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26 October 2021

The great climate collaboration

By Andrew Harrison

Small businesses have had a tough year, but here at Natwest we are talking about how to support their recovery and scaling-up. Making them a key part of our climate ambitions as a country could deliver up to half the UK’s climate targets in the coming decade. But in order to do that, they need the right financial and non-financial support.

Up to now, the focus on climate action has mainly been on larger companies operating in sectors like energy generation, where the proportion of SMEs is quite small. That will change in the next decade, with that action being focused on sectors such as transport, buildings and agriculture, where SMEs have a larger share

At our recent SMEs Taskforce we convened a group of experts from across business, academia and politics to talk about the real, practical steps our small businesses can take, and the challenges they face, if they are to become a thriving part of the transition to net zero.

Peter Mannion, associate partner at management consultancy McKinsey & Company, said the opportunities are twofold. First, SMEs can act to reduce their own emissions and costs. “Investments in certain types of electrification, particularly with smaller vehicles, can not only deliver emissions reduction, but also cost savings for an SME,” he explained. These changes can be justified purely on the business case in between 55 and 75 per cent of SMEs, without even taking into account the environmental case for action.

SMEs are also well-placed to expand into the markets for deploying the technologies to transition our economy and society to net zero. These new products and services could include components for electric vehicles, heat source pumps and reforesting land, while they reduce their dependence on declining markets based on fossil fuels and anticipate some of the changes to regulation on business and the environment. However, just 6 per cent of SMEs recognise those opportunities in decarbonisation. “The revenue opportunity is very significant, but really under-realised or under-recognised by the SME community,” Mannion said.

SMEs also need to be aware of the options, be able to act on them, and have the financing to make those investments, observed Hugo Sloper, engagement manager at McKinsey & Company. This is where banks, government and other organisations can intervene to provide and broker the support SMEs need. “One thing we really heard time and again from farmers through to consultants was providing peer to-peer counsel,” he said. There is also a need to develop the skills to make those practical steps to net zero in a way that is sector-specific and to understand the financial benefits and navigate the opportunities that are right for each business. “Managing an SME is an incredibly complex process,” he said. It requires time and understanding to make those decisions and set the right course.

“[SMEs] can’t hedge their regulatory risks,” countered Martin McTague, policy and advocacy chair at the Federation of Small Businesses. Some key sectors, such as heat pumps, are not sustainable without the government subsidy to make the market viable, he continued. Some way of hedging against those bigger risks for SMEs would be “really important”, he added.

Douglas Chapman MP, SNP spokesperson for small business, enterprise and innovation, raised the challenge of the skills needed across the UK to make the transition to deploy technologies such as heat pumps and to retrofit buildings. “There are all the skills that we probably ignored across the country for too long,” he said. “We need the equivalent of boots on the ground, and people actually making the changes.”

Some businesses that have struggled with the pandemic will need it to be “genuinely easy” to make those investments to change, said Seema Malhotra MP, the shadow Department for Business, Energy and Industrial Strategy minister. These “structural inputs” made through public policy should sit alongside a better relationship between financial services and banks, and their SME customers, she said, while the Innovation Strategy talks about building a Finance and Innovation Hub and could be linked to this agenda and to the skills issues.

Kevin Hollinrake MP drew on the work from the All-Party Parliamentary Group (APPG) on Fair Business Banking and its recent Scale Up to Level Up report. He said that while there has been “a lot of talk about levelling-up” through public sector investment, there has not been the same attention paid to private sector investment. This is vital to “scaling up” the start-up businesses, with access to “patient capital” being a key barrier.

According to Hollinrake, the structure of UK banking is part of the issue, with there being a relatively small mutual banking sector compared to Germany, which expanded finance to SMEs during the 2008 recession while UK commercial banks withdrew financing and SMEs suffered. As a result, most SMEs in the UK would rather grow more slowly than borrow, according to the APPG’s work. “It’s quite clear: we need to build a better relationship between the banking sector and business to give them more confidence that things will go well,” said Hollinrake.

There are also real opportunities for regional “angel investing”, according to Jenny Tooth, CEO of the UK Business Angels Association, the trade body for angel and early-stage investing. Over 60 per cent of scale-ups have angel investment, but much of that is focused in the “Golden Triangle” of London-Cambridge-Oxford in the south-east. It remains a “big challenge” in other parts of the UK. So far, Tooth continued, a £100m regional angel investors programme has delivered benefits, but could be expanded further with co-investment.

The challenges in getting SMEs not just back on track post-pandemic, but to being a strong and thriving sector to support a transition to net zero will take coordinated and considered action. Broad policies to support better access to finance, skills and advice need to be accompanied by a real focus on sector specific efforts and connect into tackling inequality between regions.

Andrew Harrison is head of Business Banking at NatWest Group. Read more at: natwestbusinesshub.com/articles/springboard-to-sustainability-160bn-opportunity-for-smes-tackling-climate-change

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