Sustainable Finance Guide

It’s becoming increasingly clear that both for businesses and finance providers, sustainability is climbing higher and higher up the priority list in terms of how decisions are made, how partnerships are formed, and how activity is planned. Research from Consultancy UK testifies to this, which suggests that 78% of banking executives in the UK think sustainability is an important part of business strategy, and that 58% of banks are themselves taking steps to become more sustainable.

Understanding then, how the financial services sector can offer sustainable financing, and how this offering impacts businesses, could be crucial. That’s why this article will dive into sustainable finance; unearthing the core concepts behind it, explaining how it works in the financial world today, and identifying how SMEs could leverage sustainable finance to seize growth opportunities.

What is sustainable finance?

‘Green and sustainable finance’, ‘Responsible Banking’ and ‘Responsible investment’, ‘Environmental, Social and Governance’ (or ‘ESG’), ‘Sustainable Finance’, and ‘Climate Finance’ are terms used to label activities related to the interaction between economy, environment, society, and finance. These terms are often treated synonymously, but there are differences in scope, particularly in terms of whether they include social and governance issues, as the United National Environment Programme (UNEP) points out:

1. Environmental issues – relate to the quality and functioning of the natural environment and natural systems including biodiversity loss, greenhouse gas emissions, renewable energy, energy efficiency, natural resource depletion or pollution; waste management, ozone depletion; changes in land use; ocean acidification and changes to the nitrogen and phosphorus cycles.
2. Social issues – relate to the rights, well-being and interests of people and communities including human rights, labour standards, health and safety, relations with local communities, activities in conflict zones, health and access to medicine, consumer protection; and controversial weapons.
3. Economic issues – relate to investee impact on economic conditions at local, national, and global levels. Performance areas include direct financial performance and risk, and indirect impacts such as through employment, supply chains, and provision of infrastructure.
4. Governance issues – relate to the management of investee entities. Issues include board structure, size, diversity, skills and independence; executive pay; shareholder rights; stakeholder interaction; disclosure of information; business ethics; bribery and corruption; internal controls and risk management; and, in general, issues dealing with the relationship between a company’s management, its board, its shareholders and its other stakeholders.

Source: https://wedocs.unep.org/bitstream/handle/20.500.11822/10603/definitions_concept.pdf?sequence=1&isAllowed=y

Why is sustainable finance important?

ESG considerations could form a good baseline for sustainable financing that offers an alternative to traditional profit-first financing styles. It’s important to establish this baseline to set a precedent for businesses and organisations here in the UK.

As sustainable financing options proliferate, and more banks and financial institutions implement and enforce policies that promote sustainable practice amongst borrowers, there’s likely to be a net positive impact on the environment, which should help the UK reach its net zero goal by 2050.

What’s more, there’s likely to be a strong demand from SMEs for finance that can enable them to make sustainable investments. That’s because failing to become more sustainable could result in increasing risk for UK SMEs, who must consider:

• Physical risks – if, for example, they fail to source raw materials from sustainable sources and find that the price of less sustainable raw materials increases; negatively impacting their bottom lines.
• Transition risks – if businesses find themselves unequipped to secure deals and partnerships within the new green economy due to their slow implementation of sustainable policies. That’s exactly why the financial services sector in the UK must be able to offer a robust set of sustainable financing products to businesses. Fortunately, ESG funding is becoming much more widely available, with the NatWest Group pledging £100bn of Climate and Sustainable funding and financing.

What could be achieved through sustainable financing?

NatWest’s Springboard to Sustainable Recovery Report (2021) highlights some of the key ways in which the UK economy and SME industry can benefit from sustainable financing – which could truly be transformative to the UK economy. The core goal here is to reach net zero by 2050. NatWest estimates that 30,000 new companies could be created to support this transition, while the revenue opportunity for UK SMEs as a result of new initiatives could total £160billion. Beyond the national impact these sustainable initiatives are likely to have, it’s important to look closer to home and examine the local impact changes are likely to have on your own business model.

How does sustainable finance affect me as an SME owner?

So, if you’re an SME owner or business leader and you’re looking to understand what you could be doing differently within your small business to become more sustainable, here are the key areas to look out for within which opportunities could emerge:

1. Reputation and relationships – as your partners and stakeholders place more of a priority on sustainable initiatives.
2. Markets – as sustainable practice becomes more incentivised.
3. Operations – as reducing the carbon impact of operations could help reduce costs.
4. Regulatory – as the UK law compels SMEs to embrace sustainable practices.
5. Customers – as consumers demand to see more sustainable practices from businesses.
6. Staff – as prospective and current employees may want to work for sustainable businesses.
7. Partners and Supply Chain – as committing to reducing the carbon footprint of your supply chain could open up new opportunities. Embracing a sustainable mindset and looking out for opportunities within these key areas could result in SME leaders spotting more opportunities. There are also some practical, actionable steps SMEs can take to become more sustainable in the short-term.

Embed 10 steps to net zero infographic from the NatWest business hub here: https://media.natwestbusinesshub.com/resize=w:768,fit:crop/output=format:webp/compress/6fWJW2WSzCD9ITFgG4Yw

Businesses who mobilise early on the sustainability front and build a strong track record of abiding by sustainable principles may find it easier to get access to financing in future, and could benefit from showcasing their efforts to relevant audiences.

To learn more about the sustainability and how it impacts businesses, read our sustainability guide for SMEs.

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