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NEWS - 2021 04 28 - 14:05

Ints Krasts: Are we going to be in the foreground or background in the green transformation?

Over the past year, so-called green business projects have received a lot of attention in various sustainability discussions. However, there is a misconception that banks only finance obviously green and ready-made projects, such as investments in solar panels or wind energy. Companies' activity in transformation projects has enormous potential.

Ints Krasts
Member of the Board of SEB

The European Union aims to reduce emissions by at least 50% by 2030. We have less than 10 years to achieve this goal. In the world of lending, it is a very short period of time. To keep up, we need to think about it and take action today.

Exporters and companies with high emission intensity are most interested in transformation

Working with clients on a daily basis, I can say that sustainability and environmental transformation are of greatest interest to exporting companies and companies in high-emission sectors: energy companies, real estate developers and investors, timber and building materials manufacturers.

The overall interest of companies is growing and there is a desire to take action and purposefully deal with it step by step throughout the process chain. Currently, companies are most likely to reduce their environmental impact by changing the sources of lighting, vehicle fleet, investing in the development of production facilities, and using energy-efficient solutions for building insulation. Also, by gradually integrating more ecological and greener materials and supplies into production.

Some clients have taken this path both because of the pressure of export markets and because they want to formalize and start putting their sustainability strategies into life, setting measurable goals and showing them to their supply chain partners and internal management of their company. There are also companies that have been integrating sustainability considerations into their strategy for a long time and are constantly developing them, setting an example to the public and private sectors.

Improving production facilities and changing vehicle fleets

Perhaps some companies have the impression that sustainability does not apply to them, because it is mostly about obviously green and ready-made projects. Maybe some are frightened and do not even try to start going this way, if they do not envision such projects directly in their companies. However, I want to encourage: sustainability is not only about that. I would also like to dispel the myth that sustainability ambition is only binding on global corporations or large companies, so I will mention a few examples.

A prime example is the furniture manufacturer Daiļrade koks, which is investing 1.7 million euros in the modernization of its manufacturing plant in Valmiera and replacing of the furniture painting and drying line. This will improve energy efficiency, boost the company's competitiveness and reduce its environmental impact. Similarly, the real estate group Realto has replaced most of its fleet with electric vehicles and installed charging stations in its office centres, investing almost half a million euros. This not only contributes to the development of the necessary infrastructure, but also motivates tenants to take similar steps.

In its turn, the Baltic commercial real estate investment manager SG Capital invested 1.75 million euros to certify all office building complexes owned by the fund in accordance with the BREEAM sustainable construction standard. Additional investment in improving communications and equipment was also made to increase energy efficiency and reduce emissions. These are encouraging examples that demonstrate that this transformation path can be successfully pursued by choosing the improvements that add value to each company.

Companies do not yet have a sense of urgency – where to start?

Looking at mutual cooperation in this context, it is clear that banks alone will not be able to achieve much. For example, the direct impact of our bank in the context of climate is only 5%, the other 95% being indirect impacts resulting from projects financed by the bank and emissions generated by clients. Therefore, the most important thing is to focus on how we can support the companies. So far, companies' understanding of how these changes will affect them is rather low. We all need to learn, from companies and banks to public administrations and partners.

It is important to understand that any company, small or large, is part of the overall ecosystem, be it a supply chain or cooperation with partners and financial institutions. Companies will have to start listing, measuring and showing their environmental impact and progress towards reducing it. Those who decide to remain observers will definitely be overtaken by their competitors.

The first step is to analyse your company, taking into account the specifics of the industry. There will be no panacea here. Vehicle fleets could be replaced anywhere, but for one company the emissions from the fleet can be 5%, while for another 50%. If, for example, in the context of the bank, the change of the entire vehicle fleet to the electric vehicles would bring relatively little input, the benefit for the logistics company would be significantly higher. This means that by focusing on the right things that are important to each company and industry, together we will achieve our goals faster.

The second step relates to the fact that emissions are largely hidden in costs, and it is therefore necessary to consider how to reduce costs, reducing environmental impacts and achieving higher efficiency. The benefits of efficiency then need to be invested in sustainable development projects to boost the company's growth and reduce its environmental impact, as in the Daiļrade koks example.

Finally, we need to think not only about reducing our environmental impact, but also about adapting to climate change. For example, if coal is no longer used, the railroad will transport less, the terminals will load less, and the port will have less cargo turnover. Timely consideration should be given to alternatives to fossil gas and exploring ways of adapting infrastructure to future energy sources such as hydrogen, wind and solar energy. A good example here is Conexus Baltic Grid, which will soon launch research in this area in cooperation with the Baltic and Finnish natural gas transmission system operators.

It is clear that more will be required from companies in this area. If once clients asked the supplier to reduce unit costs by, for example, 2% annually at the expense of higher efficiency, then in the future emphasis is likely to be on an annual reduction in emission intensity per unit of output.

Not everything can be calculated today – smart long-term decisions must be made

There is a lot of debate whether an electric car in comparison with an internal combustion engine is paying off today. Also, whether the most energy-efficient refrigerator will pay off in its life cycle. However, not all aspects of sustainability can be financially rationalized – non-financial aspects and their implications for today's investment decisions need to be taken into account. There is an increasing need to talk about long-term strategies, visions and values that are right in the long term, but perhaps less clear and welcome in the short term.

What can we do better? Companies must definitely pay more attention to evaluating production supplies, encourage the use of environmentally friendly and recycled materials, or the circular economy. Everyone needs to follow the sustainability trends of their industry. If we limit ourselves to electric cars and solar panels, we will miss out on new, innovative product options.

A second focus: sustainability must certainly be talked about. And it is not just about press releases or corporate sustainability reports. If companies do not do this, there is a greater risk that they will be perceived as weak. We see that more and more imported products on the shelves of shops have an information about the environmental impact on the label (e.g. how many grams of CO2 has been used in the product's manufacturing process). If our companies do not take this into account and inform customers about the environmental impact of their products, their competitiveness will decline not due to price, but due to non-financial consumer reasons.

We are accustomed to creating three or five-year financial budgets, achieving annual targets, but sustainability is a long-term ambition and is not easy to measure and assess. We all need to learn to change our perspective from financial to non-financial considerations, and then back to financial instruments to achieve sustainable development goals. One thing is clear: sustainability is to stay, no one will escape from it and it will affect most companies. The good news is that entrepreneurs have two options: wait and be in the back of the caravan or take initiative and choose their own tactics.

Ints Krasts
Member of the Board of SEB

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