- Dr Elmar Puntaier and Dr Tingting Zhu
SME Green Finance Forum 2022: Reflection and Outlook
Updated: Jul 31, 2022
By Dr Elmar Puntaier and Dr Tingting Zhu, Organisers of the event
It all began with a budget given to us to organise an event that contributes to the exchange of scientific knowledge and establishment of a collaborative network. With sustainability being a contemporary phenomenon, it was clear that any event would at least need to touch on this topic. We went for the bull’s eye and chose to take a closer look at Green Finance and what it means for small and medium-sized enterprises (SMEs). SMEs are a cornerstone in both developed and developing economies and without their engagement in sustainable business practices our future looks pretty dim and achieving net-zero by 2050 becomes unrealistic. What followed were exchanges with leading scholars in the field and eventually four of them agreed to present: Professor Per Linus Siming from Free University of Bolzano (Italy), Professor Chendi Zhang from University of Exeter (UK), Associate Professor Yukun Shi from University of Glasgow (UK) and Professor Guido Massimiliano Mantovani from International University of Monaco (Monaco) and University Ca’Foscari Venice (Italy). It was a pleasure and honour to have these speakers on board to hear about ‘The importance of banks in helping SMEs obtain green finance’, ‘Sustainable investments: challenges and opportunities’, ‘Emerging issues in carbon trading and its implications for SMEs’, and ‘Assessing the human contribution to long-term sustainability of corporate performance’.
We held the event online and although we have got used to technical hiccups, we could do without them. But we were glad to see that the event was well attended and two thirds of the registered attendees made an effort to turn up, some of whom got up at 4am, while others certainly missed their evening out due to the time zone differences. The insights and perspectives that were given by the presenters, however, did not disappoint.
From Per Linus Siming, whose presentation was based on the study by Bedendo et al. (2021), we learnt that green loans cover a rather narrow spectrum of investments mainly related to buildings, transport and energy consumption or production. The issuance of bonds to investors and the proceeds banks receive in return can then be handed out to companies in the form of loans. As issuing bonds comes at a transaction cost and requires a minimum loan volume to marginalise it, engagement with small borrowers becomes ineffective. Large banks would have wiggle room in this by balancing their loan portfolio, but it is not the largest banks who hand out most loans. It is the smaller ones who also show persistent engagement in green finance and, unlike large banks, are less driven by a political agenda. With information asymmetry being greatest for SMEs, the quality of information passed on to lenders and the evaluation of the impact investments have matter. Lenders must ensure that loans are used for the intended purpose in order to convince and gain support from their investors. The lender-borrower relationship is therefore a crucial element in making green loans a feasible option and in this regard Basel III has done us no favour.
An assessment of the S&P500 companies and how these performed during Covid-19, presented by Chendi Zhang (see Albuquerque et al. 2020), reveals that environmental and social policies produce corporate resilience. Their work has been cited nearly 400 times in just 2 years and it is as if we have been waiting for this to be scientifically evidenced. We know that cash is king, especially in times of crisis, but what is new is that companies with higher environmental and social scores produce higher returns that are less volatile. The key drivers are loyal customers and investors. While the literature is mixed when it comes to the question whether investors are willing to give up wealth in exchange of doing good, Professor Zhang and colleagues have put forward the case for a scenario where both investors and companies mutually benefit from engaging environmental and social business practices. For SMEs this means that crafting business strategies that actively engage and expand a loyal customer base is as important as knowing how to convince investors to buy in to the idea of environmental and social engagement. Loyalty results in commitment in good and bad times, but, as Professor Zhang rightly pointed out, the long-term effects are not yet known and it requires educating investors to ensure they are aware of the benefits associated with loyalty. Their collective contribution to economic, environmental and social stability must not be underestimated.
Yukun Shi, who has built an expertise in carbon markets and presented an overview of approaches, trends and emerging issues in handling the environmental footprint at national level, showed that much of Europe has a preference for carbon trading as opposed to carbon taxing or the provision of carbon credits. The benefit of carbon trading is the absolute limit that is imposed at aggregate level and while it might be effective in working toward the net-zero target, it is a mechanism that excludes many SMEs. We explored this further in the panel discussion and it turned out that it is not SMEs who are the main polluters, despite making up the largest share in terms of employment. Indeed, employment is one of the many benefits that justify the existence of SMEs, but their contribution to environmental sustainability is still required for two reasons. First, the price attached to carbon emissions is high and reducing them is costly. Hence, the low-hanging fruit should be picked and there are ways to do so. Second, reducing emissions in the first place is less expensive than mitigating the consequences of inaction. To achieve this, taking into account the structural characteristics of SMEs when designing policies is central to the intended outcome.
The fourth presentation was delivered by Guido Max Mantovani, who is, again, a well-known figure in the world of corporate finance. His central message links to the role of the human within the organisation and the value lenders attribute to the business owner. The argument boils down to the entrepreneurial capabilities and how these are measured when funding small businesses. Professor Mantovani explored this in great detail in his book entitled ‘The Financial Value of Entrepreneurship’ and makes the case for a shift away from the Q ratio and toward a T ratio. While decisions made within organisations are to some extent a black box, his evidence is unambiguous. Human competence in the form of entrepreneurial action adds value and could be the pathway to sustainability. Although this is an argument the entrepreneurship literature has made for decades, Basel III undervalues human competence and promotes the funding of non-sustainable companies. As such, we do not need a new generation of SMEs that are greener nor do we have the time to start over. We must fix the structural imbalances, let SMEs and entrepreneurs do what they are good at, and support and encourage well-intended ideas that lead to production and consumption that is sustainable in the long term.
Climate change is happening and temperatures of 40°C observed in the UK on 19th July 2022—a day when it was warmer in Leicestershire than in Barcelona—do not seem right. We have learnt that inaction is expensive and that banks play a central role in funding the transition to net-zero as does the loyalty of customers and investors. But the allocation of capital requires structural change, policies and mechanisms that account for characteristics in firm-size classes and to reduce information asymmetry we need to get better at measuring the impact of engagement in sustainable business practices. Controlling carbon emissions requires a multi-level regulatory framework that provides incentives to underprivileged groups and taxes those companies who can afford to pay for the negative externalities they generate. Splitting the risk associated with investments that are needed to achieve net-zero from conventional business risk might become a necessity if we are serious about limiting the damage caused by climate change. And, as Professor Mantovani stressed in his final remark, academics and developed economies have the duty to pass on the knowledge to those in need.
The quality of the SME Green Finance Forum exceeded our expectations and we hope that the above synopsis serves as an outline of the challenges that lie ahead. We crafted this blog in non-technical language to ensure the message is understood and because the insights gained from this event are too important to be forgotten. We hope that it encourages future research, knowledge transfer and policy design in the proposed directions, and sensible change at operational level. It was a pleasure having a distinguished panel of experts presenting and sharing their views and we thank our audience for having entrusted us with the delivery of an event that, we hope, has inspired and makes a positive contribution toward sustainable growth.
Albuquerque, R., Koskinen, Y., Yang, S., & Zhang, C. (2020). Resiliency of environmental and social stocks: An analysis of the exogenous COVID-19 market crash. The Review of Corporate Finance Studies, 9(3), 593-621.
Bedendo, M. and Nocera, G. & Siming, L. (2021). Greening the Financial Sector: Evidence from Bank Green Bonds. SSRN. http://dx.doi.org/10.2139/ssrn.3959745
Mantovani, G. M. (2017). The Financial Value of Entrepreneurship: Using Applied Research to Quantify Entrepreneurial Competence. Springer.
Philip, D., & Shi, Y. (2015). Impact of allowance submissions in European carbon emission markets. International review of financial analysis, 40, 27-37.
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