Climate targets for industry: the Investment Challenge

Neli Ivanova
15 May, 23

An asset finance specialist, for the past 12 years Neli has worked in a variety of business development and strategic roles at Siemens Financial Services (SFS). She is currently responsible for the Asset Finance Sales team at SFS including Industry Finance focused on financing manufacturing technology and solutions. Her team works with a wide range of SMEs and corporates supporting their investment in the latest industrial equipment and technology, to help them compete and grow.

Countries all over the world are redoubling their efforts to reach ambitious climate change targets in light of the compelling resolutions adopted at the UN Climate Change Conferences. In the UK, these new efforts can be seen in the government’s enthusiasm for adopting alternative green energy sources, as reflected in its Net Zero Strategy: Build Back Greener.

The strategy’s ultimate goal is to achieve net zero by 2050 and involves plans to cut emissions by a minimum of 68% by 2030. The government aims to make the UK the “birthplace of the Green Industrial Revolution”, seeking to use new technology and initiatives as an opportunity for growth and prosperity.

In order to achieve its aims, the UK requires the infrastructure to improve sustainability and move to net zero solutions. Industrial electrification is a major contributor to net zero targets. The process is complex – especially in terms of converting great swathes of legacy production plant – and will require considerable capital investment. Various mitigation pathways are currently being published by academic commentators to map routes to success[1].

A new report[2] by Global Efficiency Intelligence on US industry shows that by increasing electrification across 13 industrial sectors — from food processing to paper products — these sectors could reduce emissions more than 134 million metric tons (Mt) per year in 2050 (emissions from 29 million cars). In the UK, industry is responsible for a lesser proportion of emissions at 12%, reflecting that the UK has moved from a secondary economy (manufacturing) to a tertiary and services economy, and has reduced its industrial emissions by 56% on 1990 levels[3]. Nevertheless, decarbonizing industry in the United Kingdom remains a challenging target.

There are several enabling technologies for the decarbonisation of British industry. Perhaps the most indicative is the emergence of the ‘smart factory’. Smart factories introduce digital technologies that make it possible to monitor and manage production processes remotely. They also make it possible to observe and manipulate those processes by interacting with a ‘digital twin’. In the digital twin, real-time data picked up by sensors on the production line is used to create a virtual ‘twin’. Engineers and managers can then implement and test anything from minor adjustments to whole plant build in the virtual environment before putting it into practice in the real world. This saves time, money, business interruption and energy. Component parts of the production environment – for instance machines, machine tools and packaging lines – are all going through the process of digital upgrades, each to play their proper part on the total smart factory environment.

And the investment challenge for smart factory upgrades? Analysts put the UK Factory Automation and Industrial Controls market at over $13.2 billion by the end of 2022, rising at over 10% CAGR in 2026. Across Europe the Industry 4.0 technology market is expected to reach over $33bn by the end of 2022 and grow even faster at a CAGR of 16.4% to be in excess of $112 billion by 2030.

So how can this challenge be met? Publics funds alone will not be sufficient to create the clean and green infrastructure required to transition to net zero.[4] It will require a combination of public and private sector finance – a fact acknowledged in the government’s own strategy. Smart specialist finance solutions, offered by private sector financiers, can make investment financially sustainable.

This is especially important for small to medium-sized manufacturers and the companies that sell technology and equipment to them. They do not have the luxury of being able to raise funds from the capital markets by issuing bonds or equity – tools that are only readily available to larger firms. This is where specialist financiers play a critical role by offering a variety of financing tools to make digitalised, low-energy, sustainable equipment upgrades affordable.

Smart financing is offered by specialist financiers who have a deep understanding and knowledge of the industry and relevant technology, and can enable the acquisition of technology and equipment for competitive advantage in a financially sustainable way, tailored to an organisation’s specific business and cash-flow needs. Specifically, smart finance makes investments possible and affordable by aligning costs with revenues.

Additionally, it offers three major advantages over generalist finance: technology expertise which understands real business outcomes; a breadth of financing solutions which can meet the organisation’s exact needs; and smooth, sophisticated processes which make the use of smart finance seamless and easy.

Conclusion

The drive for sustainable, decarbonising technologies remains strong despite economic and geopolitical pressures. Yet a great deal of capital investment in smart factory initiatives remains to be completed before mandatory targets are met, which is something the public purse cannot afford alone. As a result, the role of specialist financiers is becoming more important for reaching sustainable goals, as they can help make the acquisition of the necessary technology more affordable, efficient and cash-flow friendly. You can download the report on the topic here: https://assets.new.siemens.com/siemens/assets/api/uuid:10e9cd6b-d904-4c12-9cdb-cb977b9c9544/uksfs-sie-bro-alternativefuels-whitepaper.pdf


[1] For instance: https://www.sciencedirect.com/science/article/abs/pii/S2666278721000362

[2] https://www.globalefficiencyintel.com/electrifying-us-industry

[3] https://eciu.net/analysis/briefings/cop26/cop26-briefing-industry-globally-and-uk

[4] https://www.mckinsey.com/business-functions/operations/our-insights/global-infrastructure-initiative/voices/leveraging-infrastructure-investment-to-meet-net-zero-goals; https://cleanenergynews.ihsmarkit.com/research-analysis/cop26securing-financing-for-a-global-netzero-transition-by-2050.html

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