Manufacturers are embracing the need to be more sustainable, but the road to a carbon neutral future is not an easy one, nor is the route already planned. Some have made progress; others are gradually feeling their way; some want to venture forward but have little or no idea where to start.
It’s perfectly understandable. What’s stopping many SME manufacturers from taking the first step is cash, or rather a lack of it. Whereas they may recognise the benefits that new, green technology can deliver, access to capital is holding them back.
Others, however, are being put off by a lack of understanding, and a tendency to put the idea of carbon neutrality into the ‘too difficult’ pile. They know they need to somehow measure and quantify their carbon footprint, but don’t know where to begin. And then there is also the issue of resource, and the cost of employing experts to support them on their journey, and in following up on their recommendations.
It’s all very well for a manufacturer to be told that by replacing a certain line, or moving to a new, more energy efficient building, they will reduce their carbon footprint by xx tons, but it’s a difficult ‘sell’ when the cost of doing so may be £2m or more in new equipment or premises!
Why the need for change?
The clear and obvious challenges that SME manufacturers face is only one part of the conversation. The other is why is there a need for change in the first place. One reason is to counter future volatility in energy prices.
While prices appear to be stabilising, they will settle far above the prices that manufacturers were paying before the crisis, so hedging against future disruption is one imperative. Another is the looming threat of a Carbon Tax. Whilst it’s not here just yet, the smart money says it will come in the near future, and firms will be penalised for producing more emissions than they should.
A third driver is future investment. Private equity firms, venture capitalists, high street banks and indeed challenger banks all have a role to play in promoting sustainability, and therefore investing in businesses that lead the sustainability agenda. Carbon stipulations will become more important than ever before, and investors will wish to protect their own reputations by supporting firms who have clear sustainability strategies and goals.
In certain sectors, and especially retail, consumers are already shopping with their feet, and there is data to prove that they seek out brands with a positive ESG reputation. Manufacturers who support those brands will doubtless benefit from the halo effect this will inevitably bring.
A leap of faith
So where do the banks sit in this journey? Banks are increasingly willing to support manufacturers in acquiring green technologies. This has been greatly helped, of course, by the government’s Recovery Loan Scheme (RLS), which is helping lenders expand their offering.
With the RLS offering a 70% recovery guarantee to the lender, it is helping banks to share the risk. Lending against bricks and mortar is one thing; lending against a fundamentally unproven asset (over the long-term at least) is a somewhat different proposition, and without a reliable secondary market, this additional support is vital in enabling banks to put money in the hands of the manufacturers who need it most.
RLS, of course, is not the only tool in the lender’s kitbag. It is a useful one, nonetheless, in meeting an immediate need while giving banks more time to better understand green technologies and feel more comfortable in bringing more ‘conventional’ asset finance to bear.
Banks are also helping as part of a wider ecosystem that is bringing together customers, the Government, and third-party advisers to help manufacturers progress their sustainability journey. Consultants can help in giving SMEs their starting point when it comes to measuring emissions, and from that they can better understand where savings can be made, and efficiencies gained, and where banks can then play their part in providing the investment required. Working together allows a unified proposition to help manufacturers manage the transition, track the results, recommend where improvements can be made, and deliver an appropriate funding solution.
Managing new levels of debt
Manufacturers are understandably wary of taking on new levels of debt, especially after the pandemic. They have high capital assets, which means their borrowings were higher, and they need to be convinced that taking on any further debt is really going to bring the benefit that makes the investment – and the risk – worthwhile.
This is where the broader issues of ‘understanding’ and ‘education’ come into play. Most will understand that reducing their carbon emissions is better for the planet, and that more efficient technology will ultimately reduce energy consumption and therefore costs, as well as enhancing production. But some will take convincing of the need to replace equipment that isn’t broken. They will be tempted, with good reason, to sweat the existing assets for as long as possible and kick the problem down the proverbial road.
In the mid- to longer-term, however, this could look retrospectively like a poor decision. New technology will drive greater efficiencies and accelerate their progress to carbon neutrality. This will reduce costs and make them more productive. It will help them avoid punitive taxes that may be coming down the line, and benefit from incentives that are likely to follow for those exemplars of sustainability.
This is true also of property. Whereas manufacturers may be tempted to continue operating in their existing premises, buying a more modern, energy efficient building may be a smarter move in bringing down their direct and indirect carbon emissions, and ultimately their costs.
Certain lenders, Allica being one of them, offer differential pricing on commercial mortgages for properties with an Energy Performance Certificate of between A – C, providing yet more evidence of how a net zero mindset can tangibly improve a manufacturer’s bottom line performance.
It’s an exciting time of change. It’s a time, also, for baby steps, and for celebrating those for the progress they are already making. Even slight changes to future supplier tenders and contracts, to further enhance supply chain sustainability, and further questioning of the efficiencies of any new technology being acquired, can make a tangible difference. Start small and scale.
And for the banks, it’s a time to be brave and bold. They need to invest time in understanding how their clients’ businesses are run, and their plans for the future, and then bringing the right partners and the right funding solutions to the table.
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About the author
Gareth Anderson, Head of Business Management at Allica Bank
An experienced corporate and commercial banker, Gareth has spent 17 years working in banking and financial services, with much of that time spent working closely with SME’s both as a Relationship Director and in various leadership roles across client facing and product teams.
Having spent years working with companies across sectors from manufacturing, retail & wholesale, technology and healthcare, Gareth’s passion is on supporting the plans and financial ambitions of SME business owners, helping them build resilience into their business models to navigate through times of uncertainty.
