By Morgan Terigi, CEO and Co-founder, Incomlend
Global interest in the environment, social, and governance (ESG) investments has grown steadily over the last few years, accelerated by climate change and the COVID-19 pandemic. With so many new opportunities in the space emerging, it is worth exploring if the benefits outweigh the risks. A robust ESG programme can open up access to large pools of capital, build a stronger corporate brand and promote sustainable long-term growth, benefiting companies and investors. On the other hand, concerns about greenwashing and other unseen factors can weigh heavily on decision-makers seeking to change their investment strategies.
According to the latest report from the Global Sustainable Investment Alliance, sustainable investment in key markets, including the US, Australasia, and Europe, is actively growing, having reached US$35.3 trillion this year. Comprising more than one-third of all assets under management globally, 57% of financial advisors see ESG as an added layer of risk management to client investments. According to a survey, conducted by Deloitte, of over 350 executives from the Americas, Asia, and Europe, more than half of respondents saw ESG investment having a positive impact on revenue growth and profitability. 48% also indicated increased customer satisfaction and 38% saw an enhanced ability to attract and retain staff.
COVID-19 is a turning point for ESG investing
While many pressing issues are confronting our generation, the COVID-19 pandemic has been a standout challenge in recent times. The tremendous and swift impact it had on the global economy highlighted how catastrophes and unforeseen events could rapidly and negatively impact investment returns.
ESG investing presents an opportunity in these circumstances amid demand for sustainable solutions. Companies at the forefront of emerging technologies with strong ESG values have the potential to lead positive change as we look to rebuild our economies and communities on firmer foundations. In the first quarter of 2021, inflows into European “sustainable” funds totalled €120 billion, 18% more than the first quarter of 2020. This comes when the European Market for sustainable investments reduced by $2 trillion between 2018 and 2020 following the introduction of anti-greenwashing rules by the EU, according to research by the Global Sustainable Investment Alliance.
ESG-related issues, such as climate change-induced natural disasters and workers’ unrest, can severely impact a company’s operations and profitability. However, companies that actively address these risks through robust ESG policies can mitigate the adverse outcomes and produce more reliable financial results. That translates to lower downside risk for investors. Furthermore, companies that create value for their stakeholders and positively impact the wider society and the planet can foster greater trust and bolster their resiliency. This is especially true as the economy remains volatile while social conscience continues to grow among people. This puts companies in a stronger position for recovery and growth. For investors, this means stronger, more stable returns.
By analysing and rating companies based on their financial and ESG metrics, investors can better account for unanticipated risks stemming from societal and environmental challenges. It can give investors a good indication of a company’s current and future performance. Moreover, ESG investing allows socially conscious investors to screen and select investments that better fit their values and financial goals.
Rising ESG interest a boon for SMEs
As investors’ interest in ESG continues to grow, it will lead to the emergence of more ESG financing programmes. Today, many ESG financing initiatives are still designed for larger companies. A key reason is that these companies have access to the resources, data and expertise needed to measure and report their ESG impact, an essential criterion for these types of financing programmes.
On the other hand, the SME community remains a sizable untapped segment for ESG financing, and we are expecting more SME-tailored programmes to surface. However, these initiatives will need to consider SMEs’ constraints and evolve how they assess and qualify responsible, sustainable SMEs. For example, Asia’s first ESG-focused structured finance programme for SMEs – the Incomlend ESG Invoice Financing Programme – will consider SMEs’ ESG plans using established international standards, such as the United Nations (UN) Principles on Business and Human Rights and the UN Sustainable Development Goals. This US$60 million alternative financing initiative will provide SMEs that meet the ESG criteria with quick turnaround invoice financing solutions.
It’s an advantageous development for SMEs, especially those that continue to go unfinanced. By becoming more ESG-focused on their business model and operations, SMEs can have more avenues to secure working capital, allowing them to diversify their funding. ESG financing solutions can improve SMEs’ cash flow, giving them the fiscal agility to pursue new revenue opportunities or make bolder ESG-centric changes within their organisation and supply chain.
ESG financing for SMEs critical for a sustainable future
Many SMEs today still view ESG and profitability as conflicting goals. The emergence of ESG-financing programmes for SMEs can encourage more companies to adopt responsible business practices with tangible financial incentives. At the same time, we support SMEs that are already focusing on ESG to grow their revenue. By empowering ESG-centric SMEs to expand their business and increase their profitability, they can become successful role models that their peers emulate. It will help more SMEs realise that ESG is not a hindrance but a growth accelerator. SMEs represent approximately 90% of businesses and employ more than 50% of the workforce globally. Their contributions and impact on the global economy and our society are tremendous.
With ESG investing and financing for SMEs, we are taking a step in the right direction by spurring more companies in the SME community to adopt responsible and sustainable practices. Collectively, they have immense potential to make a meaningful, positive difference to our future. Embracing ESG allows small businesses to identify improvement for all areas of their organisation, resulting in more diverse and engaged workforces and more profitable organisations. More importantly, companies will be well placed for the challenges facing the world.