No more small change
Andrew Jackson argues that it is high time for fintech to lead the way on green finance
The anticlimactic conclusion of Cop26 was that coal would be “phased down” rather than “phased out”. Alok Sharma’s tears distilled the UK Government’s failings to deliver real and impactful action or leadership on climate change. In lieu of inter-governmental responsibility, eyes now turn to the less democratic world of business to save the Maldives from swelling seas.
In 2020 BlackRock, the largest asset manager in the world, committed to helping clients build sustainable portfolios by integrating ESG (Environmental, Social and Governance) and increasing access to sustainable investing. With no-table exceptions, big business continues to profit from the exploitation of natural resources, polluting industries and cheap disposable products.
Interested parties claim that if big business steps up it gives a green light to the government to abrogate all responsibility on climate change. Without universal standards set by regulation, corporate action would be ad hoc, ineffective and subject to ‘greenwashing’ where green credentials are overstated or simply false… so why bother?
And so, the custodian responsibility to safeguard the environment for future generations of children falls to the six million small businesses making up 99.9 per cent of the business population.
Small businesses (SMEs) are accountable for 60 per cent of employment and half of turnover in the UK private sector. This pipeline of innovation and growth in the UK economy is also the most vulnerable to environmental changes on a local level. Further, consumers are demanding more accountability from local businesses where they can be heard, rather than from large international corporates where their voices are ignored.
To meet these challenges small businesses and new emerging industries, such as fintech, must place climate change as a higher priority in their product development and business plans.
Fintech is famed for fast growth, creative cultures and progressive thinking. It is an industry that is coming of age as more co-founders step aside to career-led MDs and CEOs. With new perspectives and ambitions, and under new shareholder mandates for sustainable growth, fintech will push itself to the forefront of the financial services industry as thought-leaders and market-makers.
In October 2021, Swishfund (an alternative on-line lender to small businesses) and Funding Options (a business loans marketplace) campaigned for a ‘green loans’ scheme from the UK Government to encourage more SMEs to boost their ESG credentials. The aim was to create a government-guaranteed product, or a match-funded product through the British Business Bank that would reduce the cost of SME borrowing for green/ESG-related purposes.
It has been inspired by the success of guaranteed loan schemes to help businesses survive Covid, and an activistic reaction to HSBC’s claim to provide green loans that have no price or terms difference to normal corporate loans.
Swishfund’s and Funding Option’s green loans campaign is on-going, and the partners will be promoting it at a parliamentary reception in London on December 14, held by the all-party Parliamentary group ‘Bankers for Net Zero’.
Like any lobbying campaign, to succeed it needs a passionate and committed champion in the UK Government. Given the lack of focus from Cop26, and the numerous distracting scandals that have hit the UK Government, finding that champion is increasingly unlikely.
Notwithstanding wide-ranging campaigns to revolutionise finance, new greener fintech products are coming to every aspect of the financial services industry. Appealing to consumers, the Dutch Digital Bank, Bunq, plants a tree for every €100 spent and has sown five million trees in Kenya and Madagascar. Appealing to investors, the Swedish fintech Trine is a peer-to-peer platform connecting investors with solar energy businesses. Appealing to business borrowers, Swishfund offsets 10 tons of carbon (by supporting windfarms in India, and planting trees in the UK) for every new loan it pays out.
Swishfund also offers discounted loans to carbon neutral customers and/or those in the renewable industry supply chain. The ambitious fintech justifies these discounts under the belief that customers that are environmentally responsible are more likely to be financially responsible too, and therefore have a lower credit risk. While the data is thin, it appears to have some merit.
Solar panel installations stalled during the Covid pandemic as people did not want strangers in their houses. Many of these energy companies held on with both government-backed and non-government-backed funding, and carefully reduced their overheads.
Now everything renewable is soaring: solar, electric batteries, thermal batteries, air source heat pumps, smart thermostats, smart radiator valves. This boom is largely driven by increasing energy prices, energy company failures and the wider awareness of the importance of reducing carbon emissions.
In pre-Covid times, ESG investments did not tend to out-perform non-ESG investments. During the Covid pandemic, businesses with strong ESG credentials performed much better. There could be many reasons for this, but a prevailing one is that employees at companies with strong ESG credentials had a greater desire for the company to succeed, and in times of adversity were prepared to go the extra mile.
The Global Compact paper Who Cares Wins from 2004 is largely cited as the origin of ESG-investing. Investment in the UK’s clean energy sector has surpassed £100 billion since 2004, particularly in Orkney and the Western Isles. This £100 billion represents 12.6 per cent of all new investment in clean energy for Europe, the Middle East and Africa. However, an estimated US$90 trillion of investment is needed by 2030 to achieve global sustainable development and climate objectives.
Swishfund is an alternative lender
Swishfund is an alternative to small businesses in the UK (and Netherlands). The UK business offers a 1.5% APR discount to all carbon neutral customers (as a kind of sustainability-linked bond, but for small businesses), and offsets 10 tons of carbon for all new loans. We are developing a small business environmental-responsibility scorecard, which we hope will help us make even better credit decisions. We have developed neurodiverse loan documentation, and recorded aural versions of our contracts to help dyslexic and sight-impaired customers. We have slowed down the lending process, as we believe that fast finance is not always fair finance, by offering a 48-hour cooling off period to all our direct customers. We also believe that lending is a partnership, rather than a one-off sales transaction, and take a compassionate and long-term view with customers in financial distress.
In 2019, the UN General Assembly launched its principles of responsible banking. The banks that signed up agreed to align with the UN’s sustainable development goals and the Paris climate agreement. More than 450 of the world’s banks committed to report annually on the carbon emissions linked to the projects they invest in. Reporting may lead to phasing down but phasing out requires culture change at all levels.
Six million UK small businesses contribute just under half of the UK’s carbon emissions generated from business and industry. Yet for many small businesses, environmental responsibility is seen as an additional and unnecessary cost. There has not been the right financial product for SMEs that marries commercial competitiveness with ESG-related benefits.
The British Standards Institution survey found just 20 per cent of small businesses have committed to a net-zero target. To coincide with Cop26 the Federation of Small Businesses’ recent survey found that 56 per cent of small businesses accept that the planet is facing a climate crisis, but only 36 per cent have a formal plan in place to combat climate change.
The FSB’s survey also said that two thirds of small businesses had taken significant steps to reduce energy usage. Of those who had not yet taken any such steps, a quarter said they were uncertain about the return on investment. They also considered that there was a lack of capital to invest in assets such as heat pumps and solar panels. More than half of small businesses said that grants or low-interest loans would be a strong incentive to become more energy-efficient. The tech is out there – it just needs the investment. Step up fintech!
A challenge to ESG-related or green loans has always been the standardisation of ESG credentials. New fintechs such as Early Metrics are using open banking to automate the carbon footprints of businesses. At Cop26, the International Financial Reporting Standards Foundation announced the formation of an International Sustainability Standards Board, as a step towards a consistent sustainability reporting framework.
Fintech is revolutionising the way we interact with finance and can revolutionise the way we value environmental responsibility in business. Fintech can galvanise small businesses to be the leading force in reducing the impact of climate change. Money makes the world go round; which is why delivering cheaper finance to small businesses to invest in green initiatives will keep it going. Fintech has the data analytics and digital marketing to deliver on that promise to the world.
Andrew Jackson is managing director of Swishfund. For more information click here.
Partner Content in association with Swishfund.