funding has been cited as a barrier for progress, with 35% of SMEs stating this to be an issue in a recent British Business Bank report. There needs to be incentives and support in place to encourage companies to reduce their environmental impact.
Below, we have explored the financial implications that need to be considered for businesses to become carbon-neutral and the funding access required.
- The financial implications of net-zero on business
- The business benefits
- Access to finance required for environmental objectives
The financial implications of net-zero on business
There may be many changes a company has to make to become carbon neutral. Most of these changes will come at a cost, which an SME needs to account for and be prepared to absorb. We have explained some examples of the cost implications below.
Investment in eco-friendlier technology
The longer your business has been running, the more likely you may be using less energy efficient technology and equipment. This could include machinery, vehicles and so on.
By updating to more modern assets, it is likely you will benefit through reduced power consumption, increased fuel efficiency and other features that make your operations further optimised and offer knock-on benefits to your net-zero targets.
However, buying this equipment requires investment, especially if you have multiple assets that need updating, which businesses must be prepared to invest.
Changes to supply chains
Another factor to consider when becoming more sustainable as a company is your supply chain. Depending on your objectives and capabilities, you may want to switch your supplies to greener alternatives, work with partners who source materials in an eco-friendly way or place net zero at the heart of their operations . This may cover raw materials, supplies, packaging, energy and equipment – it may even include consumables you buy from the staff room.
When you find a supplier to work with that suits your objectives, they may not necessarily be cheaper. In this sense, cash flow implications might need to be addressed. On top of this, you could face temporary disruption as you adapt to your new supply chain, which has a further cost factor.
Adapting to more efficient processes
Many SMEs will need to identify more sustainable and efficient processes that minimise waste and reduce energy consumption. However, adapting to these processes requires investment through changes to infrastructure, the addition of equipment and the provision of training.
There will also be some degree of experimentation required, which may see costs and revenue fluctuate as the business adapts to the new processes. Again, this has a financial implication which companies need to account for through sufficient cash flow.
Price increases
New processes and supply chains changes can quickly amount to increased costs. This is on top of your partners and supplies possibly having to amend their prices to fulfil their own net-zero objectives.
When costs increase, there comes the point where that must translate into higher prices for your customers.
While changing your pricing model may be required, it may have knock-on effects on your demand and revenue, especially if customers choose to shop elsewhere. Once again, this is another cost implication that must be considered – including figuring out what you can do to minimise the damage or safeguard your business while meeting climate ambitions.
The business benefits
Although there are cost implications associated with becoming a more sustainable company, which need to be addressed through external support, many benefits can also be accessed. We’ve listed them below.
Improved reputation
Given the increased emphasis on climate change, it’s no surprise more consumers are environmentally conscious in their purchasing decisions. By aligning to this moral code and proving you are doing your part to address the issue of global warming, you can avoid alienating these customers.
This allows you to maintain your sales while creating a reputation as an environmentally friendly business. If you do this effectively, you may well attract new customers specifically looking for green purchases.
Enhance efficiency
Many of the eco-friendly processes or equipment you introduce into your business are chosen because they improve efficiency, e.g. reducing waste or limiting power consumption.
By improving efficiency in this way, you can also reduce costs. This might include lower energy bills, better use of your supplies and increased productivity. So, even though the adaptation to new processes may require an upfront investment, they may have a positive financial impact in the long run.
Attract green investment
Green investment is growing in popularity, giving businesses with sustainable priorities the opportunities for substantial funding to fuel their growth.
By adding eco-friendly initiatives to your company and making it a key focus, you can make yourself eligible for green investment. This may improve your overall access to finance and enable you to fund new projects or meet your growth ambitions.
Keeping up with competitors
All businesses and industries are facing the same pressure to meet net-zero targets, and each will be working to improve their sustainability. By being proactive and making changes now, you can allow move yourself ahead of the crowd.
It is another way to gain or maintain an edge over your competitors, especially given the increasing environmental focus many customers now have.
It’s also likely that if you don’t start to adapt, you will be forced to in the future as the government continue to push its climate pledges. This means you’ll already be in a great position, making the transition smoother.
Access to finance required for environmental objectives
The British Business Bank’s report on the transition to net-zero found that only 11% of SMEs have used external finance to support their goals, while a further 22% would like to in the future. This means a substantial number of businesses have not used external finance, nor are they considering doing so soon.
Many factors are embedded in the uptake of external finance to progress net-zero goals.
Firstly, many businesses simply do not prioritise their carbon footprint (as reported by 53% of respondents in the report). With companies still facing pandemic recovery, lockdown uncertainty, supply chain disruption and skills shortages, there are a lot of balls to juggle – and environmental objectives end up falling low on the list. This means more work must be done to encourage SMEs to adapt, including highlighting the benefits to their operations and financials.
Next, many entrepreneurs may not understand what help is available for their transition. Current examples include some government-backed grant schemes, green investment and loans. This is alongside more general forms of finance that can also be used to fund environmental goals, such as growth finance or traditional loans, provided there is a commercial benefit to the action being funded.
By educating SMEs about the funding sources they can tap into, more will be willing to pursue external finance and identify routes to prioritise their emissions targets.
Of course, another element of this is giving businesses access to the funding they need. While there are some limited schemes specifically for the transition to net-zero, many of these may have specific criteria that need to be met or a set level of funding. With almost all businesses requiring change to meet the government’s goals, there must be increased eligibility and provision of external funding to serve all needs.
This would reduce many barriers to becoming carbon-neutral for small businesses and empower the UK pledges to become a reality.
Conclusion
There is no denying that becoming net-zero and reducing the impact on our environment is essential for the planet’s future. Businesses play a vital role in this, making it critical that they embody the correct practices into their operations.
However, for SMEs to join the mission to halt climate change, there needs to be the appropriate support to assist them. This means ensuring they know the importance of net-zero targets and the rewards for their business and granting them the finance they need to transition effectively.
More businesses can welcome sustainability while benefiting the broader world by doing so.
If you are looking to finance the transition to net-zero, we can help you find possible solutions and draw up a responsible plan.