Why SMEs won’t ditch green intentions despite ongoing financial uncertainty

Small and medium sized businesses (‘SMEs’) face an unclear future. Hit with high interest rates, supply chain issues, increases in wages and a worsening cost-of-living crisis while at the same time demand for working capital has reached unprecedented levels. Conister’s research recently revealed that over a fifth of UK SMEs that required external finance over the last two years, were unable to access it. What’s more, over a quarter have had to stop or pause an area of their business because of a lack of finance.

You might assume therefore, that SMEs would ditch their green intentions – assumed to be too expensive and a ‘nice to have’. Indeed, a third of businesses surveyed in a recent study by Barclays cited financial constraints as the reason behind their failure to go green. 16% were concerned around the return on investment with green technologies and 19% of businesses said they only invested in greener processes because of regulatory demands. Seemingly at this time SMEs would move into survival mode and source the already depleted levels of capital from wherever they could get it, regardless of ESG or green criteria?

In fact, no, SMEs remain more committed than ever. SMEs are driving forward Net Zero targets, with two thirds saying they have a plan in place to reach Net Zero by 2050, according to Lloyds Bank’s Net Zero Monitor. Moreover, 7% of SMEs have already reached Net Zero emissions. Consumers have followed suit – Deloitte’s 2021 sustainability and consumer report found that 32% of consumers were highly engaged with adopting a more sustainable lifestyle last year and want brands to lead the charge. 64% of consumers want brands to reduce packaging, 50% want more information on how to recycle and 46% said they desire clarity on sourcing of products. Barclays’ research also revealed 75% of businesses situated across all sectors, have seen vast commercial benefits following the adoption and inclusion of green technologies in their operations.

So, what is driving this determination for SMEs to be green? One reason is cost. It’s not because SMEs have to be green but if they don’t, they’ll be paying much higher rates on financing. Lenders, both mainstream and alternative across the board, have adapted their models to offer the best rates for those firms that are ESG compliant and green. It’s a necessity not a requirement. For example, Conister’s current rates for financing are around 50bps less for SMEs that adopt a green approach.

The opportunity to be greener as an SME is great. In the UK, SMEs already represent more than 90% of clean tech enterprises and is therefore a significant driver of green growth. SMEs in the UK have already seen a drop in their running costs as a result of making more environmentally-focused investments. This is becoming an increasingly attainable option as green technologies such as solar PV systems are becoming more accessible, with initial implementation costs being offset in the long term.

SMEs are however continuing to struggle with accessing finance and, worryingly, this lack of availability is costing them and the UK economy in terms of growth at a time when it is needed the most. Yet apart from demonstrating a necessary commercial responsibility towards the environment, adopting more conscientious green measures make it more attractive to consumers and potentially help grow the business and provide a strong foundation for the future. Gone are the days where being green came at a price, SMEs are realising that to generate the necessary capital to grow and agree the best rates with lenders in an uncertain economic environment, it pays to be green.