For SMEs (small and medium-sized enterprises) and small-cap businesses, decarbonisation can be a significant challenge, as they may have limited resources and expertise to implement sustainable practices. However, there are several strategies that can help these businesses reduce their carbon footprint.
Ivan Bates, Partner within the Board Practice at Eton Bridge Partners, recently sat down with decarbonisation expert Hugo Kimber, CEO of Carbon Responsible, and several CEOs from a range of different businesses. Their discussion explored what decarbonisation means to SME and small-cap businesses, the key challenges they face and practical advice on how smaller businesses can tackle this important issue.
Key takeaways from the discussion:
- Anti-greenwashing and clear disclosure of accurate carbon data is the main focus of existing legislation.
- Starting small is the best way. Look at the data that is currently available to you in your business, and then move on to improving and expanding that data.
- Decarbonisation strategies will become more pertinent in PE sales in the future, with carbon data requirements mirroring the need for financial data as part of purchase considerations.
- Most consumers are more likely to accept reasonably higher costs for sustainable options. However, in those sectors where consumers are cost driven, showing the long-term savings can help get people on board. This is also the case in terms of B2B transactions.
The latest Government legislation affecting decarbonisation
The main push right now is the Trades Description Act of 2011, driven by guidance from the Competition and Markets Authority. Disclosure and transparency are at the centre of current guidelines.
Regulators are trying to prevent greenwashing, which is becoming a serious challenge, Hugo said.
“You must be able to support the claims you make with data. Alongside that, the Financial Conduct Authority (FCA) now has anti-greenwashing rules which are designed to move beyond the “do no harm” aspect to full disclosure, and that will be relevant for everyone selling a financial product or who are regulated by the FCA.”
The Streamlined Energy and Carbon Reporting (SECR) Regulations apply to any company that reaches the threshold of £36M annual turnover, £18M balance sheet total and 250 employees (currently about 11,800 companies in the UK). The SECR will expand in terms of its reach, requiring Scope 1, 2, and some elements of Scope 3 to be disclosed alongside corporate reports.
SECR Scopes explained…
- Scope 1 – fuel combustion in premises and vehicles – gas, diesel, petrol.
- Scope 2 – primarily electricity, but also heat and steam which is delivered to you.
- Scope 3 – has 15 categories which cover everything else, including supply chain, investments, business travel, franchises, end of life sold goods.
Scopes 1 and 2 are relatively easy to measure, but accessing the data required for scope 3 can be challenging.
And finally, the European Energy Savings Opportunities regime applies to most businesses affected by SECR and involves disclosing similar data as SECR but in a slightly different format.
The difficulty with carbon offsetting
“It is generally accepted that a lot of our net zero trajectory globally sits around carbon storage,” Hugo said. “Mass carbon storage is a mechanical activity that is still in its infancy, so people focus on things like tree planting, which has been massively overused and abused in all sorts of retail and corporate settings. Trees take a long time to grow and claims of how much they are going to store are incorrect, nothing happens for five years. You might think you have offset by planting trees, but you haven’t.
The idea of avoided emissions (also called Scope 4 emissions) was supposed to be encouraged by the Clean Development Mechanism, which was set up many years ago to take money from polluting projects to put into clean projects. But many don’t deliver on their promises.
The problem is that projects are certified on what they are expected to deliver according to certain standards, but there is no ongoing audit of the product. So, you’re buying a promise and a hope, not an actual regulated product.
The focus should instead be on the reduction and decarbonisation that is producing a lower carbon economy and the reduced risk of excessive impact of climate change.
“One of the biggest risks, if you go for an offsetting approach, is getting drawn into greenwashing. The whole point is that reduction is something that is measured, you can see it, track it, and it is externally verified. By doing your bit for a reduced carbon economy you will experience operational cost savings and a whole raft of other benefits,” Hugo said.
How can smaller businesses begin to measure and disclose carbon emissions in an affordable or practical way?
Carbon Responsible recently launched an SME online reporting self-certification model which has now been used by all kinds of businesses, from those turning over £100M down, to local hairdressers with two employees. “The whole point is to give people advice on what they need to put in and what they can get out. For a start it’s Scope 1 and Scope 2. All these items (as outlined above such as fuel and electricity) are tracked; they are big expenses for businesses, so you usually have that data. You might not know that you’ve got good data, but you can usually achieve good data quite quickly.
“Then move to some Scope 3 where it’s easy to measure. Business travel for instance. If you use a travel management company, they can provide data. You can then move to your wider Scope 3 materiality, building up to where you get to a sensible baseline. We find for most clients this is a 12–18-month process from a standing start.”
Hugo warned against getting drawn into spending a lot of money on specialist consultants for this, however. “It’s just not necessary for what is required; it is possible to have people in the finance department supported by people like us, or similar accountants or specialists to assist with the process to deliver that report,” he said.
“Entry level Scope 1, 2 and minimal Scope 3 is very inexpensive, effectively free if you manage to save two or three tonnes. Certainly, depending on scale and complexity, it doesn’t have to cost the earth and doesn’t take a consultant charging a huge amount of money per day.”
What practical changes can small businesses make?
Our discussion, encompassed several suggested changes, such as moving to an electric vehicle fleet, heat pumps and solar power.
None of these solutions are without challenges, and the biggest problem is with existing tech and the necessary infrastructure to support it.
EV vehicles might not have the range, speed or charging capacity required to fully replace diesel fleets, and EV charging points are yet to be as widespread as they need to be.
One CEO pointed out the recent government announcement of the gas boiler ban, which will mean that gas boilers won’t be installed in new homes from 2025. Alternatives such as heat pumps are difficult to install in settings such as flats and terraced houses, and they can be noisy.
“Until there’s a practical solution that’s viable and budget friendly, the sector is up against it financially with a huge amount needing to be spent to meet these regulations”.
Onsite solar, especially roof mounted solar, has now been available for several years with technology, availability and practicality making it a more viable option than ever before. “It can be paid for by investors and will now provide you with a guaranteed rate on your electricity, cheaper than the current market rate, and you will get the carbon benefit from that as well. This is effectively a lease arrangement which has no upfront capital expenditure as far as the business is concerned,” Hugo said.
How can decarbonisation strategies impact Private Equity sales?
Hugo pointed out that greenwashing can have an extremely negative impact on the value of a business, and therefore Carbon Responsible now recommends a pre-screening approach of determining the existing messaging and disclosure around carbon data.
“There’s the question of what numbers are they using and has anybody actually checked those numbers? Because a lot of the time the answer is no,” he said.
Hugo also recommended that PE clients gather as much company data around decarbonisation and sustainability while data rooms are open, because getting the data once the deal has been concluded can be much more difficult. “And if you don’t like what you see on the other side that’s bad luck. We are definitely seeing a desire for more carbon data and that’s really insuring against risk and underpinning any value statements regarding carbon.”
Customer push and the advantages of a clear emissions strategy
There are four things that need to be present in carbon messaging to the consumer: clarity, transparency, reduction, and progress. “If you follow those principles, you will avoid greenwashing,” Hugo said.
From a B2B perspective, targets are starting to drive the supply chain in terms of requiring disclosure and reduction. As far as B2C is concerned, there is increasing evidence that consumers are willing to spend more on greener choices. “We recently ran a trial providing aviation data, working with the forerunners of Skyscanner. We offered the cheapest and greenest flight, and the results defied my expectations. 53% chose the cheapest and greenest versus the cheapest available flight, and they paid over 19% more for that flight. If you demonstrate this information in a simple way and provide the choice, even with some difference in price, consumers will accept it. That is compelling and has a lot of value.”
One of the group who works within the housing sector commented “Some customers might accept higher charges for a property that is more decarbonised, but ultimately only if it saves them money in the long term on their energy bills,” she said. “In the housing sector, one of the things we need to demonstrate is value for money; to the sector, our customers, and shareholders. From an organisational perspective, you can do more of the same for less. From a customer service delivery and customer experience perspective, we can put more into an efficient boiler, lagged pipes and LED lights; the small things that make a difference to customers’ bills. And for customers who struggle to pay market rates, every penny counts.”
Hugo ended by reiterating the importance of data; “People buy it if they’re told the truth, but it’s got to be backed by the data. Because if it isn’t, then it’s greenwashing.
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