Perseus in conversation: Financing SME decarbonisation with Tony Greenham, British Business Bank

Tony: The British Business Bank is the UK government’s economic development bank and we’re here really to drive sustainable economic growth by supporting startups, high growth businesses and smaller businesses in general to get the finance they need to succeed. And we do this through two main businesses. We’ve got an investment business that is a venture capital business, that investor a range of equity and debt funds to support high growth companies and startups. And then we also have a banking business that provides loan guarantees and wholesale funding through banks and non-bank credit providers to small businesses. And just to give you an idea of the scale of that, in the most recent year. We sort of helped about 6.8 billion of pounds of finance get to smaller businesses in the UK, and that was through 1.2 billion of our own money. A further 2.6 billion of loan guarantees that help to banks to lend more. And then that together leveraged in another 3 billion of private sector money alongside that. So it’s now quite a substantial amount of funding that we’re able to distribute to help small businesses to succeed in the UK. We are particularly good at making sure that we support businesses outside London. So 84% of the businesses that we indirectly supported with finance outside London in the last year, and that was in total 28,000 companies receiving finance. We also are very keen through one of our programmes. The Start-Up loans programme is extremely good at helping sort of previously excluded groups, female entrepreneurs people from ethnic minorities communities again outside London to access finance, to start businesses. So in a way, we are kind of designed to overcome some of the barriers that small businesses and business owners can face in getting finance. Ross: That’s really good. And when it comes to the net zero question why do you think small businesses are so important here? And is that something you focus on now? Tony: Well, I think it’s generally accepted that the UK economy as a whole can’t get to net zero, can’t meet the government’s legally binding commitments to reduce its emissions without small businesses playing their part, because they account for half of economic activity, half of emissions, very broadly speaking, and unlike perhaps larger companies that have got the resources and sort of the management, they’ve got specialists perhaps they can afford to employ to look into ways to decarbonise, and they can raise capital easily to invest in that, particularly for smaller businesses. They don’t the management don’t have the time. Perhaps the knowledge, the confidence maybe even to, to invest in new measures that can reduce their carbon emissions. So it’s actually, we think, more difficult for smaller businesses quite often to engage with this. So it becomes even more important to find ways to make it easier for smaller businesses to invest in not just net zero, not just reducing carbon, but making their businesses more sustainable, more generally. Because ultimately there’s a lot of evidence that shows that that’s going to give you a more successful business in the long run. So it is to small businesses benefit commercially to engage with sustainability. It’s just that we recognise that it’s quite it’s not an easy ask. It’s not an easy sort of thing to implement in practice. For small businesses facing the day to day challenges of, you know, cash flow and succeeding. Sort of like this month, next month, this year. On the long term view, this is a great thing for them to be investing in. But we recognise the short term challenges of devoting time and and finance to investing in decarbonisation. One of the barriers which I’m sure will come on to, of course, is them even knowing what their carbon footprint is in the first place. So then be able to manage it down. Ross: Definitely. And we did. Yeah, we did some work on carbon reporting with British Business Bank. I was going to ask, you know what the benefits were for small businesses there. Obviously, for us, it kind of painted the picture of how complex that space is because we found hundreds of carbon reporting solutions, and it kind of set the tone for what small businesses are dealing with. But I wanted to get your thoughts on that. Tony: Absolutely. So I think, you know, on carbon reporting, I think that’s starting at the wrong end, even really to talk about carbon reporting. I mean, a good way to think about carbon if you’re a business is that it’s a cost, right? And it’s actually a cost which modern technology means you don’t have to bear. So reframing it that way means, well, this is this is ultimately a cost. And in fact, it’s it’s worse than that because because the volatility of fossil fuel based energy and other inputs. As was shown when Russia invaded Ukraine and it all shot up through the roof, exposes your business to greater economic uncertainty. If you’ve got a very fossil fuel dependent set of products, services, business model energy and so on. So it’s not just that driving that out, you know, is going to reduce cost over the long term. I mean, there are of course, you know, don’t making any change, making any investment is going to involve some upfront investment. So there are capital costs, but then you reap the rewards over time with lower operating costs and a more stable cost base in the face of sort of growing, you know, world of geopolitical uncertainty, it seems that all of us have to face. So the reporting comes in because just you need to you need to if you want to manage it, you’ve got to measure it. And so that comes in quite important to start doing that. But I think my, I think it’s okay to start with quite rough numbers and actually it’s often pretty obvious what sort of actions are going to reduce your carbon emissions, even without knowing the precise number of what the emissions are, you know. And so I think I don’t think the reporting should be a barrier to action. That said, the better numbers we have, you know, the better decisions we’re going to make. So it is really important to crack this reporting nut and enable small businesses to be able to measure their emissions really accurately and crucially, really easily and with low cost and both an effort, time and pounds for them to be able to do the measurement. Ross: Absolutely. I completely agree then. A more a more recent thing I wanted to discuss was the UK government’s new industrial strategy, which I believe you play a key role in delivering that. And there’s a lot of, you know, there’s a lot of good signs from that with money going to smart data schemes and, but I wanted to get a better idea of that strategy, how that supports small businesses and you know how they prioritise where that money goes to. Tony: Sure. Well Ross, as you probably know, the this is fairly hot off the press news, really the industrial strategy fund. So the British Business Bank recently received you know, a new updated settlement of financial firepower, if you like from the government, including this full set of guarantees money that we can invest directly into companies, money we can put into funds and then also banking. Now, among all of that was this you know, very significant £4 billion allocation to the Industrial Strategies Fund. So that will specifically be looking to invest across the eight priority sectors, accounting for roughly a third of the economy that the government has identified as high growth, important areas where Britain has an advantage already. So we want to really invest behind that success. And within those sectors, you know, clean energy is one of them. There’s huge opportunities there, obviously, for backing the kind of climate innovations that are going to flow through the rest of the economy and help all businesses to decarbonise and adopt more clean business models. But some of the other sectors are equally important in terms of sustainability. You know, advanced materials science and so on. Or agritech – land and agriculture are big polluters, if you like. You know, both of carbon emissions, but also other other pollutions. So it’s a huge opportunity to invest in the innovation and the sort of enablers, if you like. Of, the whole economy to become more sustainable as long as, as, you know, alongside the sort of core purpose of, of generating jobs and you know, growth for those businesses that we’re investing in. Ross: Yeah. That’s great. It’s good. It’s a very positive sign. I think it’s best now to move on to Perseus more directly. I just wanted to get just your perspective on the benefits of Perseus for BBB and and small businesses. Tony: Yeah, absolutely. Well, I’d like to start by saying that we see it part of our role as, as a public bank working on behalf of the government, but ultimately for the country as sort of playing our part in helping to convene industry collaborations, any sort of, project, if you like, across across different industry groups, trade associations anything which is going to try and make life easier for smaller businesses, you know, to succeed. And in this case, of course, we’re talking about particularly around the carbon question. So it’s very you know, we’re very keen on and supportive of that kind of activity. And Project Perseus is a brilliant example of that. And we think I think that one is particularly important because as we’ve mentioned now a couple of times, we all recognise that it’s a barrier for for businesses to sort of get. You know, it’s confusing. It sort of takes effort. It might be quite costly. They might not really know where to start on measuring their own emissions from well, from all of their activities. But electricity is a really good place to start. So that’s where Perseus has started of course. It’s sort of what are the emissions from our electricity consumption? Is the homework question. And what we want to be able to do is that the business owner doesn’t really need to answer it. They just need to press a button. And all this magic stuff happens in the background. You know, the projects Perseus has, created of of the smart data frameworks, the trust frameworks that allow data to be collected from smart meters and flow all the way through, ultimately to banks or corporate customers or whoever it is that wants to know as well as the business owner, what the emissions are. And I think that’s, you know, that’s an amazing vision. To be able to make it a one touch of a button easy, painless, cheap process for business owners. But of course, you know, if we can do it for electricity consumption, then you can start to move on to other, other areas. You know, water and so on, or gas or, you know, whatever it is, and apply the same overall method and framework to measuring these environmental impacts, in a really accurate and an easy way. Ross: Yeah. That was actually my next question was where do you see it going next? But you’ve kind of answered that there. Are there any other sectors you think it might work in the near future? Tony: Well, ultimately I, you know, any input, any, any sort of supply into the business sector that has an environmental impact is something you’d want to be able to measure. And that will vary from sector to sector. Of course, whether those sectors are able to sort of have us any a smart meter or an equivalent, which is doing the basic measurement is, I suppose, I mean, agriculture is a bit of an obvious one where there’s a whole range of environmental impacts. A lot of organisations have done great work in improving the measurement of everything to soil health to, to, you know, nutrient runoff into rivers to the water management on land and so on, as well as the carbon emissions. So I guess you could say there’s a lot to measure out there. And I think in a way, the most significant the reason why process is so significant is creating the method, the platform, the know how and the means of doing one of these things. And then I haven’t really answered your question as to which ones I think we go to to next. We mentioned water and gas, I guess obviously how far it go it can go, I don’t know, but I mean, to be honest, even if you could really crack energy really well, then that’s a huge advantage because it’s such a major input to everything. Everything requires energy, you know, and even, if we end up with, with the decarbonisation of the grid, meaning that the actual emissions from our electricity consumption are falling, electricity still has a cost, even if it’s renewables generated. So that that information is still powerful for me as a business owner, to manage down my energy costs even when they become lower carbon. Ross: Yeah, that’s a really good point, actually. Tony: I mean, there’s also another kind of question you haven’t asked which which I could answer anyway is about who wants this sort of information and to do what with because we’ve talked about business owners, but we did talk a little bit about banks, and I mentioned corporate customers. So I sort of want to come back to that a little bit because, you know, as important as it is to get the supply of sustainability data sorted out if you like. It’s accurate and it’s timely, and it’s not expensive to generate. There’s still a question of the demand for that data. Who wants it? What are they going to do with it? Now we’ve talked a bit about the small business owner. It’s important information for managing costs or seeing opportunities and understanding your business. I think it’s also, of course, really interesting to finance providers and banks, not just because they’re on an obligation now to also get to net zero in terms of the emissions that they’re financing. But it also potentially gives you good information and insight around the credit quality or the management quality of a business. It also can give you insight into the opportunities of that business. You know, the finance that’s being used to invest in new, more sustainable and clean business models is a good thing because it’s going to make the business more successful.So you should be interested in that as a finance Provider. And so all of these. All of this data is helping to track that progress, track whether those opportunities are being realised as well as the cost of being managed, I suppose. And then there’s also in supply chains, corporate customers. I mean, earlier on we were talking about I was saying that with large businesses, it’s arguably a lot easier for them to tackle the challenges of sustainability data and getting all that and investing in it because they’re just bigger. They have the resources they can access, the money, they can access the expertise. So they also have an important role to play in working with their smaller businesses in their supply chain. I feel to help the whole supply chain to decarbonise. In order to do that, then they also need to have this information. And, you know, we do see examples of where large corporate customers are building into their contracts, more favorable terms, more favorable pricing for suppliers that can demonstrate that they are moving towards cleaner, more sustainable business models. So, you know, again, if that’s the sort of thing you can do if you have this data, but without it, you can’t start to introduce those incentives to move to more sustainable and long term successful business practices. Ross: Yeah, no, that’s a really good point. And I’ve heard the thought is kind of similar of people, you know, missing out on contracts because they can’t show their scope three emissions from their supply chains, and they’ve actually missed out on business from that. So there’s a clear. Yeah. Like you said there’s a clear advantage there. Tony: I guess a lot of people would have seen in the news that particularly in the US, it sort of looks like there’s backlash against the idea of, net zero, of climate change, even fundamentally. And what does that mean for businesses and investors and banks in the UK and Europe? Well, what I think what I’d say about that is that firstly, what we hear from other financial institutions, including in North America, but especially in Europe, is that they’re not really changing their focus on climate change or sustainability. There might be talking about it differently, but the reason why wouldn’t they be changing their focus? Because ultimately they see this as driven by financial and commercial considerations. It’s simply good business case. It’s a good investment case to be investing in new, clean technologies of the future and investing in companies that they’re going to implement and take advantage of them. So although there’s no doubt that the sort of anti-climate investment sort of sentiment in the US is probably damaged confidence perhaps, and created some uncertainty. I think that what we are seeing are definitely talking to other European asset owners and investors. Is no real change in understanding that over the long term, the financial success of their portfolios, of their customers, if they’re a bank, does depend on this transition to low carbon. I think it’s a bit unfortunate that you could say terms like ESG is an acronym. Nobody really likes acronyms. What does it really mean? What does net zero mean? I mean, most people can’t engage with terms like that. And in a way it’s quite helpful to probably dump them and just try and focus on what we’re really talking about, which is which is sort of innovation in the way that businesses can grow and succeed and deliver products and services that with new technologies that are simply cleaner technologies. And often what that means is they’re more advanced and lower cost technologies over the long term. So I think it’s always good to get back to the the basics, the business basics of this from an investor or a bank’s point of view. And let the political debate just unfold however it wants to unfold. But you know, that’s that’s yeah, that’s slightly if you like, separate from what is responsible investment and responsible banking look like. That’s something you need to carry on doing. The question I always ask people is if you had to make a range of investments now for, you know, a young relative, niece, nephew, your own child, grandchild or whatever, and you weren’t allowed to change that portfolio for 20 years, 20-30 years. Right. Are you investing in fossil fuel or are you investing in renewables in that portfolio? I know which one I put my money. I mean, because it’s consistently outperformed in terms of the innovation and the cost profile. And it’s a bit like asking somebody in 1910, are you going to invest in motorcars or horse drawn carriages? As far as I’m concerned.