Driving Sustainability: How Financial Service Providers Empower SMEs for a Sustainable Future

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 offer 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.

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. 

How Financial Service Providers Empower SMEs 
for a Sustainable Future

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. Strong corporate governance practices, such as transparent decision-making and board accountability, should also 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: 

Driving Sustainability

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.

With Funding Societies Malaysia, SMEs here can choose from a range of financing solutions both conventional and Islamic to help fuel their cash flow and revenue streams. From Micro to Term Financing, we strive to be a bridge, connecting the man on the street to an SME in need, while boosting the economy in the process. 

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.