Sustainability innovation needs more government support to succeed
A new study from Ayming suggests that almost 80% of businesses spend a fifth of their innovation budget on sustainability issues. However, governments are failing to incentivise this further, with minimal efforts to subsidise research and development making it harder for firms to prioritise long-term investment.
According to Ayming, an emphatic 78% of firms allocated up to 20% of their annual budget to sustainability, with almost a third assigning between 11% and 20%.
In the summer of 2023, Ayming surveyed 853 innovation, research and development directors, chief financial officers and chief executive officers from around the world – and found that this commitment was mostly motivated by the impact climate change events are already impacting firms.
After several years of disastrous heat-waves across Europe, combined with unprecedented flooding and fires, which have destroyed lives and wrought havoc on company supply chains, investment towards sustainability is primarily driven by financial factors – with 47% citing their reasoning as cost savings and efficiency. This will only increase in coming years, as the crisis deepens – but many firms are concerned they will struggle to meet the challenge due to current economic factors.
A 41% chunk of respondents stated their greatest challenge in undertaking sustainable innovation was the high upfront cost and investment required. They are already willing to help each other – with 87% affirming support for open innovation and knowledge sharing relating to sustainability innovations – helping cut the costs of private development. But with regard to tax incentives and state grants, 33% of respondents said insufficient government support was a challenge to their sustainability progress.
Split evenly between seven sectors – automotive, construction, finance, manufacturing, finance, pharma and technology – respondents sourced from firms of all sizes in Belgium, Canada, China, Czechia, France, Germany, Ireland, Italy, Hungary, the Netherlands, Poland, Portugal, Singapore, Slovakia, Spain, the US and the UK ultimately confirmed that inflation has driven up costs and critically damaged fragile profit margins.
Funding innovation
This makes funding from outside sources more important than ever – but the most common sources of that remain the risky avenues of equity and debt funding – which nearly doubled from 23% in 2022 to 41% in 2023. Meanwhile self-funding fell by one-fifth.
At the same time, majorities of both small and large companies depend heavily on national or regional grants. A 45% portion of large firms, and 37% of small firms, need that source of funding to make sustainable innovation happen – along with more than a quarter of respondents needing R&D tax credits – but are increasingly finding those sources are not enough.
With rising interest rates making debt funding a more difficult route to take for start-ups and smaller businesses, 43% of those firms identified upfront costs as prohibitive to sustainability innovation. Meanwhile, 33% said that they were prioritising short term goals, and the same number added they were concerned by a lack of supportive policies and regulations; as well as insufficient R&D tax incentives.
Large companies broadly echoed this, but 41% also said they were held back by a lack of sustainable materials being available.
Finding the right balance
As the global community grapples with the consequences of climate change, Ayming asserts that the urgent transformation of industries, technologies, and mindsets is “a clarion call that can no longer be ignored”. The firm added that under significant economic pressure, “greater support will be needed to accelerate sustainable innovation and limit rising temperatures to 1.5°C above pre-industrial levels”, the goals set out in the Paris Climate Agreement of 2015.
Njy Rios, Director of R&D Incentives at Ayming commented, “Policymakers must find a way to align the two or risk jeopardising future innovation. While governments pay lip service to the need for green tech to save the world, the would-be drivers of this sustainable innovation require urgent access to funding.”
“So as the world continues to advance towards climate crisis, governments need to address the funding gap with far greater resolve if policy is to be translated into practice. Until businesses are deriving economic value from prioritising sustainability, short-term economic pressures will always be a roadblock.”