There is a global aim to become more sustainable across the entire spectrum of society, championed by developing a truly circular economy. Achieving this will require significant research, development, and innovation (RD&I), write KPMG's Dr Eoin McCarthy and Ken Hardy.
Sustainable manufacturing
One of the key drivers is eroding our greenhouse gas outlay and reducing the carbon cost of producing goods and services. To support this, many governments have enacted ambitious climate action policies that overlay specific and aggressive targets at reducing the carbon footprint generated by the mechanics of our economy, very much to the fore in recent times with COP26.
Nationally, the Irish government has published a draft of the Climate Action and Low Carbon Development Bill 2021 with the aim to enact legislation to reach net zero greenhouse gas emissions by 2050, and a 51% reduction in emissions by 2030(1), which is frighteningly close, and especially pertinent for Ireland’s manufacturing and production industries.
From a manufacturing perspective, the key levers to improving sustainability have centred on reducing industries’ reliance on fossil fuels, adopting more environmentally positive design practices and improving end-to-end approaches across the entire value chain. Specific ways of achieving this include utilising 'just in time' production, using recycled raw materials, sourcing materials geographically closer to home and developing reusable components.
In terms of infrastructure, developing digital approaches has been a real boon in recent times, in which Ireland excels considering our high infrastructure ranking in the 2021 Global Innovation index(2) and accelerated digitisation strategies, of which we have seen a big uptick in practice. Tying Industry 4.0 to sustainability will be a significant driver to success.
Ireland’s climate targets
Comparing Ireland’s sustainability performance on the international stage, we sit in the lower tier of the Climate Change Performance Index(3), lagging the majority of our European peers.
Although this may appear concerning at first sight, this is an opportunity for our manufacturing industries to develop and engineer our way up the index and close the gap on net zero goals. On a conservative basis, Ireland’s manufacturing sectors contribute about 10% to the national GHG emissions, and that’s excluding logistical links.
One thing is for sure – achieving our sustainability targets will require significant RD&I. With that in mind, how does Ireland fair, and how can companies based in Ireland fund their transformation to sustainable manufacturing.
Opportunities for Ireland’s manufacturing sector
Ireland’s manufacturing sector excels in the technologically complex industries across both multinationals and SMEs, a direct result of our strong knowledge economy. Indeed, 29% of manufacturing jobs in Ireland are in the high technology sectors, four times the EU average(4).
The medical technologies and pharmaceuticals sectors, which contribute most from a GDP perspective, and the semiconductor industry are among our key strengths. These are infrastructure-heavy industries, which require significant R&D input and expenditure in the endeavour to become more sustainable.
Some of the important areas that will require RD&I include upgrading and developing new equipment and processes, designing and constructing new building envelopes, developing and enabling new raw material inputs.
This step-change brings significant challenges for companies both technologically and financially, and it is critically important that companies assess national funding opportunities to derisk and support development activity to enable their sustainable transformation.
R&D supports: Tax benefits for Ireland-based manufacturers
Companies based in Ireland can maximise the benefit from their R&D activity through the R&D Tax Credit, a valuable tax-based incentive giving up to 25% credit on qualifying R&D expenditure in the science and technology areas.
For companies that already claim the credit or those who are interested in claiming, it is important to realise that R&D for tax purposes often captures a larger breadth of activity than you might have expected. This is an important lever to maximising your opportunity, and our R&D Incentives Practice has significant expertise in mapping complex projects for RD&I incentive purposes.
The drive to sustainability may have the biggest influence on our SMEs, from a risk exposure and opportunity perspective. We expect to see the emergence of SMEs carving the path in developing technologically enabled sustainable approaches, and an increase in disruptive technologies. To support this, SMEs may soon be in a position to claim an R&D Tax Credit of 30% on qualifying R&D expenditure(5,6).
Improving our manufacturing technologies could generate IP from the R&D work. A company can claim the Knowledge Development Box (KDB) which provides a 6.25% corporate tax rate for income generated from commercialising certain IP. In general, the KDB is underutilised, with only a small number of companies availing of the tax credit.
Sustainability RD&I opportunities
In addition to the R&D tax credit and the Knowledge Development Box (KDB), there are several key funding streams that can part-finance the transition to more sustainable production.
The Sustainable Energy Authority of Ireland’s EXEED programme focuses on supporting energy-efficient capital projects, with up to €1m available per project.
The Disruptive Technology Innovation Fund, not specifically for sustainability, but may be leveraged for more ambitious projects, which funded 29 projects in 2020 valued at €95m over the next three years. The Environmental Protection Agency recently announced its 'Green Enterprise: Innovation for a Circular Economy' to fund smaller projects.
On the EU level, Horizon Europe offers ample funding opportunity with the best part of €3bn allocated to climate change, health, clean energy, and digital in 2022 alone.
Ireland punches above its weight in attracting EU funding. Leveraging these skills to finance our sustainability goals is critical. The 'Factories of the Future' and 'European Institute of Innovation & Technology' manufacturing programmes also focus on environmental and economic sustainability of manufacturing, as well as opportunities within the LIFE and Innovation Fund mechanisms.
Taking the next steps
Achieving our sustainability goals will be extremely challenging and rewarding. It’s a long-term strategy requiring significant short- to medium-term buy-in.
As the winds of change strengthen, new opportunities are emerging for our manufacturing industries, and now is a critical time to ensure you are positioned to maximise the benefits that can support your development work, through the R&D Tax Credit, KDB and RD&I grants.
For more information on KPMG’s R&D Incentives Practice and to identify the right approach across the varied funding mechanisms that can add value to your RD&I, visit kpmg.ie/RandD.
Authors: Dr Eoin McCarthy, senior scientific consultant, R&D Incentives Practice; Ken Hardy, partner, R&D Incentives Practice
References
- Climate Action and Low Carbon Development Bill 2021 - KPMG Ireland - https://home.kpmg/
- Global Innovation Index 2021, WIPO.
- Climate Change Performance Index 2022, Germanwatch, NewClimate Institute & Climate Action Network.
- Manufacturing in Ireland, Today, Tomorrow & Beyond, IBEC 2021.
- https://home.kpmg/ie/en/home/insights/2021/09/small-micro-companies-rd-regime.html
- These measures are subject to a commencement order.