How businesses are seeking a more sustainable way forward
Businesses are making ethical changes as investment decisions become increasingly influenced by environmental and social considerations, writes Rosemary Gallagher.
Sustainability is now higher up the political and business agenda than ever before, with many investment decisions taking environmental credentials and performance into account.
While this causes challenges for some sectors, such as those reliant on fossil fuels, it can open up a new world of opportunities for others, including renewables.
Scotland is relatively well-placed when it comes to sustainability, with its natural resources and the Scottish Government’s commitment to ambitious environmental targets – the aim is to reduce Scotland’s emissions of all greenhouse gases to net zero by 2045 at the latest.
Such a focus on sustainability will undoubtedly influence investment decisions, and the approach by senior management and their advisers when doing deals. And Covid-19 has also seen attention move to investing in the “new normal”.
As Chris Thompson, a senior manager in the corporate finance team at Anderson Anderson & Brown, has observed. He says: “The coronavirus outbreak presents an opportunity for both companies and governments to invest in a new way – instead of continuing to focus resources heavily to support old norms, it makes sense to invest in what will be the new normal.”
He says that the coronavirus outbreak and accompanying lockdown have shone a light on how business can be done differently, with a realisation that there has been a significant waste of resources due to practices that are now outdated.
The last few months have shown that technological advances allow work and meetings to take place remotely, with substantial cost savings available to businesses who embrace these technologies and sustainable practices.
Thompson says: “There is now an exceptional opportunity for investment to be focused on more sustainable companies and industries, as well as in a way that reduces inequality, that will help the wider economy be far more resilient against future global disruptions, whether from future pandemics or financial crisis.”
He points to certain government support packages, announced in response to the pandemic, that suggest policymakers favour supporting sustainable industries.
For example, the UK government introducing the Sustainable Innovation Fund, a £200 million package which will help companies keep their cutting-edge sustainable projects alive. Meanwhile, the European Union has unveiled a €750 billion (about €690bn) support plan to ensure Europe builds back better and greener.
Thompson adds: “It’s difficult to assess whether these government measures will have the desired effect to make a more sustainable economy given the relatively low values involved.
“However, there have been well-publicised calls to require companies to set how they will be able to improve their carbon footprint and demonstrate green credentials before they receive further financial assistance.
“There is also likely to be more pressure on governments to increased investment in digital infrastructure rather than transport infrastructure.”
According to Thompson, the current situation provides an opportunity for companies that can prove their green credentials or assist in the improvement of digital infrastructure. In so doing, they can position their business to match changing consumer behaviours, thus becoming a more attractive proposition for external acquirers, investors and lenders.
Doug Crawford, a corporate partner at law firm Brodies, agrees that sustainability is becoming a bigger theme in business for a number of reasons.
He explains: “There are a few things going on. The environmental, social and governance, and social responsibility, [ESG and SRI] ethos and the climate change agenda is having a part to play in reducing some historical investment opportunities.
“If you look at the North-East of Scotland, for example, a number of private equity companies, which have historically invested there, are now shying away from investing in businesses involved in the oil and gas industry. But on the positive side many of these private equity funds are looking to put money into energy transition and renewables in a move away from investment in fossil fuel -based businesses.
“So some of the deal flow is being taken away, but I can see it coming back as investment in alternative forms of energy and energy technology.
“There are also many practical ideas for investment which are aligned with ESG and SRI. If you look at some of the investments made by private equity companies, they are finding businesses with sustainable themes, such as extending asset lives, reducing waste materials, refurbishment and recycling.”
And David Lightbody, a corporate partner at Brodies, says: “We’re seeing a shift by governments in the UK and elsewhere towards the goals of addressing climate change issues and trying to create a more circular economy.
“Until relatively recently, the perceived timeline has been beyond the horizon of a lot of investors, but there is a sense now that this is going to feed directly into the bottom line, and valuations, for some companies.
“Those that are best set up to pre-empt and adapt to the regulatory landscape are the ones that will thrive. You can see why there may be a shift towards businesses that can demonstrate sustainable credentials and are positioned to grow with the new economy.”
Crawford points out that a large number of the UK’s SRI funds are based in Scotland, putting the country in a good position to capitalise on this trend. And he says a lot of companies are coming up with good sustainable ideas to create viable and financially successful businesses which will benefit the wider Scottish economy.
He adds that a whole range of sectors are doing well as a result of a focus on sustainability, including those that are coming up with new technologies in such areas as waste management and managing domestic energy usage consumption.
Lightbody gives the example of Orbital Marine Power, which has tapped into investor appetite forsustainable and impactful businesses.
It raised £7m on Abundance, the peer-to-peer ethical investment platform, to fund the construction of the UK’s first floating tidal stream turbine to go into commercial production. This was then the largest investment to date on Abundance.
Crawford says: “Sustainable businesses are not charitable. They make money if they are good. It is commercially viable to run sustainable businesses and to have a focus on a product that helps the wider community from an environmental point of view.”