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Monday, 14 November 2022

Banks can play an important role in the transition journey of SMEs

By Natalie Blyth

If the world is to meet its net zero targets by 2050, businesses must contribute by innovating quickly and at scale. Large firms are already in the spotlight in this regard, and many are making good progress. But the role that SMEs need to play in the net zero transition is critical, and needs to be more closely addressed.

SMEs are the backbone of most economies. They make up 90% of global supply chains, which themselves account for nearly 80% of total carbon emissions. Of the USD 100 tn investment required to reach a net zero economy by 2050, USD 25-50 tn must be directed to SMEs. These figures are stark, and show that SMEs’ ability to address sustainability is critical to the outcome of climate change.

Yet, compared to large companies and multinationals, SMEs are poorly equipped to make the changes necessary to transition. Unlike larger peers, they often lack the data, resources and know-how to map out detailed ESG plans. And as they navigate an environment shaped by pandemic aftershocks, energy crises, soaring inflation, and volatile geopolitics, SMEs the world over are simply operating in survival mode. They might be forgiven therefore, for focusing on the short term, but if we are to avert the worst impacts of climate change, it is critical that the challenges they face on their transition journey are significantly reduced.

How can this be achieved given the backdrop? While there is no silver bullet, banks are becoming an increasingly significant enabler, because they can play an important role in three key areas — facilitation, financing, and absorbing risk.

On facilitation, banks can help SMEs take the first step — developing transparency around their emissions, by providing inexpensive (and sometimes no-cost) tools like carbon calculators and ESG scorers to help identify individual footprints, highlight emissions hotspots, and suggest high-impact reduction measures. They can also provide a range of guidance, thought leadership, and vetted solutions to help customers on their transition journeys.

Bank financing, arguably the most well-known solution, allows for the provision of a range of options, from mechanisms to tie the cost of lending to ESG performance, through to ring-fenced finance such as SME funds for funding green companies, or where proceeds are earmarked for green purposes. At HSBC we worked with a waste management company to provide financing to restructure its capex. The business was able to invest in modern machinery to recycle materials to sell back to the industry (capitalizing on a revenue stream), establish lower landfill costs, reduce emissions, and thus create a circular economy.

With regards to mitigating risk, banks have acted as intermediaries between trade buyers and sellers for centuries, absorbing the risk and / or acting as guarantor, allowing companies to trade with confidence. In the case of supply chain finance, suppliers gain the reassurance of receiving early payment, and when counterparties are new to trading with each other, the intermediation of banks can provide more certainty that the quality or specifications of goods sold are as they should be. This need will grow as businesses look to trade or source more sustainably.

Expecting SMEs to transition in isolation is unfair and unrealistic, and misses how hugely complex and multifaceted solving the climate problem is. It will take collaboration — not just with banks, but with peers to share knowledge and approach across sectors; buyers to understand their requirements, and the public sector to understand policy and enable access to skills development programs, to name but a few.

The road ahead may look daunting, but tackling this challenge is not beyond SMEs’ reach. Seized now, the transition to net zero can be a huge growth opportunity for small businesses and help increase the pace of change required for the world to achieve net zero targets.

Natalie Blyth (LinkedIn) is global head of commercial banking sustainability at HSBC. HSBC’s column on Enterprise appears every second Monday.

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