Small Business Catches the Green Bug

Climate policy and customer demand are spurring growth for small and medium-sized companies to supply green materials to their corporate clients

The fight against global warming has become big business. Companies ranging from German utility E.ON (EONG.DE) to global financial-services giant HSBC (HBC) have launched "green" products to meet regulatory requirements and tap into growing concern among consumers over climate change.

The big guys aren't the only players, though. The move by multinationals to boost their enviro-credentials is opening up opportunities for small and medium-sized enterprises (SMEs)—companies with less than 250 employees—to supply green products, services, and know-how to corporate clients.

Corporate Purchasing Goes Green

"The changes in climate policy are opening up all sorts of new markets for small businesses," says Robin Smale, director of London-based consultancy Vivid Economics. Smale estimates that in Britain alone, SMEs will rack up $8 billion in annual revenues by 2010 selling a wide variety of products such as energy-efficient industrial components and cutting-edge materials, as well as eco-friendly consumer products.

Pressure from large companies is partly responsible. Looking for ways to reduce their carbon footprints, corporations are leaning on vendors to deliver greener solutions. "Many large brands are starting to really question their suppliers," says Harry Morrison, senior strategy manager at the London-based Carbon Trust, a government-backed research and advisory group. "Small firms willing to take the climate-change issue on board are starting to move quicker and quicker."

Consider SynchroPulse, a British-based manufacturer that specializes in energy-efficient motors. Used primarily in industrial machinery and refrigeration, the company's motors consume up to 87% less energy than existing alternatives, says Chief Executive Officer Andrew Hogbin. That helps SynchroPulse's clients meet their energy-reduction targets. Hogbin won't reveal sales results for the privately held company, but says business is strong.

One factor boosting growth, Hogbin adds, is that green awareness has altered purchasing criteria. "The dynamics have definitely changed," he says. "Before, people were only interested in [the product's] cost. Now energy efficiency is as important; it's a must-have."

Britain's Zero-Carbon Construction Code

Another big opportunity for small firms is in construction. Under government plans, all new British homes and offices built after 2016 will have to be "zero carbon," which means they won't produce any net carbon emissions. To meet these stiff regulatory demands, large developers such as Barratt Homes (BDEV.L) and Persimmon (PSN.L) already are turning to their suppliers in search of new ways to cut greenhouse gases.

That's creating openings for firms such as Environmental Building Partnership (EBP), a spin-off from the University of Aberdeen that has developed a new form of insulation capable of reducing average household energy use by up to 43%. Founded in 2002, the Aberdeen-based company now has pilot projects in Scotland and Dubai and is in talks with developers to bring its technology to a wider audience.

"Zero-carbon legislation has been very important to make companies look for new ways of doing things," says EBP Chairman Mohammed Imbabi. "Now there's a commercial advantage to promoting the climate-change issue."

Another beneficiary is Interflush, a British firm offering water-saving bathroom devices. Since receiving an $80,000 government grant in 2002 to start his business, founder David Wilks has signed customers such as Barclays (BCS) and AXA (AXA) who are looking for ways to reduce their carbon footprints. Lowering water consumption by up to 50% saves energy and cuts costs.

It also lets customers crow about how environmentally sensitive they are. "Not being green can damage a company's profile," says Wilks. "That provides an opening for companies like us who can offer something that's both good for business and the environment."

A Recession Could Slow Progress

The only cloud on the horizon is the potential for economic downturn, which could slow the movement to greener business. "A recession could possibly dull interest in climate change," says Nigel Howorth, a partner in the climate-change practice at law firm Clifford Chance. "Nice-to-haves are the first to go when times are tough." That, in turn, could hurt SMEs plying environmentalism to expand their businesses.

But even if belts are tightened, the combination of popular pressure and stiffer regulations spells opportunity for companies supplying ecological products. Indeed, Vivid Economics figures business will earmark almost a trillion dollars over the next five years for carbon-reduction initiatives. Consciousness of the issue remains highest among large companies in the public eye: Nearly three-quarters of the firms listed in the Financial Times Stock Exchange 100 (FTSE100) index say they already have plans in place to reduce their carbon footprints, according to figures from the Carbon Trust.

In the broader economy, projects are far less developed. Just under one-third of all companies in Britain say they're working to reduce their carbon footprints. But among those who sell to larger companies, awareness is growing fast. After all, their customers are demanding it.

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