As the focus on climate change and sustainability in business grows, banks and financial services are recognising the importance of incorporating Environmental, Social, and Governance (ESG) considerations into their investment decisions and loan approvals.
To meet this demand, banks are offering loans with specific ESG targets, such as green loans, sustainability loans or sustainability-linked loans. For instance, sustainability-linked loans have been rapidly increasing since 2017, reaching a total loan issuance of $500 billion in 2021 (Bloomberg, 2021). Non-bank financial services are also headed in a similar direction. At Funding Societies | Modalku Group, we are incorporating ESG considerations by creating an ESG risk assessment framework to account for the environmental and social risks of SMEs as part of their loan application process.
SMEs are encouraged to consider ESG aspects in their business to have more access to funding and secure funding from banks and financial services. Based on an internal survey conducted by Funding Societies | Modalku Group, 60% of Indonesian, Malaysian, and Singaporean SMEs consider lack of funding as their primary challenge when integrating ESG into their operations. This shows that there is a shared interest both from financial institutions who seek ESG-aligned SMEs and SMEs who need more financial support on the other hand.
SMEs can benefit from incorporating sustainability and ESG practices into their business. For example, an Agritech SME in Singapore received a favourable sustainability-linked loan of SGD 27 million with a lower interest rate by meeting Humane Farm Animal Care standards (DBS, 2019). Similarly, one Southeast Asian company in the offshore industry, secured funding by proposing the initiative in reducing carbon emissions and implementing energy-efficient practices, making it a benchmark for SMEs to get funding by just having structured ESG initiatives on hand and eagerness to implement it.
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What do Financial Services Look For in SMEs in Terms of ESG?
1. Have an ESG Strategy
SMEs should develop a comprehensive ESG strategy that aligns with their business objectives. This strategy should outline specific goals, targets, and initiatives related to environmental sustainability, social responsibility, and governance practices. Clear and measurable ESG objectives demonstrate the SME’s commitment to sustainable business practices, which can positively influence lenders.
Banks and financial services often use frameworks such as the Sustainability Accounting Standards Board (SASB), Global Reporting Initiative (GRI), or the Task Force on Climate-related Financial Disclosures (TCFD) to guide their evaluation of ESG performance. SMEs can refer to these frameworks as a benchmark when creating their ESG strategy. They help SMEs address specific aspects within the three ESG pillars and ensure alignment with industry standards.
Image source: Media Clinic ESG – Modalku (adapted from MSCI Industry Materiality Map)
2. Implement Sustainable Practices
SMEs should implement sustainable practices throughout their operations. This includes reducing their environmental impact by adopting energy-efficient technologies, minimising waste, and promoting recycling. They should also focus on social responsibility by implementing fair labour practices, ensuring workplace safety, and promoting diversity and inclusion. Additionally, strong corporate governance practices, such as transparent decision-making and board accountability, should be in place.
3. Track & Report ESG Performance
SMEs should track and measure their ESG performance regularly. They can establish key performance indicators (KPIs) to monitor progress towards their sustainability goals. It’s important to gather relevant data on environmental metrics, social impact, and governance practices. Transparently reporting this information demonstrates accountability and allows lenders to assess the SME’s commitment to ESG.
Here’s an example of an ESG KPI with SMART (Specific, Measurable, Achievable, Relevant, Time-bound) objectives that is relevant for SMEs:
4. Pursue ESG Certifications
SMEs can pursue ESG certifications or labels to validate their sustainability efforts. Certifications such as LEED, B Corp, or ISO 14001 (environmental management) can provide independent verification of the SME’s ESG compliance. These certifications can enhance the SME’s credibility and demonstrate a commitment to sustainability, increasing the likelihood of securing ESG-focused lending or boosting their export readiness
How Can Funding Societies Help SMEs?
In this case, we are keen to create a better future by supporting SMEs who work towards sustainability and consider ESG in their business. Embracing ESG is no longer just a matter of compliance; it is an opportunity for SMEs to thrive in an evolving business landscape driven by sustainable development. Funding Societies, surveys SME borrowers on their ESG maturity as part of the loan application process, to help them realise ESG is an increasingly critical criterion. Read more about it here.
In conclusion, embracing environmental, social, and governance (ESG) considerations has become increasingly crucial for small and medium enterprises (SMEs) seeking loans. By aligning with ESG frameworks, SMEs can enhance their sustainability practices, mitigate risks, and position themselves as attractive candidates for lending/financing. By doing so, SMEs will not only pave the way for a more sustainable future but also unlock new opportunities for growth and access to financing that aligns with ESG principles.
Disclaimer: The information provided to you in this blog post is intended only for general information purposes only and does not constitute legal or other professional advice on any subject matter. The materials and the information provided are not intended to be and do not constitute an advertisement or solicitation. In no event will Funding Societies be liable to any party for any direct, indirect, incidental, special, consequential or punitive damages for use of such information by you or any unauthorised third party.
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