INVESTING

Sustainable businesses: A £9 trillion investment opportunity

Ultromics secures £10 million investment to bring AI heart diagnostics to hospitals

By Sue Summers is CEO of Frontier Development Capital.

‘Sustainability’ is the business community’s latest buzzword. Sustainable practice, sustainable products, sustainable supply chain. The list is endless.

Behind the veil of PR, the shift from businesses towards sustainability is grounded in commercial benefits.

Sue Summers, CEO of Frontier Development Capital

Sue Summers, CEO of Frontier Development Capital

According to a recent study by the Business Commission, private sector companies could unlock more than £9 trillion worth of savings and revenue by 2030 through pursuing sustainable, low-carbon operating models.

As firms begin to recognise the opportunities that sustainability presents, investors are also responding to the trend with dedicated products. Most recently, BlackRock, the world’s largest asset manager, announced six new sustainable equity exchange-traded funds.

At Frontier Development Capital, we too have observed this shift and adjusted to it. By backing businesses with green credentials, we are future-proofing our portfolio – financing firms as they improve their sustainable product, service or business model.

This approach is emblematic of a wider sentiment; companies who embrace sustainability now, will be those most likely to reap commercial rewards in the future. In the business-to-customer market this has become increasingly apparent.

Termed the ‘Blue Planet effect’, elements such as plastic usage and business pollution are now firmly in the spotlight. High-profile TV documentaries, social media and the 24-hour news cycle are all playing a huge role in the increasing levels of scrutiny around sustainability.

The business-to-business market is under the same pressure. Multi-national firms are now assessing their supply chains and integrating suppliers who align with their own sustainability targets. The SMEs that can use their green credentials to tap into larger supply chains pose a huge opportunity for investors, with accompanying stronger order books making for a more attractive finance proposition.

However, to unlock the potential associated with the shift towards sustainability, investors, need to adapt their approach to providing finance so that a business’s green credentials, and the subsequent impact on market position and strength, are considered at the time of an investment.

In line with emerging regulations, the first step investors can take to embrace this approach is through incorporating sustainability into their commercial due diligence process. By being alert to any current or forthcoming changes in environmental regulation, investors can identify barriers to entry and potential competitive advantages to the investee business’s industry.

Beyond reviewing new and existing prospects, investors should also remain attuned to working with firms who have made steps to becoming green in the long-term – acknowledging the impact sustainable business practices can have on reducing costs, increasing sales and, ultimately, bolstering the bottom-line.

The challenge for sustainable SMEs when approaching investors for funding is that green services and products are historically priced at a premium. While consumers are becoming more environmentally conscious, businesses must be wary that if the current economic uncertainty continues, the green agenda will become less of a priority, as consumers inevitably look to reduce costs.

While traditional lending can be hard to access, especially during a downturn, there are alternative funding options available for green businesses seeking finance.

Consumers are now more aware of and willing to criticise the impact a business has on the environment, and a flexible approach to funding can help businesses address the commercial implications of this growing vocalisation. With such a diverse range of investment now offered, what types of funding should sustainable businesses be pursuing?

Debt finance can offer needed levels of flexibility. This makes it well suited to meeting the short-term spikes in demand for working capital often experienced by sustainable firms when carrying out research and development. It also avoids business owners having to forego any equity stake.

Another viable option, particularly for sustainable firms posing higher risk to investors, is mezzanine finance. This allows investors to bolster their security by using equity as a form of collateral, while providing larger deal amounts and extended repayment terms which can be beneficial to green firms whose success may be realised over a longer period, especially when absorbing initial costs such as sourcing sustainable materials.

Most importantly, investors must approach sustainable businesses ready to cultivate staged growth. There are, of course, risks associated with this and just because a business is committed to being green does not necessarily mean that it will succeed. However, by incorporating both strong investor support and a robust roadmap for transition to sustainable practices, growth potential can be maximised.

A £9 trillion opportunity awaits and it is the investors who show the ambition to back sustainable businesses now that will thrive in the long-term.

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