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You are at:Home»Finance»Is ESG the secret to funding for SMEs?
Photo 106537664 / Esg © Siriporn Kaenseeya | Dreamstime.com

Is ESG the secret to funding for SMEs?

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Posted By sme-admin on December 19, 2023 Finance

SMEs have faced a host of hurdles in 2023, which has pushed the pursuit of ESG initiatives down the priority list. According to KPMG, CEOs feel that pressing economic matters are the biggest barriers to delivering an ESG strategy in the next three years. 

However, with some light on the horizon as we head into the new year, Ryan Sorby, Regional Head at Growth Lending ,suggests business leaders should revisit their ESG strategy or implement one. Research shows that 90%Ryan Sorby, Regional Head at Growth Lending of global investors consider ESG in their investment approach and 85% of chief investment officers surveyed by McKinsey say that it’s an important factor in their investment decisions. From banks to venture capitalists, and alternative lenders to government funds, ESG is becoming a key consideration for all. 

Funding has been increasingly challenging to secure for SMEs in recent times and those acting to better their business are well placed to stand out from the crowd and attract the attention of investors. As the number of ESG-focused funds continues to grow, securing capital from these can be crucial for driving growth through expansion, product development or additions to the team. 

Benefits beyond funding 

Greater investment opportunities are not the only reason SMEs should ensure they have an ESG strategy. Consumers are increasingly seeking to purchase goods and services from businesses that align with their values. This means that businesses working to reduce their impact, from packaging to ensuring ethical supply chains, are likely to attract customers over competitors which are not. 

Beyond investors and customers, demonstrating a commitment to ESG principles also appeals to employees, helping to retain and attract top-tier talent. Just as people want to do business with companies that align with their values, they also want to work for them too. 

Investors view companies performing well on ESG factors as inherently less risky. This is because ESG-focused companies look to minimise operational, regulatory, and reputational risks. As businesses face increasing scrutiny over the impact of their operations on people and the planet, those already equipped with a strategy will be well placed for when more stringent regulation comes into play. Furthermore, whilst devising the plan, business leaders can identify any issues in their operations or areas which could be improved, reducing the risk of these causing a problem later down the line and ensuring reputation is upheld. 

ESG isn’t just about short-term gains, it’s also about long-term value creation. Research shows that investors seek to invest in companies which prioritise long-term business fundamentals over short-term targets. Considering these factors now will contribute to the building of a resilient, adaptable, and innovative business that continues to thrive. 

Funding routes to support ESG efforts  

Whilst the benefits of embedding ESG principles are clear, securing the capital to do so can be more of a challenge. There remains a limited supply of finance products specifically to scale up ESG efforts, but firms are developing their offering in this space. There are also many funds in place to fuel growth, which can be utilised to make progress in this area. 

For many SMEs, external finance will be a crucial means to transition to net zero. The British Business Bank found that 22% of businesses planning to take action to improve sustainability would consider using finance to support these plans. 

Utilising an ESG strategy to secure capital 

For businesses with a stringent ESG strategy already in place, this can be a key tool for gaining funding. However, business leaders need to know how best to present this to investors. Investors will be looking for a robust strategy which ties into long-term value creation. Research by McKinsey found that investors are prepared to pay more for companies that can demonstrate a clear link between ESG efforts and financial performance. 

SMEs need to ensure that they’re reporting on the progress and impact of initiatives they put in place to communicate this back to investors transparently and illustrate their commitment to driving change. 

Conclusion 

Whilst investors and lenders are looking for businesses taking ESG seriously, increasingly, business leaders themselves are considering these factors when choosing where to seek funding. It’s only right that SMEs want to partner with lenders practicing what they preach. 

ESG principles are no longer a nice to have, they’re fundamental to attracting customers, talent, and funding. As time ticks on it will only become more pivotal to unlocking sustainable success in a rapidly evolving world.

Ryan Sorby, Regional Head at Growth Lending

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