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Climate change: preparing for net zero

We all know we need to be doing more to help reduce carbon emissions, but knowing where to start – and how to finance initiatives – can be a challenge for small firms.

Last updated: 19 May 2021 6 min read

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What is net zero and the green economy?

Net zero refers to the balance between what individuals, companies or countries produce in terms of greenhouse gas emissions and what is removed from the atmosphere, ensuring the overall effect is neutral. The UK is committed to bring all greenhouse gas emissions to net zero by 2050, relative to 1990 levels.

The green economy or green finance, meanwhile, refers to the link between economic and financial tools and the broader sustainability agenda. “I like to define it as making sure there is a focus within our normal economic activity around ensuring our actions are as sustainable as possible and we are aware of the environmental impact we are having,” says Leah Waterhouse, a director at Lombard.

The government defines green finance as “aligning private sector financial flows with clean, environmentally sustainable and resilient growth”. For small firms, this means making use of finance to improve either their own sustainability credentials or to support wider initiatives to help play their part in moving closer to net zero.

Why should small businesses be part of this?

There are many reasons why small firms should get involved, aside from the overarching need for everyone to do what they can to combat climate change. Increasingly, prospective staff, clients and investors expect to see evidence that small firms are taking steps to reduce their own impact on the planet.

Dr Chris Coleridge, senior faculty in management practice at Cambridge Judge Business School, points to the Science Based Targets initiative that encourages corporate organisations to sign up to reduce their own emissions, and currently has around 1,200 members, growing by around 100 a month.

“Grants range from vouchers to encourage the purchase of electric vehicles, through to government investing in products and services that will be game changers in a green economy”Tom Butterworth, account manager, Swoop

“The way this knocks on to small businesses is pretty obvious; if you’re an enterprise-facing business they will expect you, as a condition of doing business, to fit into their net-zero plans,” he says. “The low-hanging fruit, as far as the corporates are concerned in reaching their net-zero target, is to put pressure on their supply chain.”

In the public sector, it is now law that contracts and bids are assessed on a range of socially conscious measures, and the role a company plays in fighting climate change and reducing waste, points out Jo Edwardes, managing partner at Good Karma Media, a PR and communications agency, which is also a registered social enterprise. “This focus is also shifting to the private sector, which is similarly including these factors in new contract bid-scoring models,” he says.

Investors are also starting to be much more focused on the environmental, social and governance credentials of a business, adds Jake Standing, a partner at accountancy firm Kreston Reeves. “Investment from some of the larger institutions is going to go to businesses that are committed to those areas, and one of those is obviously the impact on the planet,” he says.

What finance options are available?

There are a number of finance options available to help small businesses make a difference, including grants from government or local authorities for specific energy-saving measures. “Grants range from vouchers to encourage the purchase of electric vehicles, through to government investing in products and services that will be game changers in creating a green economy,” says Tom Butterworth, account manager at business finance platform Swoop. “There are also grants aimed at making the supply chain a greener process and which small businesses are eligible for, as well as regional and sector-specific grants.” Funders will expect to see evidence of how the money will reduce a firm’s environmental impact, he adds.

Green loans, where the money is awarded for specific environmentally friendly measures, are another option, and can be sourced from finance providers or, in some cases, through product manufacturers, where they can be repaid out of savings made from lower energy bills. “Initiatives could, for instance, incorporate LED lighting to replace fluorescent lights, or more energy-efficient heating and cooling systems that reduce dependence on oil and gas,” says Dr Periklis Boumparis, assistant professor in finance at Trinity Business School.

One simple step for small firms is to switch their energy tariff to one that uses sustainable energy sources, says Standing. “There are plenty out there, and the price differential is really not that big,” he says. “Reviewing your processes on a periodic basis will also allow you to eliminate unwanted elements of that process, which in turn should reduce cost.”

What is a sovereign green bond?

Sovereign green bonds are debt instruments issued by governments, with the money raised used to finance particular projects that lead to environmental benefits. “Examples of these projects include clean water and wastewater treatment projects and grants, subsidies, and support schemes designed to reduce agricultural environmental impacts,” says Boumparis.

What is carbon offsetting?

Carbon offsetting allows firms to pay to offset carbon emissions. “For example, if a small business is unable to cut its carbon emissions further it could pay to plant trees to try and ensure the impact of their business is still net zero,” explains Waterhouse. “The difficulty with carbon offsetting is that it can often be easier to pay to offset rather than tackling the core problem to reduce emissions from a small business as, ultimately, this is what we need to do to limit the effects of climate change.”

For firms wishing to go down this route, a starting point is to assess their energy consumption and carbon emissions. “Once you have done that you will probably have to purchase carbon credits, so specific projects which take carbon out of the air,” says Standing.

This is something Kreston Reeves itself has done, partnering with tree-planting operation Ecologi. “We have committed to being net zero by the end of this year, and the advantages in being able to attract both clients and talent has already outweighed the cost,” adds Standing. “It’s given us a differentiator when it comes to attracting clients, and our next student intake cited it as a big reason to want to work for us.”

The Royal Bank Climate Accelerator programme is launching on 28 June – find out more here.

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