ESG business potential: 7 principles for giving SMEs the support they need
The rise of ESG offers banks a rare opportunity to draw closer to SMEs and provide them with the products and services they need to transition to the green economy. To capitalize on this opportunity, however, banks will need to change how they do business with SMEs.
The rise of ESG offers banks a rare opportunity to draw closer to SMEs and provide them with the products and services they need to transition to the green economy. To capitalize on this opportunity, however, banks will need to change how they do business with SMEs.
Why on earth should I talk to my bank about ESG? That’s the attitude of many small business owners. And with good reason.
Competitors, trade associations and media platforms are the trusted sources of information and help for most small and medium-sized enterprises (SMEs). Banks are where SMEs go for funding.
But SMEs could soon be calling on banks for a lot more than finance. And global environmental, social and governance (ESG) concerns might well be the spur that brings them closer together.
How can banks use ESG to strengthen ties with SMEs?
Specialists from across the banking industry grappled with that question at a recent online Best Practice Forum hosted by the Qorus SME Banking Community. They shared insights about how banks could seize a “once in a generation opportunity” to strengthen their businesses by helping SMEs increase their commitment to ESG.
Speakers such as Susan Davies, head of Business Banking at Santander UK, pointed out that many banks, in their efforts to become sustainable and purpose-driven, have developed extensive resources to track their ESG impact and risk. Such institutions already have the infrastructure, experience and business networks to help SMEs navigate ESG requirements and transition to the new green economy.
And banks have big incentives to up their support of SMEs.
SMEs will need funding of around US$50 trillion if global supply chains are to reach net zero by 2050, according to the University of Cambridge Institute for Sustainability Leadership. Furthermore, McKinsey & Company estimates that 2050 net zero scenarios will require as much as US$275 trillion - US$9.2 trillion a year - to spent on physical assets for energy and land-use systems.
Funding opportunities for banks are enormous. Income from associated ESG products and services could also be substantial. What’s more, banks are under growing pressure from regulators, investors and civic organizations to help SMEs and other business clients reduce their greenhouse gas emissions and transition to the green economy. Close to 99% of businesses throughout the world are SMEs.
SMEs, for their part, need ESG support. Lots of SMEs want to transition to the green economy but don’t know how, said Jack de Mooij, head of SME banking at Rabobank in the Netherlands. They often lack the skills, knowledge and resources to adequately respond to the demands of ESG.
Matt Bullivant, director of ESG strategy at the OakNorth Bank in the UK, remarked that banks can provide SMEs with valuable tools, education, advocacy and ecosystems to help them measure their impact on the environment and devise ways to respond to those findings.
What must banks do to give SMEs the ESG support they need?
1. Go beyond banking: To partner SMEs on their ESG journey banks need to deliver more than just finance. They must adopt a “beyond banking” mindset and provide SMEs with a range of ESG products, tools and services. The management of energy sources, supply chains, transport and assets are areas where banks could help SMEs transition to the green economy, according to Tom Groom, managing partner Strategy and Transactions, at EY in the UK.
2. Listen to SMEs: The needs of small businesses are diverse and shaped by the firm’s size, maturity, management and market. SME often have little knowledge or experience of ESG. It’s vital that banks listen to the specific needs of their SME clients and question them about their particular requirements. A broad, top-down approach is unlikely to succeed. “It’s for the customer to decide what support they need and when they want it, not the bank,” said Lynne Robertson, enterprise education and insight lead at Santander UK.
3. Overhaul ESG resources: Banks have tended to focus their ESG initiatives on compliance, disclosure and stress-testing. To better support SMEs they need to improve the sources, quality and management of ESG data, integrate such data with risk management frameworks designed for SMEs, and develop models and scenarios tailored for the specific needs of emerging businesses. “Banks should consider a client-centric approach rather than a regulatory-centric or disclosure-centric approach,” remarked EY’s Groom.
4. Don’t ignore S & G: While climate change and other environmental challenges are important, it’s critical that banks don’t neglect the social and governance needs of SMEs. “There’s a danger ESG could be hijacked by E at the expense of S and G,” noted Santander’s Davies.
5. Embed ESG in all SME engagements: Banks must avoid consigning ESG into a silo when they engage with SMEs. Instead, they should put ESG into every interaction with SMEs. “Banks need to take an always-on approach to communicating about ESG,” said OakNorth’s Bullivant.
6. Step up ESG education: Banks should increase ESG education across their organizations and especially among relationship managers and other frontline staff. Key workers need to understand how ESG affects the credit risk and performance of the businesses they finance.
7. Focus on core strengths: The SME sector is broad and diverse. A successful SME strategy requires banks to build on their specific strengths and experience. Banks should identify the sectors in which they operate best and focus their ESG efforts on where they will have the greatest impact, advised OakNorth’s Bullivant.
"SMEs are critical players in global climate efforts, not only as drivers of technological change, but also as adopters of green business models and practices to reduce their environmental footprint. Banks & Financial Institutions have an equally critical role in supporting SME’s finance this transition and by providing non financial support. Raising awareness and providing practical tools are key ways to help guide SMEs on the journey to net zero," said Ken Burke, Chairman of Qorus SME Community, in conclusion.
"These imperatives are fully front of mind to the Qorus SME Community as member institutions engage, share and prioritise their own efforts in supporting SME clients in the transition to a green economy."
On April 25, the Qorus SME Banking Community will host an online session on “SME Digital Onboarding.” And on May 4, the Qorus Sustainability & Regulation Community will host an online conference on "ESG Data Strategies." Both events are reserved for Qorus members only. For information, contact Dorota Valkova.
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