Why is sustainability important in business?


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The move to a low-carbon economy is underway, and corporate action is gaining pace. News headlines and discussions so far have often focused on big businesses and their climate commitments. But their efforts alone won’t be enough.

Small and medium-sized businesses (SMEs) account for 99.9% of the UK business population. Collectively, they play a vital role in helping Wales reach its legally binding net zero carbon emissions target by 2050.

In this article, we discuss the risks your business could face if you don’t act. We also explore the opportunities that sustainability presents, giving some real-life examples of SMEs that are taking climate action and benefiting commercially as a result.

What is sustainability in business?

There are a lot of different terms used in the discussion of becoming more sustainable – decarbonisation, carbon-neutral vs net-zero, but what do they actually mean? Here is a quick summary of the most common terms:

Decarbonisation

The term decarbonisation refers to the process of reducing or removing carbon dioxide emissions released into the atmosphere by human activity. Countries and companies can decarbonise by reducing their use of fossil fuels and instead using low-carbon energy sources.

Carbon neutral

A person or company is carbon neutral if they remove as much carbon dioxide from the atmosphere as they create. This is typically achieved by carbon offsetting, whereby they compensate for their own emissions by supporting projects that reduce an equivalent amount of emissions elsewhere.

Net zero

Like carbon neutrality, net zero also means achieving a balance between emissions produced and emissions taken out of the atmosphere. While the terms net zero and carbon neutral are often used interchangeably, there are key differences between the two.

A net zero strategy generally involves eliminating emissions as much as possible before purchasing carbon offsets to compensate for any remaining emissions that are too hard to eliminate. It’s therefore harder to reach net zero than it is to achieve carbon neutrality.

Another difference is that with a net zero approach, any offsets purchased must permanently remove carbon from the atmosphere, rather than simply reducing them.

Why is sustainability important to SMEs?

Having a good product or service is not always enough any longer, as more and more people are prioritising sustainability when making purchasing decisions. So, how are sustainability and consumer spending linked?

According to research by Deloitte, 23% of consumers say they will switch to buying products from companies that share their environmental values, and 42% have changed consumption habits themselves out of concern for the environment.

With policy, supply chains, and consumer demand already moving in the direction of net zero, your business will need to begin its own journey in order to stay competitive – the sooner, the better.

What are the opportunities?

The good news is that challenges come with opportunities. We’ve seen this during the pandemic, with many SMEs diversifying and finding advantage in adversity. If treated as an opportunity, decarbonisation could bring powerful benefits to your business. These are a few of the main advantages:

Cut costs

You could save money by improving energy efficiency. Businesses can often achieve immediate cost savings with simple, low to no-cost measures, like:

  • Turning off equipment when it’s not needed
  • Switching to a competitively priced green energy tariff
  • Reorganising office space to maximise the amount of natural light and making sure radiators and vents aren’t obstructed by furniture
  • Keeping outer doors closed wherever possible in winter; if they need to be left open, installing air curtains or strip curtains can help conserve energy
  • Opening windows and closing blinds in summer before switching on the air conditioning

 

Other measures, however, are more complex and can require significant upfront investment. Installing renewable energy technologies or transitioning to an electric vehicle fleet, for instance, can save businesses a lot of money in the long run.

Tax breaks like the super deduction capital allowance can make things easier. This offers 130% first-year relief on qualifying plant and machinery investments until 31 March 2023, including items like solar panels and electric vehicle charge points.

For a lot of businesses, though, external funding is key. Getting advice about where to invest and thinking holistically about implementation is also important. For example, if you’re moving to electric vehicles, you’ll also need to think about charging points and the energy supply that they use. If it’s not renewable energy, you risk not delivering the benefits of the investment.

Chartered Accountants Evens & Co is a great example of a Welsh business that has reduced its carbon footprint by embarking on a sustainability programme with help from Business Wales and funding from us at the Development Bank of Wales. 

A business loan for relocation, coupled with support for the implementation of a Green Growth Pledge, has enabled the company to reduce CO2 emissions and proactively engage with employees and customers. This includes extending product life cycles, co-owning and sharing products across sites, sourcing locally wherever possible, and optimising supply chains to achieve low-carbon performance.

The measures to improve energy conversion are reducing carbon footprint and helping the company to save money in the long term.

Gain a competitive advantage

The net zero transition is also creating new revenue opportunities. As we’ve mentioned, larger businesses are under pressure to decarbonise their supply chains and will be factoring sustainability into their procurement processes. Boosting your green credentials could help you win business.

Consumer demand for sustainable products and services is growing, and businesses that innovate to meet this demand will stand to benefit. This could be through offering low-carbon products, or products that help others to reduce their own carbon footprints.

Take Deer Technology, for example – a company we have supported with equity investment. Co-founders Hugh Mort and Garry Jackson co-invented the LimpetReader™ to take accurate meter readings. The technology provides a new standard in the remote, non-invasive, and accurate recording of meter readings for water, electricity, gas, and other metered consumption. 

Regular meter reads are critical to the UK achieving net-zero greenhouse gas emissions by 2050 – otherwise wastage can go undetected and unsolved. With an estimated 56.4 million utility meters in the UK alone, this is a market that offers Deer Technology the real opportunity to scale rapidly.

Attract and retain employees

It’s not only customers who look for strong sustainability credentials; employees do too. An increasing number of jobseekers want to work for a company that values sustainability and who are actively making a positive difference.

In a survey of more than 3,700 business students, 64% said they did not think that businesses were doing enough to address environmental challenges. Adopting green practices can help you to enhance your employer brand, and having an eco-friendly workspace, for example with better ventilation and natural light, can create a happier and healthier work environment.

What are the risks of ignoring decarbonisation/net zero?

In 2019, Mark Carney, the then- governor of the Bank of England, warned that companies that don’t adapt to climate change “will go bankrupt without question”. A warming planet presents a range of risks that businesses can’t afford to ignore.

Physical risks

We’re already seeing the tangible impacts of climate change in the form of extreme weather events like floods and droughts and slower onset events like rising sea levels. These can have huge repercussions for businesses, from damage of physical assets and increased insurance costs to disruption of operations and supply chains.

The only way to stop the physical risks from worsening is to achieve net zero greenhouse gas emissions. If net zero is achieved globally by 2050, scientists say that global temperatures could stabilise within a couple of decades. That means that the actions we all take now have a direct bearing on our future.

Transition risks

These are the risks that occur as a result of the shift to a low-carbon economy, including:

Government regulations and policies

Currently, the UK has a number of implicit carbon taxes including fuel duties and the Climate Change Levy, as well as an Emissions Trading Scheme covering specific sectors. It has other environmental taxes, too, like Landfill Tax and the new Plastic Packaging Tax, which will come into effect from April 2022.

Also from April, the UK’s largest companies and financial institutions will have to disclose climate-related financial information, in line with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD).

It’s likely that reporting requirements will become more widespread, eventually affecting small businesses. Carbon pricing could also be expanded. One possibility is a carbon tax that puts a direct price on greenhouse gas emissions produced by businesses.

These growing regulatory pressures will leave businesses with little choice but to go green. But rather than waiting for regulation to force the change, preparing now will put you on the front foot and help you to avoid costs later.

Pressure from buyers 

Although the new reporting requirements don’t impact SMEs directly, the fact that large companies have commitments to decarbonise has consequences for them. Many big businesses are looking at their ‘Scope 3’ emissions - indirect emissions including those from other companies in their supply chains – as these often make up the bulk of an organisation’s carbon footprint.

If you supply to large companies, it’s important that you understand your Scope 1 and 2 emissions, as you may soon be required to report and reduce them. Scope 1 covers greenhouse gas emissions that your company makes directly, while Scope 2 covers indirect emissions from the use of purchased electricity, steam, heat, or cooling.

Investing in sustainable companies

At the Development Bank of Wales, we’re committed to addressing the climate change emergency and supporting the Welsh Government’s net-zero strategy.

Our finance can help businesses in Wales invest in becoming more sustainable and support their transition to becoming carbon neutral. We can also provide loans and equity for companies developing and providing innovative green products and services in Wales.

Support and links

We support our customers to improve and reduce their environmental impact by working closely with Business Wales. Their specialist sustainability advisers offer support on grants, renewable energy, environmental sustainability, and the Green Growth Pledge.

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