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Time for banks and businesses to put their money where their mouth is on ESG

Time for banks and businesses to put their money where their mouth is on ESG 1

By Paul Christensen, CEO of fintech Previse

Commitment to ‘environmental’, ‘social justice’ and ‘corporate governance’ (ESG) criteria is fast emerging as the touchstone of good practice in the business world. In fact, almost half of FTSE 100 companies have linked executive pay to environment, social or governance targets, as investors’ and stakeholders’ demands for companies to adopt these non-financial goals grows stronger.

ESG’s move from buzzword to real world application is on a clear trajectory. Yet, the specific ways in which businesses can commit to fulfilling this is less certain. It remains clear that the implementation of environmental policies outweighs the focus and pursuit of the ‘S’ and the ‘G’. The environment is critical to sustainability, however banks and businesses can also work towards an ESG-oriented strategy by adopting more inclusive practices – particularly where small businesses are concerned – by supporting sustainable finance.

 

‘S’ for slow payments

Late payments caused 50,000 small businesses to go under prior to the pandemic, and the problem was exacerbated by COVID-19. The virus prompted many corporates to lengthen already protracted payment terms in order to preserve their own cash flow, to the detriment of their SME suppliers. Previse tracked the impact of the pandemic on payment times and found that from 11 March last year, late payments almost doubled compared with the year before. Late payments continued at high levels throughout April as lockdown took hold.

Clearly, there is a direct link between times of uncertainty and steady cash flow. Unfortunately, it is often suppliers that suffer adversely as a result of this. The data shows that both the scale and scope of the late payments problem are growing. Despite this, little – if any – focus has been given to how banks and corporates can contribute to tackling the problem.

The reality is that banks and corporates can contribute significantly to alleviating the chronic and painful slow payments problem that plagues small businesses. Supply chains today are complex, with increasing numbers of counterparties being introduced to the chain of command. If supply chains are to be stable and efficient, it is only right that the various parties work together to ensure no single player is left in the cold. Faster payments of invoices to suppliers means that they in turn do not have to delay payments to their own suppliers. Looked at this way, it becomes clear that safeguarding supplier payments is an obvious candidate to satisfy the ‘social’ criterion of ESG.

There is much low-hanging fruit to make meaningful progress towards an ESG-oriented strategy by improving day-to-day processes, particularly where small businesses are concerned, by supporting sustainable finance for real social value.

Technology is the missing link

 

Machine learning is the clear missing link in enabling a new era of faster, more efficient payments that the B2B world sorely needs. In B2C payments, advances in new technologies are such that customers expect to make and receive payments, immediately. This does not extend to B2B. There is an astounding irony in this, as machine learning enables all suppliers to get paid instantly and at no extra cost to large corporates.

Harnessing past invoice data to make a probabilistic assessment of payment is an easy and effective way to get all suppliers, even the very smallest, paid instantly. 

But, the technology alone cannot deliver instant payment. Banks and corporates each have a part to play in making this a reality.

Large corporates can unlock their ERP data in a secure way, to give a historical view of their payment patterns. Fintechs can harness this data to make a highly accurate assessment of whether a supplier’s invoice will be paid eventually, based on a corporate’s payment history. The small number of invoices which look unlikely to be paid, and therefore require manual intervention, can quickly be identified. The majority of invoices that will be paid at the last date of payment terms, or even after, can be paid immediately, by unlocking bank funding. Done in this way, suppliers can be paid before an invoice is even approved. True day-1 payment.

Bringing banks, corporates and fintechs together through the smart use of data is an easy way to enable financial inclusion that could save Britain’s SMEs, and in turn, aid in the recovery of the economy. This is both a step towards the ESG goals of banks and corporates and a helping hand for small businesses to stay afloat and invest in their own ESG objectives. Many corporates are now requesting suppliers in their ecosystem to meet ESG goals such as net zero – these requests come with a high cost for small businesses, for some, cripplingly so. By paying suppliers faster, corporates can deliver a big boost in cash, which enables suppliers to invest in their own ESG practices without comprising on cash-flow.

If large corporates and banks are to be believed, net-zero is a mere 29 years away. But, banks and businesses can do more to meet their ESG commitments, and many are criticised for paying lip service to the idea. The sustainable financing that the SME community desperately needs is a clear and tangible way for businesses to put their money where their mouth is when it comes to ESG. It could just help save small businesses at the same time.

 

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