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Unlocking value on the road to Net Zero

24 January 2022

Caroline Milton explains how food and drink manufacturers can unlock value while on the road to Net Zero. 



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With COP26 still fresh in the mind, now is the time for food and drink manufacturers to renew efforts reduce their carbon footprint in support of the Government’s net zero emissions by 2050 goal. Some businesses may be concerned about the cost of carbon reduction strategies. However, investing in sustainability in the right way can help realise significant commercial rewards. 

Some food and drink businesses have made a positive start in developing an approach to decarbonisation by investing in eco-friendly products, green packaging solutions, waste minimisation strategies and energy-efficiency initiatives. Other organisations are only just getting started, with limited industry-specific support or guidance available to help them.

Research conducted by Make UK found that when it comes to acting on climate change, many manufacturers still have a long way to go. It found that 30% are yet to make an individual or team within their organisation accountable for the development and delivery of an environmental and social governance (ESG) strategy, and 50% of firms are also not measuring their sustainability performance.

Launched at COP26, the Food and Drink Federation’s ‘Achieving Net Zero’ handbook has been designed to help. As well as highlighting the objectives set by some leading food and drink businesses to help them to achieve net zero by 2040, it provides valuable guidance, covering areas such as ingredients, packaging, manufacturing, distribution and storage and customers and consumers. 

The Environment Agency is also leading an initiative to standardise the metrics used to measure the environmental performance of the food and drink sector. In doing so, it aims to improve knowledge of environmental performance in areas such as carbon reduction and resource efficiency.

An important driver
Another important driver for manufacturers, when putting in place a plan to decarbonise their operations, is promoting strong ESG. This is more important than ever in consumer, customer, employee and investor decision making. As such, food and drink manufacturers that demonstrate their commitment to reducing carbon emissions and having a positive impact on society could realise a competitive advantage. With consumers increasingly opting for branded goods that reflect their sustainability and ethics, businesses in the sector can strengthen their consumer appeal by proactively developing carbon reduction strategies. 

Showing a strong commitment to sustainability can also help business owners seeking a funding boost to support their growth plans. Placing decarbonisation strategies at the centre of long-term strategic growth plans can open up opportunities and enhance business value.

Other commercial opportunities for businesses investing in carbon reduction strategies include the potential to strengthen supply chains and boost employer branding to attract skilled workers. 

Finally, when investing in green facilities and processes, manufacturers may not be aware of how much tax relief they can claim. By seeking support early on, it may be possibe to optimise R&D tax relief claims and/or make the most of capital allowances to improve cashflow.

The first step
By planning carefully, businesses can invest in sustainability and achieve ESG goals, without compromising on profitability. An important first step is to put in place a bespoke sustainability or net zero plan and then test it thoroughly to ensure it is viable and capable of delivering long-term value. The plan should be supported by robust metrics, so the business can keep track of its success as it aims to reduce the whole-life carbon footprint of its products.

Access to accurate cashflow forecasts is vital, enabling decision makers to assess the effect of any planned investments or process changes. Effective cash management and structuring is also key, allowing the business to react quickly to market opportunities as their plan progresses.

In order to make investments in sustainability pay, it is crucial that the business gets its timing right. For example, when investing in new plant and machinery, it may be worth bringing forward investment 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.

Businesses should also have access to an accurate financial model, to effectively work out the payback period of any planned investment in carbon reduction, waste minimisation or other sustainability initiatives. This will also help in understanding the cashflow impact of any planned investment and how it could affect business value in the short, medium and long term. 

Manufacturers should also focus on generating some financial quick-wins at an early stage, to secure Board-level buy-in and demonstrate that it is possible to make a healthy return on investment. For example, this might involve exploring ways to monetise waste by selling unwanted by-products to another business. Food and drink businesses may also be able to boost revenues and profits by diversifying to meet a new or growing area of market demand.

Exploring cost-cutting opportunities is also important, to ensure that processes are operating efficiently from the start. When developing a net zero or sustainability plan, manufacturers should seek employees’ input in identifying cost reduction opportunities, as this can deliver welcome rewards. 

Optimising value
To optimise value from sustainability investments, food and drink manufacturers should ensure they are making the most of available tax reliefs and grants. In particular, when considering whether investments might qualify for R&D tax relief, businesses should bear in mind that the definition of R&D is much broader than they might realise, and innovative manufacturers may qualify for an enhanced deduction of 130%. That equates to tax relief of up to circa 33% of the R&D spending. Seeking advice at an early stage can help businesses to drive maximum value from the scheme.

Decision makers should also carefully consider the impact that the plastics packaging tax – due to be introduced in April 2022 – could have on their business model and make any adjustments needed. It 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. Packaging that contains at least 30% recycled plastic is exempt. 

Food and drink producers and manufacturers should view sustainability-related changes as an opportunity to strengthen their employer brand and attract and retain skilled employees. People management strategies to boost employer brands could involve increasing employee involvement and honing communication strategies to provide workers with a greater sense of purpose.

It’s worth bearing in mind that grant funding is available to support manufacturers in making specific sustainability investments and this tends to be focused geographically. Industry bodies can provide valuable sources of information regarding the options available to manufacturing businesses.

With a considered plan in place, investing in sustainability and enhancing profitability can go hand in hand. By seeking the right professional support, food and drink processors and manufacturers can unlock hidden value on the road to net zero.

A new whitepaper – Unlocking Value on the road to Net Zero – can be downloaded from: https://bit.ly/30M7Ab8

Caroline Milton is a manufacturing sector specialist at accountancy firm, Menzies LLP.


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