Round table: Green Investment
Darren Flynn, MD Wealth & Asset Managers & Regional Head for Scotland, Bank of Scotland Commercial Banking
Jeavon Lolay, Head of Economics & Market Insight, Lloyds Bank Commercial Banking
Gordon Farmer, Chief Financial Officer, Global Energy Group
Paul Stevenson, Director, GSS Developments Ltd & Ribnort Ltd
Charles Wordie, Director, Wordie Properties Ltd
Warren Bowden, Group Sustainability & Innovation Director, Scottish Leather Group
Anne Anderson, Head of Sustainability, Scottish Sea Farms
Martyn Link, Chief Strategy Officer, Wood Group
Q: Jeavon, would you like to set the scene with the economic backdrop to today’s discussion?
Jeavon Lolay: The one thing we can say with confidence is that there remains an extraordinary degree of uncertainty regarding the economic outlook. A lot of my discussions at client meetings and with other economists are still centred on the risks: what we’re seeing in Europe in relation to the resurgence in infections and in the US about inflation worries.
This acutely reflects the nature and scale of this ongoing economic shock and also the unprecedented response from policymakers. There is still a lot to unfold: the path of the virus, the reopening of economies, the phasing out of emergency policy support, changed consumption habits, and the disruption to existing business models – and that’s for starters!
Having said all that, I should also emphasise that the overall tone is far more upbeat than earlier in the year; in fact, it’s far more positive than it has been for some time, particularly in the UK. We have to appreciate the scale of the shock last year: we witnessed the biggest annual economic contraction for more than 300 years – GDP down about 10%.
On the positive side, we’re now in a position where we have effective vaccines and already more than 67% of the UK adult population have been vaccinated. The economy is also far more resilient to lockdowns and, if government ‘roadmaps’ to re-opening are followed, then expectations are for a really strong rebound in the coming quarters.
However, a key point worth highlighting is that this was not a typical recession – and nor will the recovery be typical, either. When we speak to our clients, one of the key themes coming across is that while all firms have been impacted, this recession has been highly divergent at the sector level.
If you look at hospitality; in the first lockdown, output was down 90%, and January-to-January it was still down nearly 70%. Whereas in manufacturing, in the initial lockdown, output was down 30%, but only by about 4.5% January-to-January, far less than the overall economy.
Overall, the future still holds major uncertainties for the different sectors of the economy and we should also not overlook the important cross- linkages between sectors.
The final point I wanted to make is around longer-term growth: after all, this conversation is about sustainability. One of the key areas where the UK economy has really struggled in recent years has been business investment. Since the EU referendum, UK business investment growth has been lower than the G7 average. The measures announced in the recent UK Budget offer some optimism that firms may bring forward some much- needed spending. Meanwhile, the government also appears committed to investing more to achieve its climate and digital infrastructure goals.
A strong bounce-back is in prospect if business conditions continue to improve. A key concern, however, is that, when we look to the results of our Lloyds Bank Business Barometer survey, it shows that business confidence has been very variable across the UK.
Notably, Scotland has underperformed against the UK average for at least the past two years. It would be useful to hear your views on this and what you believe is required to see confidence and growth really take off in Scotland.
Q: With the uncertainty of the external environment, including continuous Brexit challenges and the recovery from Covid-19, how high up on your company’s agenda is climate change?
Warren Bowden: Some of our customers refer to sustainability as defining the new luxury. That is quite different to what’s done before. Due to the disruption taking place in their sector, and the post-Covid world, not to mention the change to electrification, transport in the next 10 years is going to be very different. What they’re looking at is durability, traceability, integrity of supply chains and they’re wanting an entirely carbon-neutral supply chain.
Up to two or three years ago, this wasn’t on the cards, and it’s now becoming an obligation. This has been on our agenda for a while. But I think it’s notching up a little in urgency in terms of investment and commitment. As I was told some while ago, if we aren’t “sustainable” then we won’t be in business.
We do lead the global leather sector in this regard. Covid has had a massive effect on the ability to produce – obligatory shutdowns, for example.
We also now offer an antiviral leather. Brexit is having a short-term effect in disruption, with 85% of our product exported, mostly through the EU. So, all sorts of barriers are in play at the moment. But there’s no doubt, apart from the cost of the product, sustainability is the next most important metric for our customers.
Anne Anderson: The expectation is that salmon – where the high-risk, high-reward aspects of agriculture exist – demonstrates a very strong and improving level of sustainability in its production; from sourcing materials to ensuring we’re not transporting our problems away from our producing nations.
The environment, balanced with the social and educational perspectives, are the challenges going forward for each sector and it’s a huge focus within my own. For us, part of that challenge is having infrastructure available for the rural sector. It’s very difficult to go electric when there are no charge points.
Martyn Link: In terms of our own company, we're discussing it at board level and the strategy function provides quite a lot of information and analysis to the executive leadership around this subject. I'm looking at it from a strategic perspective: where is the world going? How do we respond? All the markets are changing, what's going to happen?
About 18 months ago I started to see ESG [environmental, social and governance] moving to the centre of the radar of the investor community. I think in an ideal world many companies want to be more sustainable, but the earnings, the returns, how we make money in this new world also needs to be in place.
For us, purpose and performance go hand in hand, purpose without performance is a dead end.
Paul Stevenson: Our world has changed massively during the last five to 10 years. To do what the regulations say is not enough. We can build buildings to the minimum, but that is not enough.
If we want the best buildings in class, if we want to encourage major corporates to come to our buildings, it’s going to require us to be way better than what the minimum asks. We recently completed a 60,000 square foot office building in the middle of Edinburgh.
While there are only seven car- parking spaces, we made them all electric vehicle compliant. There are changing facilities, shower, cycle facilities, heated lockers. There are bike maintenance facilities and an over-provision of bike racks. It’s all aimed at encouraging occupiers to cycle, to run, to walk to work.
Delivering the minimum the regulations ask for is way below what you need to do to encourage the very best occupiers. Ultimately, there’s got to be a culture change and an appetite to do more than we have to.
Gordon Farmer: The investment mindset and how you create value has changed, with an increased focus on ESG. The pace of change in the past 12 months has been far greater than anybody anticipated in low-carbon energy and climate change. The change now, in terms of when you tender for work and what customers expect, has significantly changed. At Global Energy Group, we have a lot of work to do but we are committed to deliver on our responsibilities as a group.
Understanding your carbon footprint, and the way you operate as a business is critical. This is a challenge but important for developing a sustainable business with the right culture.
Q: What specific measures have you taken as a business on sustainability and reducing your carbon footprint?
Warren Bowden: We started off in 2004 with what we called a zero-waste strategy, which evolved quickly. We built our own energy recovery plants, which is a waste-to-energy operation, producing renewable energy. But, beyond that, this topic requires a much broader commitment towards the social agenda, as per UNGC [United Nations Global Compact], which does change the way you and your supply chains operate.
Automotive supply chains have to be carbon-free. So, for us, it means adopting 100% renewable energy.
Darren Flynn: We were the first UK bank to announce clear goals aimed at reducing the emissions that we finance by 50% by 2030 on our path to net zero by 2050 or sooner. We were also the first UK bank to achieve sourcing 100% of our electricity from renewable sources and have committed to making our own operations net zero by 2030, which is an ambitious target.
We are also the only UK bank to be a Carbon Trust Standard Bearer for Carbon and Waste reductions and have reduced our own carbon emissions by nearly 75% since 2009.
Another thing we’ve committed to doing is planting more than 10 million trees over the next decade in partnership with the Woodland Trust.
More recently, we announced an increase to the expansion of our green financing initiatives from £3bn to £5bn, given the fact that we have seen more requests coming through from clients in the last 12 months than we have during the last four years.
Anne Anderson: It’s about setting targets and driving those targets; one of the key things for us is tackling our energy use – our fuel, our transport. It’s only been six months since we published our targets and there is almost a sense of competition that starts to develop, with suppliers seeking to see how many targets they can tick off a list in terms of what the next farm in Scotland will look like.
How much carbon reduction can you get? Can we get to the point where we are sourcing 100% renewable energy for businesses like ours who are at sea?
Martyn Link: There are obvious things we can do as a business around real estate, such as single-use plastic and renewable power. We are also focusing on the opportunities brought on by smart and sustainable buildings, as well as their cost. We have developed our proprietary SCORE methodology which can help companies develop a roadmap around how to reduce their carbon footprint and ultimately shape a path towards net zero.
A lot of companies are wrestling with this challenge and want support. We've spoken to many companies across different industries including a big airport in the UK to a beauty product company. We have even trialled a ferry in the Scottish islands using hydrogen as a fuel. We see this as an opportunity to further pivot our portfolio over the next few years.
Q: Is nobody saying to you – the environmental agenda is all very well, but can we cut the cost?
Paul Stevenson: Are companies saying to their landlord, their developer, their investor: We’re happy to pay an extra 10p per kilowatt hour for the power to be from a green source? I haven’t heard that discussion yet.
It will take big corporates like the banks and others to say that. There is a cost to that but there is also an upside, so those conversations need to be had.
What could be changed is the non-domestic rates legislation, which I think is so out of date. You see buildings that could be refurbished being demolished because of the vacant rates liability. The carbon footprint of demolishing a building is very high. Companies should be incentivised to improve the energy efficiency of buildings and a better non-domestic rates relief system can play its part.
Charles Wordie: We operate in the retail industrial sphere, not office, so we’re looking at different dynamics. With respect to clients being prepared to pay more for a 'green' building: in industrials, they frankly don’t mind. It’s about location, the ability to shift their products from A to B.
In terms of the way some legislation is drafted, particularly Section 63 [to do with energy action plans], it’s a bit carrot and stick. The carrot refers to the tenants not the landlord, so we (as landlords) can spend as much money on the building but will not get the benefits through the rents – it will be tenants who will benefit through reduced utility bills.
So that bit of legislation doesn’t work well. When you start linking that to planning, it is a minefield. It’s too time-consuming. Admin and bureaucracy stands in the way of this. But, if you could do something that reduces costs, there’s more of an incentive to do it. We would like to do it but it doesn’t stack up economically.
Darren Flynn: Whether companies would be prepared to pay more to occupy a ‘green’ building is a good question. From the bank’s perspective, ‘Landlord managed’ buildings make up a relatively small proportion of the Group’s property footprint, so our main focus has been around developing our strategy and plan for reducing the carbon footprint of the buildings we have full control over.
Having said that, we have begun to engage with some of our bigger landlords on the subject of renewable electricity, and plan to do more of this engagement on other areas of environmental sustainability in the future. We also now assess various factors around energy and carbon performance of a building in our acquisitions process.
Q: What are the main hurdles to advancing sustainability within your business and sector?
Anne Anderson: From my own sector, there are high investments and high costs to go down this route, particularly for a farming sector that is itself impacted by climate change. Business confidence to invest in this area is around our ability to grow sustainably, to be able to secure additional tonnage to enable those sorts of investments.
Secondly, from the agriculture perspective, it is around our regulatory environment, which is incredibly fragmented. There are multiple regulators in the space. Where there are multiple regulators, there is conflict between them as well as gaps. With the bureaucracy of the administration, our ability to get additional tonnage is challenging.
There is a planning system that is land-based for us and yet we work in the sea. So, for the sector, it’s about ensuring government is supportive and we have a reform of the regulatory landscape.
Martyn Link: There are a number of key questions around new markets. If you look at the hydrogen and carbon capture market, the government is going to have to invest significantly to create them from scratch and provide stable, long-term policy direction.
There is definitely a business-to-business challenge around the emergence of new industries and I think a big question for the UK is where does it want to be globally competitive. We missed a trick with offshore wind. We can't do that with these other industries that are emerging. It's a big question for government: give us market clarity around how companies can make money.
The other big area I would put on the table is the need for a clearly defined assessment of what is sustainable. The EU sustainable finance taxonomy is a key bit of guidance that's been worked through the European level. That will help investors understand their portfolio at a much more granular level around what these companies are doing and what is sustainable.
Warren Bowden: There are key areas for me. Language: the definitions of some of these metrics. They’re all over the place. I’ve had to repeatedly explain each of these definitions to my colleagues and it is difficult for me, never mind others less familiar. Clear policy requires clear understanding.
Anne mentioned policy and I must add to that: most legislation is geared towards energy use rather than carbon emission. The climate change agreement, for example, doesn’t mention carbon. You can be 100% renewable but still have a carbon liability.
I don’t get that; someone in policy somewhere must understand that. I don’t. Policies need to be joined up.
Some of the hurdles are around infrastructure. We’ve had to invest, otherwise we wouldn’t be here.
We invested in our own waste facility because there wasn’t enough external capacity to treat it, so it became the right thing to do. These costs and green premiums for renewables are unlikely to be recoverable from our customers but we have to secure the business; and some of these premiums are eye-watering, very hard to justify in the boardroom.
All lending is subject to status.