COP26 was a reminder that when it comes to reducing their carbon footprint and supporting the Government’s net zero emissions by 2050 goal, manufacturers have no time to waste. However, with businesses often concerned about the cost of carbon reduction strategies, how can they drive value when investing in sustainability? Caroline Milton of Menzies LLP explains.
Many manufacturers have already got their decarbonisation approach underway by investing in eco-friendly products, green packaging solutions, waste minimisation strategies and energy efficiency initiatives. However, this is not the case for all businesses, particularly as many still lack any industry-specific support or guidance.
Findings from Make UK reveal that when it comes to kickstarting sustainability initiatives, many manufacturing firms are yet to take action. 30% have not yet made an individual or team within their organisation accountable for the development and delivery of an environmental and social governance (ESG) strategy, and 50% are not measuring their sustainability performance.
Strong environmental and social governance (ESG) is an increasingly significant factor in consumer, customer, employee and investor decision-making. As such, manufacturers that are able to show their commitment to reducing carbon emissions and having a positive impact on society could achieve a competitive advantage. Increasingly, consumers are choosing branded goods that reflect their sustainability and ethical ideas. As such, strengthening carbon reduction strategies could enable manufacturers to improve their consumer appeal.
Being able to demonstrate a strong commitment to sustainability is also key for business owners pursuing a sale or seeking an injection of funds to support their growth strategy. Investing in carbon reduction strategies can also help manufacturers to strengthen their supply chains, improve their employer brand and attract and retain talented people.
Sometimes, manufacturers investing in green facilities and processes are not aware of how much tax relief they can claim. Getting the right advice from a trusted adviser at an early stage will enable them to optimise R&D tax relief claims and/or make the most of capital allowances to improve the business’ cashflow.
Businesses in the sector should start by developing a tailored sustainability or net zero plan, before testing it carefully to ensure it is capable of delivering long-term value. The plan should be underpinned by robust metrics; this will enable the business to keep a measure of its success as it reduces the whole-life carbon footprint of its products.
Accurate cashflow forecasts can help business owners to gauge the impact of any planned investments or process changes. Effective cash management and structuring is also important; this will improve the business’ ability to react quickly to market opportunities as the plan progresses.
When it comes to driving value from sustainability investments, timing is everything. For example, when investing in new plant and machinery, it may be worth bringing forward plans to take advantage of the 130% ‘super-deduction’ that applies to investments in plant and machinery (available until 31 March 2023) or else the £1 million limit for the Annual Investment Allowance, where assets do not qualify for the 130% super-deduction, which has been extended through to the end of March 2023.
Having access to an accurate financial model is vital for working out the payback period of planned investments in carbon reduction, waste minimisation and other sustainability strategies. This is key for understanding the cashflow impact of planned investments and how they might affect business value in the short, medium and long-term.
Manufacturers should also look to secure Board-level buy-in and look for ways to generate financial quick wins early on. For example, could the business monetise waste by selling unwanted by-products? The business may also be able to realise opportunities to boost revenues and profits by diversifying to meet a new or growing area of market demand.
Having efficient processes is also key, so manufacturers should look for cost-cutting opportunities wherever possible; employees should be involved in identifying these while the business is developing its net zero or sustainability plan.
Manufacturing firms should also look to take advantage of available tax reliefs and grants, including R&D tax relief. The definition of R&D is far broader than many businesses realise, and some innovative manufacturers could qualify for an enhanced deduction of 130 per cent – up to circa 33 per cent of their R&D spending. Decision makers should secure advice at the earliest possible stage in order to realise maximum value from the scheme.
Manufacturers should also be aware of the plastics packaging tax, which is due to be implemented from April 2022, and be ready to make adjustments to mitigate any impacts on their business model. The new tax will apply at a rate of £200 per metric tonne for UK businesses that manufacture or import 10 tonnes of plastic packaging per year and will apply to packaging that contains more plastic by weight than any other single material. The definition of plastic includes biodegradable and compostable plastics and packaging that contains at least 30% recycled plastic is exempt.
Sustainability-related changes can provide manufacturers with an opportunity to enhance their employer brand and attract and retain skilled employees. This could involve a focus on increasing employee involvement and honing communication strategies to strengthen employees’ sense of purpose.
Sustainability investments and profitability don’t have to be mutually exclusive. By planning carefully and securing specialist advice particularly in areas such as taxation, manufacturing businesses can realise commercial opportunities when pursuing their net zero goals.
Caroline Milton is an audit partner and manufacturing sector specialist at accountancy firm, Menzies LLP.
To learn more about how to unlock value on the road to net zero, read Menzies LLP’s new white paper here.