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  • Writer's pictureStephen Plimmer

Signals for SMEs: Indicators on Net Zero from 2023 thus far

Updated: Aug 2, 2023

Already by July, 2023 promises to be a critical year for Net Zero. Several conditions are prevailing to support an acceleration in investment and, equally, the onus to act. In light of the UN’s recent call for global acceleration, and the UK Government’s series of strategy documents, we review the high level global and national signals from the year so far. Opportunities and risks are emerging for the nation’s SMEs which make a Net Zero strategy increasingly necessary.


Introduction

Just over the midpoint of 2023, signs are emerging that Net Zero is about to enter the next gear. Such signals have come from supranational bodies like the UN, actions of the UK government and other policy makers, investments by industry, and the implementation of Environmental, Social and Governance programmes across the corporate and business landscape.


Adding further impetus to existing trajectories, the early indicators are that, despite trillions of pounds of global investment into “clean tech” already, global emissions are set to hit record levels in 2023 (Forster et al, 2023), bouncing back after a lull due to COVID.


Net Zero faces other challenges too. Both consumer-citizens and businesses, while supportive of decarbonisation, face economic uncertainty and challenges, exacerbated by Russia’s invasion of Ukraine. This is shifting the focus and pace of investment.


That said, the UK Government have pushed-on strongly with a series of new policy announcements and activities in 2023, strengthening and adding-to those already in-flight.


The combined effect of these trends is to evolve market systems so that they monetise decarbonisation initiatives and penalise emissions. We see a picture whereby SMEs are facing pressures to act in different ways from a several actors (Fig 1)


Fig 1. Simple view of the key actors and forces (denoted by arrows) affecting SMEs in navigating Net Zero


Several studies over the last 1-2 years show SMEs to be at different stages. It appears ever more critical to devise strategies while remaining agile to adapt to the ever-changing regulatory, economic and technology landscape.


International

The relevance of supranational bodies to SMEs is they are setting the broad direction of travel and priorities for markets and national policies, which will ultimately affect every business. While they don’t determine the exact policies and recommendations per country, their narrative on priorities, strategic direction and recommendation are strongly influential in determining the intent that we might later see reflected in UK policy.


The international effort on Net Zero is championed, led and coordinated by several influential bodies, notably the UN, World Economic Forum, International Committee on Climate Change, World Bank, and International Energy Agency. Key agreements that reflect the international consensus on policy-direction come by way of the UN Framework Convention on Climate Change (UNFCCC), Kyoto Protocol, Paris Agreement, the UN’s 17 sustainable development goals while the IEA’s global net zero roadmap to 2050 has been influential at providing an overarching guide.


Each actor plays different roles and makes different key contributions to the evolving global response, to which national governments, including the UK’s, are aligning.


This year, we note four particularly important publications amongst many that offer signals to the imminent direction of travel.

  1. In their 2021 document “Net Zero by 2050: A roadmap for the global energy sector”, the IEA had already stated that the pledges of Governments at that time were not sufficient to reach Net Zero and limit temperature rises to 1.5C. The IEA called for an urgent ramping-up of investment to hit 400 milestones, such as an immediate cessation of coal power plants and the phasing out of petrol and diesel cars by 2035. Investment in clean energy and energy infrastructure needed to “more than triple” between 2021 and 2030. Meanwhile, the onus was placed on Governments to unlock public and private finance. Each year, the IEA report on global investment. In their 2023 release in June, the report pointed to the early emergence of such policies to incentivise clean energy spending on a global scale, and the transfer of spending from traditional industries to renewables, with solar growing strongly.

  2. In 2023, the WEF provide their annual insight report (“Fostering effective energy transition: Insight report 2023”) which provides the status on the state of global energy transition, measured by a series of indicators into sustainability, security, and equality for each nation and overall. The scoring of nations has also started to include “momentum” – the pace at which nations are moving toward goals. Some pivotal landmarks were noted this year, such as the ratio of investment of renewables to fossil fuels reaching 1.7:1, the expanded coverage of green-house gas emitters by regulation to over 3 in 4, and the shift of clean-energy investment from West to East (notably China). Concerns to the WEF included that, because of the economic downturn, the “equality” dimension of the net zero transition had gone into reverse. Sustainability remained low. Meanwhile, of various wider conditions that are deemed necessary for transition, “education and training” remain particularly low.

  3. In 2023, the IEA also produced a white paper which served as a rallying cry for energy efficiency (“Energy Efficiency: A decade for action”). Progress was noted in terms of the investment already made and surging product markets. However, “under current expected and announced policies, efficiency-related investment is projected to rise by a further 50%, to almost USD 910 billion per year by 2030…. However, these levels are still around half of the energy efficiency-related investment needed in the second half of the decade to realise the Net Zero.“

  4. The UN produce an annual report on the annual progress against 17 broader “Sustainable Development Goals (SDGs)”, which were derived from member states following their Rio20 conference. Goals include but subsume net zero. The advanced release of their 2023 report ("Global Sustainable Development Report 2023") in May stated “(The) defining principle of the 2030 Agenda for Sustainable Development is a shared promise by every country to work together to secure the rights and well-being of everyone on a healthy, thriving planet. But halfway to 2030, that promise is in peril. The Sustainable Development Goals are disappearing in the rear-view mirror – and with them the hope and rights of current and future generations. A fundamental shift in needed – in commitment, solidarity, financing, and action - to put the world on a better path. And it is needed now.”


This year’s COP28 summit, due in November, will almost certainly see Governmental, industrial, and other actors coalescence around these agendas, and agree a renewed impetus going forward.


The expected implications for SMEs from these signals include:

  • Broadly, a call for urgent acceleration of global efforts to decarbonise, with focus on emerging economies, will offer international UK businesses increasing opportunities to contribute. The UK consumer will, however, likely see an increasing onus to pay through taxation or levies on goods and services as UK Government investment increases as a fraction of GDP, which may exacerbate existing challenges in the UK to supporting vulnerable customers and tackling inequalities. Businesses will need to innovate to retain their competitiveness and ensure provision for poorer customers.

  • The increasing availability of public and private finance vehicles to invest will represent the opportunity for proactive businesses and those within the sector to develop products, services, and solutions, or embark in new partnerships to those ends.

  • A further push on training and education of workforces will see increasing advantages gained by SMEs with knowledgeable workforces, who are able to maximise the evolving conditions in markets, new technologies and government incentives.

  • More attractive opportunities will emerge for business to invest in renewable energy, energy efficiency and electric vehicles, reducing exposure to volatile wholesale energy prices.

National

Whereas the global bodies are setting an overarching set of directional agendas, the factors directly affecting SMEs will come from the opportunities and impositions created by UK policy.


The UK Government have been particularly busy in 2023, building on several important directional policies since publishing a “Ten Point Plan for a Green Industrial Revolution” and an Energy White Paper in late 2020.


In 2023, strategy and planning documents have included the following which provide further signals for SMEs as to what to consider in their own plans for the next few years:

  1. Two plans were published under the banner of “Powering Up Britain” with one focussing on energy security (March) and the other on Net Zero (April). Both served to underline the Government’s commitments. While both were wide ranging, the security strategy placed a focus on reducing the UK’s reliance on gas, while protecting short and mid-term supplies, while transport and heating sectors are electrified. The net zero strategy highlighted the importance of expanding the current renewables investments and creating a revitalised UK nuclear sector, while outlining the case for further Government interventions in areas of 1) Innovation, 2) Green Finance and investment, 3) Net Zero Workforce, 4) Embedding Net Zero in Government, 5) Local Net Zero, 6) Empowering the Public and business Make Green Choices, 7) International Leadership.

  2. Further to their strategy on electric vehicle charging in December 2022 (“Taking Charge: Electric Vehicle Infrastructure Strategy”), the Government created “The Electric Vehicle Smart Charging Action Plan” to address the creation of an electricity grid that can support electric vehicle, while also allowing the energy stored in electric car batteries to flow back into the grid and serve sources of demand when needed. (This facility creates so-called demand flexibility, reducing the need for expensive new electricity plants).

  3. The "Green Finance Strategy" (March) aimed to “to harness the UK’s world-leading financial services sector to support our climate and environmental objectives” by creating the means for more investment in the sector. The report also described ongoing work to increase the labelling of investment products for their green credentials, and to increase the transparency of business reporting. (The prospect that all businesses will report on their carbon footprint was also discussed by the London School of Economics). Further funding was earmarked for pre-commercial technologies including nuclear, carbon capture, usage and storage and hydrogen.

  4. Nature Markets: In recognition that UK nature has been declining, but investments to arrest or reverse the decline are often unviable, the Government outlined their vision and principles for future nature markets in a strategy document called "Nature Markets" in March e.g., to enable farmers and landowners to be rewarded for contributing to sustainability objectives.

  5. Climate Adaptation Strategy: The latest climate adaptation strategy, "NAP3", outlined the work done so far, and further work needed, to mitigate the impacts of climate change both in the UK and worldwide.

  6. Retail market improvements: The Government are seeking to create a market where consumers continue to have a choice and the energy industry – along with other sectors - compete to produce the best solutions. Enhancements to the future retail energy market for both consumers and businesses, while also providing a more stable market environment for suppliers, were outlined in principle in July (“Delivering a Better Energy Retail Market”). It was recognised that new forms of retail product were needed to reward consumers that contributed to net zero e.g., by using a time-of-day tariff or who exported green energy back to the grid.

The expected implications for SMEs from these signals include:

  • The increasing onus to measure, publish and reduce carbon footprints for businesses of all sizes. For businesses with premises, this will increasingly mean considering the carbon footprint of premises, sources of heating, as well as choice of energy supplier.

  • The increased availability of tariffs that can save money versus standard tariffs, and/or reward businesses that generate their own energy, will emerge.

  • The increased availability of financial products will provide the means to invest in green energy, and the increased consideration of the green labelling of such products.

  • The opportunities to add electric vehicle charging points more easily to premises.

  • Some businesses may face the prospect that climate risks impact their insurance policies of some businesses, based on their activities and locations.

  • Advantages will grow from engaging consumers in business activities toward the end of net zero, through information or marketing.


SMEs

So far, a range of indicators shows SMEs are at different stages of their net zero strategy. Notably, research by Lloyds Bank found that in 2022 7% of businesses had reached net zero already, and 36% were navigating the path ahead, but the rest were taking more ad-hoc steps, while 5% had not started on their journey at all.


Some common barriers for SMEs include finance, low perceived returns on investment, knowledge and perceived control over carbon emissions.


The landscape is, however, ever-changing and creating what is effectively a new set of market rules, which is making the business case more attractive for acting and less so for not doing so. Notwithstanding the pressures from environmental activism or consumer scrutiny, the sum of UK Governmental policies means that businesses that contribute positively to Net Zero are getting rewarded. Those that are not compliant face heavier costs or even, ultimately, potential obsolesce.


Companies that are championing the transition are going to be rewarded in terms of new revenue streams, lower costs, and reputational benefits. Those that don’t transition face an increasing risk of best being omitted from tenders or consumer consideration, and at worst, reputational damage.


It is arguably time that SME included both new revenue and cost items against sustainability, if not already present.


However, while the broad trend is clear, the economic environment remains volatile, following the numerous shocks of the past few years and their impact on the energy market and prices. Therefore, SMEs will need to proceed thoughtfully.


Overall, it is important for any SMEs that have not already done so to create their own strategic- and business plan – recognising the longer-term direction of travel, imminent UK policy changes, likely availability of new technology, their own industry benchmarks, while accounting for risk.


How X2Y can help

The path to Net Zero provides important trends for nearly every business that we consider in our services when helping businesses to consider their own future. We can also provide deeper dives into considering bespoke business scenarios for net zero using our Map or Discover services, or test propositions and ideas for responding to the trends using our Evaluate service.


We also provide an interactive workshop on the Net Zero landscape, expanding on the developments and trends in this article, to afford time for business decision makers to start considering the implications before focussing on specific areas.

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