SMEs and the Net Zero Target

I beg to move,

That this House has considered support for SMEs and the net zero target.

It is an absolute pleasure to serve under your chairmanship, Ms Ghani. I draw hon. Members attention to my entry in the Register of Members’ Financial Interests on all things small business.

I am very supportive of the push to get to net zero as soon as possible. I absolutely believe that business will help to deliver that solution even faster than 2050. My principal concern in bringing forward this debate is that, in the headlong rush to get to that point, we must not treat businesses as collateral damage. We have done that in the past. When we had a change of emphasis in lending back in 2008, that happened to some good businesses, as well as to some businesses that had probably borrowed inappropriately.

I want to give an example of a business in my constituency. There is a very good business a few miles away from where I live called the York Handmade Brick company. It makes wonderful, handmade bricks, that look like old clamp bricks, for lots of houses around the country. It is a fairly small business employing about 20 people and is an award-winning company. Its processes use fossil fuels—natural gas—to fire the bricks. Now, I can see a situation where, in future, banks may look at this business and say, “That business does not sit with our ethical and sustainable goals portfolio. Therefore, it is perhaps not a business we want to support.” If that business needs to borrow some money to invest to move away from fossil fuels, for example, and move to other processes—biogas being an obvious one—what that company will need as it moves, down the line, to a different process, is money to invest. It is absolutely critical that our banking sector takes such businesses forward with us. Hon. Members might say that that is blooming obvious, but that is not always what we have seen in the past.

If we are going to get to net zero, it is absolutely vital that the private sector is taken with us. It will provide the cash and capital to invest in new processes and new techniques. We know for an absolute fact that the private sector is much better at allocating capital than the public sector—I might point to Croydon Council in that regard, if Members have seen some of the recent news reports. The private sector is much better at allocating capital; in the past, the public sector has misallocated capital.

Of course, that investment will contribute towards innovation, and the solutions to climate change are about innovation. The more innovation and the more competitive free markets we have, the more our consumers get a better deal at a better price. We are seeing some interventions from shareholders in banks, who are saying, “We do not want you to invest in these kinds of industries anymore.” Shareholder action groups will get increasingly vociferous, which could be to the detriment of small and medium-sized enterprises, and even bigger companies. This is not just about SMEs: bigger companies will remember that last year, for example, there were some protests by actors from the Royal Shakespeare Company regarding BP’s sponsorship of that organisation, which led to a parting of the ways between the RSC and its sponsor. That is despite the fact that BP is working within our overall regulatory framework, and will be incredibly important in the future in making the investment we need to move from a dependence on fossil fuels to a greater dependence on renewable energy.

We have seen this with recent shareholder action in terms of things like the covid corporate financing facility, which is dispensed by the Bank of England. Again, there has been pressure from certain shareholder groups, saying that at this crucial time, when lots of businesses are in trouble because of covid, support for those businesses should have been linked to environmental objectives. How unfair would it have been, when hundreds of thousands of businesses employing millions of people are in crisis, to link those supportive measures to sustainability goals at such short notice?

My key message for this debate is that any intervention by the Government and our financiers, who are so critical to the UK economy, must be comprehensive, well considered, strategic and stable. Our interventions should be consistent over a long period of time to get to that long-term goal. Again, one example I might give is the recent news that we will bring forward the date on which we move away from fossil fuel cars—diesel and petrol cars. It was 2040; it has been brought forward to 2035, and has now been brought forward again to 2030. The motor manufacturers, of course, are gearing up for that, although it presents some real challenges for that sector during what is a difficult time anyway. What about the other businesses in that supply chain? Lots of other SMEs will have to make that change as well: those could be parts manufacturers, but they could also be forecourts. They are going to have to make massive changes over a very short period of time, so we must make these decisions in a strategic fashion.

My hon. Friend makes a really good point about giving sufficient notice. He also points out that businesses will always overachieve, and he might recall that back in 2015, the announcement was made that we would be taking coal off the system by 2025. It has indeed been the case that businesses have overachieved, because coal is almost off the system and it is only 2020.

Does my hon. Friend agree that there could be some merit in the UK Government doing what many G7 countries have done, which is to create a development bank that brings in some offer of Government funding to help with the transfer towards net zero that we all want to see, and from which all SMEs could benefit?

I absolutely agree with my right hon. Friend, and commend her on the work she did when she was in the Department for Business, Energy and Industrial Strategy as Energy Minister, providing a long-term framework that businesses can work within to phase out coal over that period of time: she was very far-sighted with her interventions. I am sure that my hon. Friend the Member for Grantham and Stamford (Gareth Davies) will talk about a development bank in his remarks in a few minutes.

One other area in which we need to look at a more strategic framework is that of the green homes grants. In our manifesto, we committed to about £9 billion for retrofitting, and I think we have committed about £2 billion so far through those grants, which is very welcome. One of the difficulties, as I have communicated to the Minister, is finding installers in our area. A lot of installers are thinking that £2 billion will go very quickly and, therefore, what is the point of applying?

The Federation of Master Builders has some data on that. There have been 180 inquiries to the Federation of Master Builders and only three have completed the paperwork because it was seen as too short a timescale. If we have a longer timescale, businesses will be more likely to invest in the training and the necessary other actions they need to take to qualify as a registered installer for that grant. A long-term, stable framework will encourage much-needed investment.

I will go back briefly to 2008. I am representing here, as I often do as co-chair, the all-party parliamentary group on fair business banking. Much of our work of the past 10 years—including the three years I have been involved—has been around trying to clean up the mess of 2008, when we withdrew support from lots of SMEs, unfairly and far too quickly, and did not give them the chance to transition into a different kind of business or even rebroker their finance.

Contributions are limited to four minutes.

It is a pleasure to serve with you in the Chair, Ms Ghani.

I thank the hon. Member for Thirsk and Malton (Kevin Hollinrake) for securing the debate on this vital subject. In 2019, the business sector accounted for 18% of total carbon emissions. It is one of the biggest contributors of greenhouse gas, along with energy production and transportation. SMEs make up 99% of firms and 61% of the private sector workforce, and contribute £2.2 trillion in turnover, which makes them indispensable to the UK economy. They are extremely innovative, generate vast amounts of employment, and deliver economic prosperity and social cohesiveness. They are also disproportionately present in deindustrialised areas, and therefore present a unique opportunity to build back better.

Nowhere is that more evident than in Leeds, where we have a multitude of SMEs meeting social and environmental responsibilities. For example, Seagulls Paint was awarded a five-year contract by Leeds City Council for the collection, reprocessing and distribution of unwanted household paint, collecting and reusing more than 170 tonnes of paint a year. Other SMEs have been set up with the express intention of protecting the local and global environment, and they include Last Mile Leeds, Revive IT, the Phoenix Works and Revive Leeds.

It is not just a matter of businesses that have a sole environmental focus. Many are leading the way in taking steps to make their businesses more environmentally friendly. A recent opinion poll found that more than half—54%—of SMEs said that they had taken steps to green their business in the past 18 months. When asked whether the transition to a green economy would be financially positive or negative for their business, 61% were optimistic, and just 8% said that the overall impact would be likely to be negative, on balance. Participants pointed to net zero legislation, the ongoing war on plastics, climate activism movements and the green recovery movement as drivers of the transition, so SMEs are rising to the challenge. There are huge benefits and opportunities in the transition.

It is a pleasure to speak in the debate, Ms Ghani, and I congratulate my hon. Friend the Member for Thirsk and Malton (Kevin Hollinrake) on securing it. I shall not repeat the statistics about how critical SMEs are to the national economy, but just point out that behind every business is someone who had an idea, stuck it out, saw it through and made it happen. As the son of a small businessman I know exactly how hard it is, so it is right to have a debate about how to support them to tackle one of the great challenges of our generation.

The debate is, of course, about support for SMEs and the net zero targets. I do not think that it is controversial to say that SMEs are both a cause of and a potential solution to climate change. The Federation of Small Businesses has said that about 16% to 18% of emissions are caused by SMEs, but also, given their might, they are a huge potential solution, with a view to our meeting the targets set down in legislation. We should be proud of that. Their role in our communities, as well as the knock-on effect on their customers and people who interact with them, can have a great impact.

Climate change is a risk and an opportunity for SMEs. As the hon. Member for Leeds North West (Alex Sobel) said, when surveyed SMEs say that they believe climate change is a significant risk, whether to the supply chain or because of extreme weather. However, it is also a huge opportunity for SMEs to show great innovation and to capture the opportunity of a changing climate. We should encourage and embrace that.

As my hon. Friend the Member for Thirsk and Malton said, much of this comes down to money. It is clear that in the UK we have a financing gap for SMEs. Only 30% of SMEs use external capital and financing. Many more would like to use it, but are unable to do so. Although the figure is a couple of years out of date, I understand that the National Audit Office has stated that there is a £22 billion financing gap for SMEs.

Thank you for your chairmanship today, Ms Ghani. I echo the thanks to my hon. Friend the Member for Thirsk and Malton (Kevin Hollinrake) for introducing this important debate.

Given that SMEs employ more than 60% of the private sector workforce, it is right that they play their role in this defining issue for our generation. I believe that our vibrant private sector businesses and entrepreneurs, with the right guidance from Government, are the key to meeting our climate change obligations. Green businesses are setting up across the UK, with the aim of reducing our climate emissions and getting them under control. Some of those products and services are playing their part in removing and stopping the release of far more CO₂ emissions than they are creating, and as parliamentarians we must bang the drum for those businesses. I will therefore shamelessly plug businesses in my constituency in this debate.

Water Powered Technologies in Bude has created the Papa pump—a pump that is lighter and smaller than the alternative options available. It uses no electricity and, with no moving parts, is probably the world’s simplest and most cost-effective water pumping solution. Balaena Offshore Utilities is creating unique solutions to island and coastal communities’ water needs. It works out of the Gaia Energy Centre in Delabole, a facility that was built to celebrate the UK’s first wind turbine firm in Delabole—a revolution in 1991.

CleanEarth Energy in Wadebridge is helping people to refit their homes to provide energy-efficient solutions. Also playing its part is the Bude ReFILL shop—a brilliant shop that is designed to eliminate the need for plastic packaging by encouraging customers to bring their own containers to refill. Bude Cleaner Seas is working on a couple of brilliant solutions to cut plastic pollution. Reuse eliminates the need for plastic packaging, which can litter our planet indefinitely, and cuts the CO₂ emissions that would have been released had the products needed to be produced.

That was an eloquent tour of all the SMEs in North Cornwall.

It is a pleasure to serve under your chairmanship, Ms Ghani. I congratulate the hon. Member for Thirsk and Malton (Kevin Hollinrake) on securing the debate and commend him for the work that he does through the all-party parliamentary group.

The hon. Gentleman made a number of points about the importance of innovation in the role of banking. In the aftermath of the 2008 banking crash, a number of banks looked to rebalance their balance sheets off the back of their SME clients, and we must make absolutely sure that does not happen in the aftermath of this crisis.

The pressures on SMEs and the difficulties in ensuring they play a full part in the pursuit of the goal of net zero are well understood. The goal of many SMEs will understandably be to ensure their survival, often week to week and month to month, rather than to focus on the wider goal of net zero.

There are two roles for the Government, the first of which is to help to ensure that the businesses are still there and to help them to transform through the legislative environment, as well as facilitating change and innovation through grants and investment. On ensuring that businesses are still there, it is unfortunate that, even with the extension of the furlough, the owners of so many SMEs find themselves on the list of the excluded—those remunerated through dividends. That sends out a poor message that we are not helping them to do what they do best and grow their businesses and position them for recovery. The Minister needs to hear that, and although I am sure he has heard it many times, I make no apology for repeating it. I wish him strength in making that argument where it needs to be made.

The other role for the Government is in helping businesses to transform. It will help if there are no cliff-edges and no surprises. The Government have intervened through the bounce back loan scheme and the coronavirus business interruption loan scheme. The hon. Member for Thirsk and Malton spoke of the difficulties that businesses in his constituency faced, particularly if they operate through non-traditional lenders, in accessing CBILS and BBLS. A number of businesses in my constituency face the same difficulties and needless obstruction to what was intended by the schemes.

It is a pleasure to serve under your chairmanship, Ms Ghani. We always state this as a courtesy when opening our remarks in this place, but I am genuinely grateful that the hon. Member for Thirsk and Malton (Kevin Hollinrake) secured this debate, because the subject deserves far more attention in this House than it has received to date. When we talk about decarbonisation of the kind required by the net zero target, the focus is invariably on either big market trends or the action that the Government must take to drive emissions reductions across the largest emitting sectors of the economy. Although it is recognised that SMEs will be impacted by both, the assumption is always that they will simply adapt to any change made. To some extent, that will no doubt be the case, but, given that SMEs are the backbone of our economy, they need to be much more than an afterthought in our thinking about net zero, and much more thinking will need to be done about what targeted support they will need to ensure that the transition to net zero is as orderly as possible. The hon. Gentleman made very good points about the risks entailed when that does not take place and the need to learn lessons from history.

I intend to touch on three specific areas where there is clearly a need to do more to support SMEs in transitioning towards a local carbon economy. Before I do, I want to make two general points about the Government’s approach to climate action that have implications for them. The first is the need for a clear and credible net zero strategy. Setting a net zero target was an essential first step, but hitting that target requires a plan for its delivery. Despite having legislated for it more than a year ago, the Government have still not brought forward such a strategy. Indeed, core building blocks of it, from the national infrastructure strategy to the energy White Paper, have been repeatedly delayed. Although there will need to be a sector-specific component for SMEs in it, the most important thing is that the Government bring forward that comprehensive strategy as a matter of urgency to provide clarity and certainty for SMEs and other sized businesses, and a framework within which they can make investment decisions. The test of the announcement expected from the Prime Minister tomorrow will be whether it moves us forward towards that comprehensive strategy.

I am very pleased to be conducting this debate under your eagle eye, Ms Ghani. I am also pleased to welcome my hon. Friend the Member for Thirsk and Malton (Kevin Hollinrake), who did a terrific job in outlining the issues. He has long been a champion of small businesses in this House and a very effective advocate for those interests and businesses which, as many hon. Members have pointed out, are absolutely essential to our economy. I will address a number of his points and then turn to points made by other hon. Members in this debate.

We have to make clear our absolute 100% commitment to net zero as a Government. The Prime Minister has shown many times that this is at the centre of our strategy. We also feel that, given where we are with covid, it is absolutely necessary to build back better. As my hon. Friend the Member for Thirsk and Malton said in the first part of his speech, the 2008 crisis was extremely difficult, but one of its bad features was that we did not as a global community look at climate change and think about building back greener and better in the aftermath. People in this Government, in the Opposition and in Governments across the world are much more focused on building back greener and building back better as a consequence of this covid crisis.

As my hon. Friend said, SMEs are the backbone of our economy and will have a key role in driving economic growth. He described a headlong rush to net zero; others might take a different view. However, we cannot assume that the push to net zero will be imposed on businesses. We have to take our people and our SMEs along with us. I fully accept that we should engage with SMEs. I do this fairly regularly, as I am sure he and others do as local MPs. If he has SMEs in his constituency that he wants to talk to about net zero with me, I urge him to engage with me on that. It is a two-way street, and I look forward very much to engaging with many of the excellent businesses in his constituency. My hon. Friend the Member for North Cornwall (Scott Mann) gave us a flavour of the many SMEs engaged with net zero in his constituency. He said that net zero and the covid-19 crisis would “fundamentally adjust” our economy, which was an excellent and well-made point.