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Can Small Businesses afford Net-Zero?

ESG Investing

cop26For a number of weeks, COP26 has been all over the news. This is, of course, the climate change conference that recently took place in Glasgow. The final agreement was widely considered slightly disappointing as it did not commit to reducing carbon emissions. Some branded the Glasgow Climate Pact as a ‘huge win for coal’ because there were late amendments to the wording from India and China. The words ‘phase out unabated coal power’ were changed to ‘phase down the use of coal’. Although seemingly minor, there is a significant difference in their meanings.

Despite this, there remains a huge drive to net-zero worldwide. Net-zero refers to balancing the greenhouse gases in the atmosphere with those taken out. Boris Johnson has clarified that he is taking a green stance, but many questions remain unanswered. Who is going to pay for this transition to net-zero? Will small businesses be left with this burden? And what are the benefits of small businesses achieving net-zero?

According to figures from the UK Government, £650bn will be required to transition to net-zero. Of that, 4% will be provided by the Government. That leaves £624bn to be funded by the private sector and external investment. Reports suggest that the percentage being given by the Government in the US is equally eye-watering.

Clearly, businesses will only invest these amounts if they see them as a profitable use of company funds. The government will unquestionably demand that businesses show how they are going to achieve net-zero, with the Treasury requiring big businesses to show (by 2023) how they will achieve their climate change targets.

This should not be a problem for banks. Take HSBC, for example—they recently reported a profit of £4.02bn in the third quarter of 2021, so making the transition to net-zero should not significantly affect their finances.

plumber afford net zeroBut what about Paul the Plumber? There will come a time when the Government demands plans from companies on how they will achieve net-zero. However, tradespeople require their vans and must travel to their client’s houses. They cannot work from home. This isn’t possible using public transport, and their finances are most likely left severely damaged following the pandemic. Considering this, it will be difficult for them to purchase an electric van, given the large upfront cost. Furthermore, there will be very few benefits to them of making the move to net-zero.

When changing banks or investments, perhaps their ‘green audit’ would be a factor in our decision. However, if a pipe bursts at 6 a.m. and we need to call a plumber, we will most likely use Paul because we have used him in the past, and he is always reliable. At that point, whether he had an electric van would not enter our minds.

Many experts have pointed out that the Government’s lack of funding will unravel exceptionally quickly. Since Paul lacks subsidies to purchase his electric van, the additional cost will more than likely be passed onto his customers. If he somehow receives a subsidy for the van, the consumer will still pay for it through additional taxation.

When considered practically, small businesses will find it difficult to justify the large investment required to achieve net-zero – especially given the apparent lack of benefits to their company.

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