The planetary emergency needs sure footed action over the next decade after years of negative human influence. Despite the ongoing challenges of Covid-19, over half of the UK’s small and medium sized enterprises (SMEs) see this as their business priority. We need to empower them to make positive interventions.
The net-zero greenhouse gas emissions challenge requires large scale social innovation and the development and adoption of new technologies. Experts say the supply of capital to fund this transformation needs to grow 5 times by 2030 to meet future demand[1].
In order for the transition to net-zero to be successful it must be just. This means it must absolutely consider the social impact of change. A just transition is helping businesses adapt early rather than facing widespread closures and job losses when they can’t meet new regulation; enabling SMEs to invest into innovative solutions that create jobs and generate reinvestment into the community; and catalysing community engagement and empowerment through locally owned community energy schemes.
SMEs make up 99% of firms in the UK. They provide jobs, build up communities and innovate to bring us new products and services. All SMEs need to decarbonise by 2050 – earlier if they can, or they could be left behind by competitors, and access to finance will unlock their potential.
There are three categories of SME in relation to the transition to net-zero:
- Green solution providers: SMEs which make green innovations or support other businesses to decarbonise. Finance is one of the key determinants of effective innovation, particularly for resource-constrained SMEs. Research has found businesses engaging with clean technologies have a higher demand for external finance, and these demands are not being fully met by traditional providers[2].
- Green adopters: SMEs which will need to adopt green technology and transform their ways of working (such as using low emissions vehicles in their fleets) to ensure their business models are sustainable and aligned with the transition.
- Transition exposed: SMEs that are particularly vulnerable to being negatively impacted by the transition to net zero. This can be in relation to their sector (most exposed are transport and manufacturing), their region (East Midlands, West Midlands and Yorkshire and the Humber)[3], or underserved SMEs such as those led by women and people from Black, Asian and minority ethnic communities. Reaching these exposed businesses is key as over half a million jobs that will be at serious risk if the UK doesn’t step up its investment in green infrastructure and jobs[4].
Access to finance will be essential for all three categories of SMEs. However in the UK access to finance is already challenging for many SMEs (read last week’s article, here).
Why is a diverse supply of finance important for meeting the scale of the challenge?
Large banks are the most significant source of finance but their automated, policy-driven approach and regulatory restrictions mean that they reject a large proportion of the businesses who apply. Most challenger banks and fintech lenders also use centralised decision-making technology that does not gather and analyse ‘soft’ information which can be gleaned from relationship-based approaches to lending. This particularly hampers them from lending to SMEs in more risky industries, deprived areas and those from already underserved groups.
What if there was a network of local, non-profit lenders who have reach into these communities?
Community Development Finance Institutions (CDFIs) are non-profit lenders who reach into the more deprived regions and typically underserved communities in the UK. Their aim is to create jobs and develop communities. They get to know their investees, challenge business plans, and take a flexible approach to lending when the banks’ systems have said no.
- 9 out of 10 of the viable businesses CDFIs support have already been declined by a bank
- Over half of CDFI lending is made in the Midlands and Yorkshire and the Humber, compared to just 6% lent in London and the South East of England
- 16% goes to SMEs in the manufacturing and transport industries, giving them reach and influence into these crucial sectors
- 10% of loans are made to ethnic-minority led businesses (in the UK minority ethnic group led businesses account for 5% of SME employers)
- 26% of loans are made to women-led businesses (in the UK women-led SME employers make up 15% of the business population)
Because of their experience and ability to cut through the noise and assess a business plan based on its future merits – experienced talent spotters – CDFIs have the flexibility, reach and trust to ensure all SMEs are engaged in the transition. And they manage risk well. Research into loan guarantee schemes has found that CDFIs have the same loan default rates as the biggest UK banking groups. And when the SME doesn’t have collateral, local lenders have a screening advantage over the big banks[5]. Their approach has real results too; supporting 13,000 jobs for every £100 million lent.
The net-zero challenge requires rethinking decades-long practices and doing many things differently. The CDFI sector is a natural partner for investors and government to champion the social dimension of the just transition and harness it for a better future.
CDFIs on the ground…
Novalux LED, York – supported by Business Enterprise Fund
Novalux LED helps companies to save money, save energy and save carbon by changing old inefficient lighting for the latest LED lighting technology. Its founders saw an opportunity in the lighting industry and created Novalux, but they needed finance to enable its start-up and initial growth. After unsuccessfully approaching several banks, they received a loan from CDFI Business Enterprise Fund (BEF) and this allowed them to take the business through its first 18 months. At this point, when the businesses’ growth was increasing, Novalux approached BEF to take out a second loan to employ new staff and invest in development.
Founder and Director Nigel Codman commented “Our growing relationship with BEF has been very substantial. We have done work at BEF’s head office in Bradford. It is a wonderfully circuitous relationship where they have seen the quality of the work that we’ve done and felt more secure.”
“We’ve taken on loans and repaid them on time, and that has led us to a position where we can expand into another area entirely; water-saving toilets. It is BEF that we turned to first because we knew they would be very supportive.”
Point and Sandwick Development Trust, Outer Hebrides – supported by Social Investment Scotland
Point and Sandwick Development Trust (the Trust) built and operates the UK’s largest community wind farm and has been recognised as leading the way in community renewable energy. CDFI Social Investment Scotland (SIS) provided £600,000 loan funding as part of an overall financial package.
It uses the income of community-generated wind power to support local social, cultural, educational, and environmental aims.
With the income generated funding projects of all sizes, the Trust provides significant support within the Point and Sandwick communities on the Isle of Lewis, and the wider Western Isles. It has invested over £1 million in a range of local, impactful community projects.
Donald John MacSween, General Manager, said “Point and Sandwick Trust was delighted (and relieved!) when SIS stepped in and confirmed that they would lend a substantial sum to complete the funding package enabling us to build our windfarm. The gift aid from the windfarm has supported our community, with over £1million to various social developments over the last few years: a considerable achievement for a complex development enabled by SIS.”
[1] Robins, N. (2020) The Road to Net Zero Finance.
[2] Cowling, M. Liu, W. (2021) Access to Finance for Cleantech Innovation and Investment: Evidence from U.K. Small- and Medium-Sized Enterprises: IEEE Transactions On Engineering Management.
[3] Robins, N., A. Gouldson, W. Irwin and A. Sudmant. (2019) Investing in a just transition in the UK: How investors can integrate social impact and place-based financing into climate strategies. London: Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science.
[4] Trades Union Congress (2021) Safeguarding the UK’s manufacturing jobs with climate action: carbon leakage and jobs
[5] Mimeo: University of Derby.