Commercial Finance Week: SME Sustainability
The highly credible trade association UK Finance held its 2021 Commercial Finance week from the 5th to the 9th of July, providing insights from hundreds of officials on the most important financial subjects in 2021. Markets have seen historically unprecedented externalities, pushing business owners of both large and small enterprises into unfamiliar ground. Contemporaneous concerns involve the greater role of debt in business functionality, Environmental and Social Governance (ESG), supply chain resilience, and access to finance. The panellists’ impressive arrays of stakeholders, all spanning a plethora of industries, highlighted the need for greater co-operation as we move forward from the COVID-19 pandemic and capitalise on our positions in a post-Brexit economy. This article will focus on the inevitability of green energy and building resilience from within one’s supply chain.
The Green Elephant in the Room
While sustainability may seem like a tangential issue to direct financial concerns, predictions from leading professionals portray an inexorable stake in the need for renewable energy resources. As our article regarding the Global Trade Review suggests, access to financial services may become more burdensome for those unprepared as sustainability pressures continue to mount. Furthermore, pressures on the Government from trade unions and international bodies might alter incentives to use renewable energy—most likely in the form of monetary penalties. The Principal of UK Finance Jennifer Tankard hosted a panel with the venerable Dame Teresa Graham DBE, Dr Jonathan Scurlock (Chief Adviser of Renewable Energy and Climate Change at NFU), Jack Semple (Alliance Secretary at EAMA), Adam White (Head of Agriculture, Barclays), and Luke Hampton (Senior Supply Chain Manager at SMMT); Teresa Graham started off the discussion drawing the parallel between Brexit and net-zero carbon emission ambitions. Many SMEs did not prepare for Brexit, despite it being a certainty, yet there appears to be a relative under-engagement in preparations for net-zero plans. As Adam White later mentioned, you could ask one hundred different SMEs about what net-zero actually means, and you could plausibly get one hundred different answers. Graham was underscoring the important role of helping smaller businesses anticipate potentially radical financial schemes.
Jack Semple later conceptualised the net-zero drive as comparable to a ‘crisis’ of some degree; UK Government policy is translucent at best, and without hard-line rules to operate by, it’s hard to be proactive. For SMEs in particular, that risk is amplified. Nevertheless, it is possible to turn the crisis into an opportunity. An influential element behind the current perception of green energy is the notion that longer-term investments can somehow damage a company’s operations, and that green investments necessarily have longer turnovers. It is time for enterprises to look beyond the immediate return and collaborate to set a net-zero environment. Semple cited some surprising and refreshing examples; a number of the members of the Engineering and Machinery Alliance are opting for 6-8 year investments on solar panels, solely due to its financial viability. Another firm purchased a £6,500 carbon shredder yet is already saving £1,200 a month on packaging costs (a notably quick turnaround, even undermining the notion that carbon investment is inherently long term!). As Dame Teresa Graham later mentioned, the average life-span of a Small to Medium Enterprise is saliently shorter than larger corporations, pushing a greater burden on the smaller companies. One common theme throughout the course of the talk was the subsequent need for larger corporations to engage and support SMEs within the supply chain. Ironically, while many net-zero initiatives are currently unclear, accepting its inevitability should offer security in forthcoming decision making.
Supply chains have been heavily affected by the COVID-19 pandemic, but it’s easy to take for granted the momentous efforts made by governments and agencies to mitigate the maladies. As Aysha Fernandes, Director of Commercial Finance at UK Finance, rightfully points out, the Bounce Back Loans saw changes in legislation, laws of the Financial Conduct Authority (and other entities), and exposed SMEs in particular to an array of unprecedented risks. We saw subsequent and successful Government programs mitigate those risks. In fact, Alex Waterman, Principal of Invoice Finance and Asset Based Lending (IF/ABL) at UK Finance, provided data to support that conclusion in a separate seminar, showing that advances dropped from £21b to £14b in the last twelve months. What SMEs should take from this is that radical changes in economic incentives will probably precipitate comprehensive financial schemes that only those will a solid supply chain could be eligible for. Matthew Davies, Director of IF/ABL at UK Finance, agreed, stating that many businesses currently do not have access to Invoice Finance or Asset Based Lending resources, and it seems that such services will only become more relevant. These predictions all operate in margins spanning the next decade, perhaps even longer. By the time that many financial services and schemes become available to dull the knock-on effects of the pandemic, a green supply chain that is socially responsible will only help secure that finance.
Sustainable Innovation and Supply Chain Resilience
Many adaptations involved in a transition to green energy will be sector specific and will require comprehensive thought from those involved. Previously irrelevant factors in ledger management may become integral in the demand for net-zero initiatives. As Semple mentioned toward the beginning, factors in the special arrangements of rooms and nuance effects on humidity levels might prevent a business from receiving funding for sustainable agendas. Semple and others accentuated the need for SME owners to communicate with each-other rather than hold their breath for Government advice; familiarity with specific industries will go far in familiarising the SME owner in risk exposures. Jonathan Scurlock, who is involved in farming and agriculture, provided indelibly helpful comments. Much of Scurlock’s sector involves a lot of greenhouse emissions, but they are the result of complex biological processes rather than by anthropocentric means. While that can look negative on paper, it also provides the opportunity for much more carbon capture. This is important to recognise, both for the consumer and for the Government; we must accommodate the needs of finance specifics to the target industry. Without bespoke financing, a flat carbon tax, for instance, would disproportionately cripple the agriculture and farming sectors while simultaneously depriving them of making the most difference in mitigating emissions.
Responsive and sensitive financial packages are essential for a successful recovery, whether it be across industries or within them. While these discrepancies between sectors are easy to notice now, many effects from externalities will only materialise in the coming months or even years after the pandemic. As Matthew Davies also mentions, such butterfly effects will be rendered obvious when the UK Government support packages begin to peel away. Barry Hastings, Manager of the Retail and Banking Projects Team at the Financial Conduct Authority, states that post-pandemic finances may require SMEs and firms to be more diligent with forbearance and collections. Under current analysis from the FCA, SMEs remain at risk of mistreatment, particularly when they are in positions of financial distress. It is therefore important for firms, including SMEs, to maintain a customer focused culture with positive and responsible remuneration schemes in order to make the most of available forbearance tools. Charlie Shepard, the Head of Retail, Corporate and Wholesale Banking at Santander, makes the point that the upcoming period involving repayment, collections, and recoveries, will mark the hard yards of the game.
While we all have sympathy for those in the vacuum of clarity in future funding, we can take some comfort in the patently collaborative ethic many business owners are displaying. By communicating with each-other, SME owners can learn of the newest and most reliable technology most fitting for their supply chains. As mentioned at the beginning of this article, it is best to understand the net-zero movement as an inevitable shift that SMEs should not ignore. Adam White’s research at Barclays show that around 33% of current customers plan to invest in green energy over the next 12 months, though with SMEs the number is much smaller. This doesn’t necessarily reflect the sentiment of SME owners, however; as Teresa Graham and Jennifer Tankard reiterated, there appears to be an enthusiastic sentiment behind net-zero initiatives within the SME community, but many do not know what to do. In order to mobilise a very influential demographic of the financial community, there are a few fundamentals that SME owners should focus on. Jack Semple posited three main pillars: the first is to make your business conduct agree with your personal motives and standards. Respect is not something to be ignored. Second of all, functioning business operations are a necessity: cost reduction, brand marketing, and technological integration are key for modernisation. The third and final element is to adapt to regulations. Unfortunately, that isn’t sufficiently clear enough at the moment; as Jonathan Scurlock stated, we are expecting a report from the Government on how best to finance net zero projects later this Autumn, but there are many contingencies that have yet to be addressed. In the meantime, as Adam White and Luke Hampton said, SME owners should collaborate and communicate with banks and trade bodies for the best advice, as well as between each other.
As the talks progressed over the Commercial Finance Week, the opaque landscape became notably clearer, particularly in the arena of green energy. It offered time to reflect on how the COVID-19 pandemic forced many business models into short-term structures, and how easy it has been to forget about the long-term fate of our social science. If the pandemic had never happened, we might have already seen green energy enter households by mid-2021. While such counterfactuals don’t offer much substance, it accentuates the need to expect the unexpected. Many business owners have been living at the mercy of UK Government policies for almost 16 months—while we are creatures of habit, we can and should prepare for change that is just on the horizon. Green energy transitions and resilient supply chains will require an awareness for new technology, communication with other entities, and an inclination for preparation. Keep posted on our website FinCred CF for more.
For those of you who missed the Commercial Finance Week, it is available on demand HERE.