ESG-Adopting Organizations to Gain Easier Financing Access

Author: Luiza Buserska, Corporate Communications Executive, CODIX, and TRF News Editorial Board Member

Receivables finance industry is configured as a key element capable of offering easier access to credit for many businesses that are struggling in the current economic context. However, the evolving landscape demands considerations regarding sustainability and regulatory compliance in funding provision.

Banks are starting to play an increasingly important role in the process of reducing carbon footprint and enhancing sustainability. Financing conditions for companies neglecting ESG standards are tightening, and this is logical also because of bank positions. Going forward, they will increasingly collect such information to report on their own ESG strategies.

ESG investments are on the rise and this trend is becoming the new way of doing business. The interest in financing such initiatives is increasing dramatically and this will be the trend going forward. Green transition initiatives require significant financial investment to meet goals. According to the European Commission, EUR 18 billion should be invested every year in the coming decades. The entire resource cannot be provided by the public sector and the private sector, each actor in the chain must be involved, work in a coordinated manner to mobilize and optimize resources. And this is precisely where banks play an important role in helping their customers transition to a more sustainable business.

At present, the ESG reporting framework is rather voluntary and simplified. In the future, however, we can expect more serious data collection and reporting, as well as tighter controls on audits. Larger organizations are more prepared for the new rules because they are used to disclosing and publishing information related to good corporate governance, which is accompanied by corporate social responsibility. At the same time, a significant part of businesses, especially smaller companies, are not fully oriented to what exactly is meant by "sustainability". It is mainly large business and the financial sector that are most familiar with it.

Moreover, there's the matter of the so-called "green claims", or greenwashing, which affects a number of industries around the world and cannot be overlooked by the Receivables Finance sector. Last year, the European Commission published common criteria against misleading and deceptive green claims, placing restrictions on the use of the word "green" by companies when it comes to their products or activities. But it's more a matter of communication and wording.

In this context, banks and their receivables finance divisions will have an increasingly significant role, as companies that implement ESG strategies will have an advantage in accessing financing. Apart from purely image benefits, every company needs financing for its growth and will have no choice but to adapt its policy to the expectations of investors. In this sense, disclosing information and ensuring transparency is an important part of its duties. From now on, however, those organizations that are managed sustainably will receive funding under better conditions. Companies must now conduct end-to-end analyzes of their supply chains, make a comprehensive assessment of the impact their operations have on the environment, and even the impact of their contractors and partners.

This transformation will be a process and will not happen quickly, although regulations will force it. All of this goes beyond the European Union (EU) and even small companies must make efforts towards sustainability, because if a company wants to operate in the EU, it must account for its ESG initiatives. On the other hand, there is also serious PR pressure, as well as pressure from customers who are increasingly aware of the environmental and community impact of businesses.

Businesses will gain a lot if they stop seeing ESG regulations as just an administrative burden and additional costs. On the contrary, companies which want to continue doing business and growing will have to change their business ethics. It's a path of no return – whether it's called ESG, sustainability or some other way. And this new business morality will be administratively enforced because it has to happen faster than it would happen naturally.

These processes will develop exponentially because companies will have to evaluate all their partners. In a few years, all market participants will have ratings, or at least some documents, from which the degree of sustainability can be quickly established.

Of course, the green transition implies changes at various levels, incl. maximum degree of digitization of processes. The change in attitude also helps to create the innovations that attract investment in the company so that it becomes part of the new type of economy. Companies should discover those indicators that would provide them with a competitive advantage in the supply chain.

The EU's concept is that the transformation of the economy will largely be facilitated through financing regulations, with banks playing a significant role in this process. It is they who should help businesses to find their way sooner if they want to be competitive on the European market.

No doubt, embracing sustainability is imperative for businesses' future viability and competitiveness, regardless of nomenclature. The financial sector's support and adherence to regulatory frameworks will accelerate this transformation, fostering a more sustainable and resilient economy.

This article was published by BCR Publishing, the leading provider of news, market intelligence and training for the global Receivables Finance industry: TRF News – Feb 2024.

The article was featured also on FCI’s website.

It was published also by the Italian Factors association (ASSIFACT): “Facts & News” Magazine, May 2024.