Responsible finance providers are key to the UK’s shift to a sustainable economy
Responsible Finance's business blog considers how to have a fair transition to net-zero.
There is a growing consensus that the success of our move towards sustainable development and net-zero relies upon an increase in finance for the just transition.
The just transition is a ‘transition which delivers a resilient and zero-carbon economy that is fair for all’. This means that as the UK transitions to a sustainable economy, the environmental and social dimensions of change must be linked to ensure the whole of society benefits.
In practical terms, this means ensuring the phase out of high-carbon sectors does not leave workers and communities behind; it means local regeneration in affected communities and investment in reskilling for workers; and it means ensuring that the transition delivers positive effects for communities. This is where responsible finance providers come in. They help to create decent jobs and thriving businesses in deprived areas. This stimulates local economic activity, tackles inequality and promotes inclusive growth.
Small and medium-sized enterprises (SMEs) are central to the UK economy. They represent 99% of all private sector businesses and account for 60% of private sector employment . They often need external finance to help them launch, purchase equipment and grow. SMEs are particularly significant in deprived areas. They contribute to local regeneration, employment, innovation and social cohesion. Despite this, many viable small businesses struggle to access finance. The success rate of bank loans continues to decline and is now at just 63%.
Responsible finance providers are non-profit lending institutions that offer finance and support to people and businesses that cannot access finance from high street banks. They use finance creatively and positively to increase the social and economic wellbeing of the communities they serve.
Businesses struggle to access finance from mainstream banks if they are deemed high-risk due to a lack of trading history or insufficient assets for security. Responsible finance providers adopt a flexible approach to determining the viability of a business and can often provide support when mainstream lenders can’t. In 2019, responsible finance providers lent £78 million to over 4,000 businesses. This created 3,400 businesses and created and safeguarded 8,300 jobs. 93% of the businesses lent to had previously been turned down by a mainstream bank.
Responsible finance providers directly contribute to achieving most of the United Nations Sustainable Development Goals; a blueprint to achieve a better and more sustainable future for all. They contribute to fulfilling the goals indirectly too through the businesses they lend to.
For example, former fisherman Wave Crookers and his partner, Marine Scientist Laura Robinson, were able to purchase essential equipment for their commercial seaweed farm thanks to a £25,000 loan from responsible finance provider the Business Enterprise Fund. The couple were inspired to set up a business harvesting seaweed after discovering many of its surprising qualities. They initially harvested the seaweed from rocks to create products for food, baths, pets and restaurants. They then began to venture into seaweed farming with support from the Coastal Communities Fund. After seeing a significant increase in demand for their products and wanting to expand into bigger industries such as biochemicals, food additives, biofuels and biodegradable plastics, they approached BEF for funding.
Wave Crookes, director at SeaGrown, explained: “After setting up the company eighteen months ago, it’s magnificent to see our dream of a seaweed farm come to life! Seaweed has many phenomenal qualities, including soaking up of carbon, oxygenating and de-acidifying seawater, its ability to create biodegradable plastic and cut down ruminant animal methane emissions by up to 80%. All it requires is sea and sun to grow, so sustainability is at the heart of our business”.
Despite the growth of the responsible finance industry it still faces barriers, such as a lack of awareness and access to capital to on-lend. The government has a renewed impetus to work with responsible finance providers as it shifts towards a focus on sustainable development, and we would like to ask for its support for business lending responsible finance providers by:
Ensuring responsible finance providers have access to long-term and sustainable funding
This will ensure the sector has the capacity and capital to expand its reach and impact. The creation of a dedicated fund would allow a strong and capitalised responsible finance industry to increasingly build wealth, help move people out of poverty and reduce inequality of opportunity in communities.
Replacing access to European Union funding and facilities through the new UK Shared Prosperity Fund
It is vital that EU facilities which incentivise commercial investment into the responsible finance sector, namely EaSI, COSME and ERDF, are replaced in full by the UK's Shared Prosperity Fund. A UK Shared Prosperity Fund should be delivered through accessible, grass-roots organisations such as responsible finance providers.
Updating Community Investment Tax Relief to ensure it remains fit for purpose
Tax reliefs and guarantee schemes are tools widely utilised by the responsible finance industry to leverage commercial investment, thus increasing our impact. These tools need to be kept competitive to maximise social and economic return.
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