Scotland top outside London for net zero deals despite slump in demand for external finance

Scotland has been ranked as the top area outside of London for net zero equity deals despite a “challenging economic climate” and a drop in demand for external finance, a new report reveals.

The British Business Bank’s Small Business Finance Markets 2022/23 study found that the country accounted for 14 per cent of smaller business equity deals in net zero sectors, spanning 2018 to the third quarter of 2022 - double its 7 per cent share of total UK low-carbon and renewable energy sector turnover.

Among the businesses securing net zero equity deals has been Celtic Renewables, which produces biofuels from whisky co-products. The firm is using the funding to develop Scotland’s first biorefinery facility in Grangemouth. The findings support previous research from the British Business Bank’s Nations and Regions Tracker, which found that Edinburgh was the UK’s top “net zero cluster” by deal count, with some £186 million invested through 92 transactions between 2011 and the second quarter of 2022.

Despite the volatile economic backdrop, Scotland saw a 26 per cent increase in the announced equity investment value during the first three quarters of 2022 compared to the same period the previous year. The £525m invested between January and September also meant that values were on track to exceed the record £540m set in 2021. However, in line with much of the wider UK, Scotland saw a fall in the total number of announced equity deals between the first and third quarters of last year compared to 2021 – down to 151 from 178.

Overall demand for external finance has fallen markedly, from 42 per cent among Scottish smaller businesses during Q3 2021 to just 28 per cent in Q3 2022. The British Business Bank said this was also reflected across the UK, with 33 per cent of small businesses using external finance in the third quarter of 2022, compared to 44 per cent the year prior.

Susan Nightingale, director, UK network, Scotland, at the British Business Bank, said: “Today’s report shows how small businesses are adapting to a challenging economic climate, as they reduce their use of external finance. Nevertheless, there are promising signs of growth in the net zero deal sector as equity finance markets respond to growing demand for investment in green innovation.

“Scotland has always been a hub for net zero sectors and it is highly encouraging to see that the country is also a leader in funding these industries. However, smaller businesses unable to transition to a low-carbon economy to keep up with regulation or competitors could face significant challenges and may also struggle to secure investment in the future, as more financial institutions begin reflecting ESG [environmental, social and corporate governance] in their lending criteria and decision-making. Ensuring that these businesses can access the skills, support and finance to drive change, no matter where they are located, is crucial to supporting a just transition to net zero,” she added. “The launch of our £150m Investment Fund for Scotland this year will play a key part in tackling geographical imbalances, supporting smaller businesses across the country.”