Highlighting the complexities of the SME green finance sector, new findings from the Lending Standards Board (LSB) examine the various challenges, opportunities, and strategies for banks and lenders to aid their customers on the path to sustainability.
The LSB, serving as the self-governing body for banks and lenders, has recently stressed the necessity for financial firms to comment on its protection Standards for business customers. The aim is to ensure these standards promote sustainability within the financial sector, leading to better customer outcomes.
A newly published report by the LSB scrutinises the availability of green finance products tailored to SMEs. Despite a rising demand and burgeoning interest, smaller businesses continue to confront considerable obstacles when seeking access to sustainable financial products. The limited uptake of these products clearly illustrates the issue, with the LSB identifying around 15 such products, offered by its registered firms, that are specifically designed for green purposes for SMEs.
Customer reach for these products varies extensively, ranging from nil to 500, across different firms and product types. Green loans, primarily targeted at SMEs aiming for efficiency improvements in their premises or travel methods, surfaced as the most frequent offering.
According to distinct research by the British Business Bank (BBB), approximately 50% of SMEs demonstrate an openness towards enhancing their environmental impact. However, factors such as cost, capacity, and uncertainty surrounding the availability of green finance options discourage nearly 47% of SMEs keen on minimising their environmental footprint. Additionally, only 22% are willing to utilise finance to bring about green changes.
The LSB also noted the considerable strain on SMEs due to a series of adverse economic events in recent years. This has amplified the focus on maintaining daily operations and handling escalating costs, leaving little room for exploring complex green finance options.
LSB chief executive Emma Lovell commented, “As the drive to transition to net zero continues to intensify, firms should be considering, across all finance products, how they can help customers to achieve their green objectives, whilst balancing the effects of the wider landscape. For customers looking to borrow or use finance to make changes that are positive for the environment, firms should be understanding how their products – whether they are labelled as green or sustainable, or not – can support the SME’s objectives.”
Further, the LSB report points out that most regulatory actions have so far concentrated on large businesses’ disclosure requirements and the tagging of investment products. The report stated, “However, the direction of travel is clear, and the wider financial services sector needs to consider how products and services are being used to support green or sustainable initiatives.”
The review of the Standards of Lending Practice for business customers, known as ‘the Standards’, is currently in progress. It will consider the issue of green finance for SMEs from the perspectives of registered firms and the wider industry. The consultation will also discuss how the Standards can intensify firms’ expectations relating to inclusion and support for business customers in financial distress. It will also explore whether digital channels used by firms to engage with business customers and offer them products require further enhancements according to the Standards.
While the Standards do not currently specify green products, the LSB emphasises that if the product falls within the Standards’ scope, the relevant requirements will apply.
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