25 January 2023
Despite the current economic turmoil, sustainability remains of paramount importance. At COP 27 it was finally recognised that the opportunity to limit global warming to 1.5 degrees Celsius above pre-industrial levels, have all but vanished. The hopes of remaining within 1.5 degrees now rest on a technology breakthrough of such significance, scale and time sensitivity that many are reluctantly aiming for a 2.0 degree scenario. The term ‘overshoot’, whereby we pass the 1.5 degrees target but then reduce back down, is becoming more widely used and discussed.
More broadly, governments worldwide have legally binding shorter term carbon reduction targets and both companies and governments worldwide are pledging to achieve net-zero emissions of greenhouse gases.
Whilst it is acknowledged that to meet these targets, investments of trillions of US dollars each year will need to be made up to and likely beyond 2050, the economic cost of not making such investments is significantly higher. Way back in 2006 the Stern review estimated that the impact of ignoring climate change could reduce global GDP by 20% by the end of the century. Outside of climate change, wider environmental concerns including waste, pollution and the loss of biodiversity, scarcity of natural resources (including those essential to a low-carbon economy such as rare earth minerals) and a growing skills gap are of significant concern. Modern slavery, equality, diversity and inclusion and social justice initiatives, as well as an increasing movement of businesses with greater social purposes are all increasingly influencing supply chains, investors, and wider stakeholders.
Net zero and R&D investments on the backburner?
Sustainability will heavily impact the manufacturing sector like few others. From the industry’s ability to source raw materials, throughout its direct business operations, through to how the sector meets new market demands and ultimately the end-of-use options for manufactured products. Governments the world over are targeting sustainable manufacturing as being so significant that it will drive national competitiveness.
Set against this backdrop, we would hope to see significant investment, not only in the low carbon technologies that will enable manufacturers to meet increasingly stringent sustainability requirements from their existing customers, but also in R&D with a view to securing access to new markets, products and materials.
Unfortunately, our recent survey, run in partnership with Make UK focussing on the manufacturing industry’s investment priorities, does not suggest significant investments are on their way. Rather it points to delays across the board on investments, with 41% of manufacturers confirming they had delayed net zero investments over the past two years, 39% holding back investments in labour and 36% holding back investments in R&D over the same period. Even more troublingly, since our survey took place, the macro-economic climate, political instability, rising interest rates, inflation and recessionary pressures have created an even more challenging environment for manufacturers and this is potentially putting the industry’s international competitiveness at risk. Hardly a stable environment for manufacturers to confidently make investment decisions.
Manufacturing is a capital-intensive industry and the UK’s productivity is already behind major trading partners and rivals. In 2019, the UK’s output per worker was lower than four of the G7 nations, leaving the UK lagging 13% behind the average across the rest of the G7. It is widely accepted that investment is crucial to bridge the gap.
Bentley making changes
There are of course those businesses making significant investments particularly those aligned to ‘catalyst industries’, motor vehicles for instance. Bentley, by way of example, only recently set out the gains they are making on their £2.5bn factory sustainability investment, where they will focus on building electric vehicles. Standout data includes a drop of 70.2% in CO2 emissions at the business’ Pyms Lane site, where all Bentley models are built, and a decrease in energy consumption per vehicle of 17.2%, thanks to an ongoing focus on efficiency, the use of green gas and the impact of a more efficient boiler system. The use of energy generated from the company’s extensive onsite solar PV system has helped too, with the business confirming that the system, which currently consists of circa 31,500 panels, will be extended further. And they are certainly not alone. Across the industry there is still investment happening, be it driven by investor requirements, customers, new markets, end users, other stakeholders or as a direct view that sustainability increases long-term business resilience and value.
Can manufacturers afford not to invest in sustainability?
Our survey with Make UK highlights that for manufacturers, unless an investment can readily demonstrate that it would improve output capacity, improve quality, or reduce cost then it will be unlikely to take place. Indeed, the data suggests the top two motivating factors (by some distance) when decision makers are faced with investment decisions are whether the investment will improve productivity and whether the business will gain a return on their investment. There are of course investments in sustainability that meet these criteria, and knowledge in the financial markets around such investments and results are now more widely understood. For instance, there are now more than $150tr of assets under management within the PRI (principles for responsible investment) and sustainability backed loans are becoming the preferred tool of mainstream lenders. Elsewhere, both Private Equity and Institutional Investors are increasingly using both ESG screening and inserting contractual requirements regarding sustainability performance. It’s safe to say at the point that finance is required, the consideration of sustainability is a key parameter.
Key considerations for manufacturers
For businesses, the task is to get a real understanding of both the opportunities that becoming a more sustainable business brings allied to the risks of business as usual/standing still. To do this it’s imperative that within internal return on investment models alongside the normal parameters, manufacturers start to include more dynamic models that account for longer/lower rates of finance (as opposed to standard at that time), the potential increased market access that being a more sustainable business can bring, as well as the internal carbon cost savings.
Embedding sustainability principles into business strategies and operations will continue to be crucial too. This includes considering stakeholder interest and influence, evaluating supply chain sustainability, conducting risk assessments across the short, medium and long-term; redefining internal processes (eg new product development and capital allocation), putting in place transparent reporting and KPIs; and assessing future skill requirements.
Key considerations for government
For government there are several things, the most important of which are outlined below.
1. Absolute clarity. In recent months there have been mixed signals, such as the overturn of the ban on fracking, planning permission for coal mines and noise around attending COP 27. Such narrative undermines the confidence to invest in low-carbon technologies at a time when they are very much needed.
2. The need for a proper industrial strategy both at an overarching and sector level that not only identifies the short, medium and long-term priorities and strategies that will underpin our international competitiveness but also the instruments to support them.
3. SMEs need special attention. Often much more agile and entrepreneurial than larger corporates, they can be a rich source of intellectual property generation and with the right support, rapid growth. However, it can be more challenging to raise finance and resource investment projects and in particular R&D. So, whilst the news from the autumn statement for large companies whereby the RDEC relief was raised from 13% to 20%, an increase in net benefit of 4.5%, SME’s saw their rate slashed disproportionally from 33.35p to 18.6p in the pound.
For more information on building a sustainability business strategy, contact Rich Hall.