Key factors in the future of sustainable finance

Daouii Abouchere, Head of ESG and Sustainable Finance at Channel Capital Advisors, was one of many specialists we were privileged to have on stage at our recent Lendscape Live event. Recently announced as one of Forbes 30 under 30 and a member of the World Economic Forum, Abouchere is responsible both for Channel Capital’s overarching sustainability strategy and bespoke sustainability solutions to meet the needs of clients, investors, and borrowers.

As well as joining us for a lively panel discussion on the challenges and opportunities of sustainable finance, Abouchere also talked the Lendscape Live audience through some of the forces driving it forwards – including the vital role that the SME market plays. Here, in abridged form, are some of the key points she made on the day.


Global megatrends are pushing ESG concerns up the corporate agenda

Abouchere believes the turbulence and uncertainty of the past few years has only helped heighten the importance of ESG. She noted that both the markets and our own lives are affected by external shocks more now than ever, and the idea that businesses can operate in isolation from environmental, social, and governance issues is fundamentally flawed as a result. 

Four issues can be linked to the growing importance of sustainable finance. 

  1. From an environmental perspective, the climate crisis has considerable economic implications; data from the Swiss Re Institute suggests that a 3.2 °C increase in global temperatures would wipe out more than 18% of the world’s current GDP.
  2. On the social side is the continuing uncertainty caused by both the pandemic and the subsequent “great resignation”. The result is a volatile global economy and one in which many companies are struggling to maintain their operational efficiency.
  3. As diversity and inclusion dominates discussions around governance, the behavioural shift towards purchases based on principle rather than product has been a massive awakening for businesses - consumer-facing companies, in particular (although this has a massive impact upon the upstream supply chain too).
  4. Finally, there is the impact of recent global events. From companies facing consumer backlash for refusing to pull their operations from Russia to the rising price of wheat and oil, the past few months have made markets more unpredictable.


The focus on sustainability isn’t just going to disappear 

Sustainable finance has seen a notable rise over the past few years, buoyed by the factors mentioned above. Yet Abouchere believes it will not be a fleeting trend.

The climate crisis, for instance, is an ongoing concern – one that needs a long-term, viable solution(s). In many cases, the regulation surrounding the COP26 pledges means that corporations (and eventually SMEs) will be bound by certain ESG-adherent behaviours in those economies.

Even beyond that, ESG is now treated as a triple bottom line risk strategy - one that can help businesses solve their operational inefficiencies and become more sustainable. Many CEOs have started to view sustainability as a prudent risk management framework, one that helps protect against the risk of assets not being refinanced. 

Abouchere notes that companies which manage their material ESG factors well tend to deliver better investment performance and provide more downside risk protection from volatility. Additionally, as society demands changes and contributions towards ESG factors by the brands buy from, and as businesses shift towards stakeholder capitalism, sustainable companies are increasingly considered premium investment targets. Little wonder that 2021 saw a record $859bn of sustainable investment.


SME lenders can deliver immense value in this space

Abouchere believes the unique circumstances under which SMEs and lenders operate means that they can have a noticeable impact on the future of sustainable finance. Why?

  1. Supply chain finance is focused on the “real and now” – offering tangible products with real economic outputs and, in Abouchere opinion, lenders can have far greater influence with SMEs.
  2. While SMEs have a significant environmental footprint on aggregate, they can also make a major contribution to reaching net-zero through innovations and green efforts.
  3. It’s easier for lenders to nudge SMEs towards sustainable actions than it is for large corporations. With the shift towards sustainable investing, doing so can also help protect their long-term access to capital.
  4. Sustainable finance also serves to build supply chain and SME resilience. Used as a risk management policy, it not only improves their credit portfolio performance but helps mitigate reputational, operational, and financial risks.

With many companies rethinking their supply chains in the wake of the pandemic, Abouchere also noted that SMEs have a growing opportunity to influence ESG behaviours outside of their organisation.

As well as their “direct” impact – that which surrounds their practices, policies and initiatives, SMEs can also influence both “up and downstream”. Upstream, they can encourage and support suppliers to adopt more socially and environmentally friendly business practices. Downstream, they can do the same with their customers – something that with the right approach can also be used to gain market share.


The concept of sustainable materiality provides focus

Abouchere notes that with ESG - as with anything in business - you can’t boil the ocean. It’s essential to focus on the issues that truly matter, and sustainable materiality provides a convenient way of working out what those are.

Sustainable (or ESG) materiality helps to identify how relevant a sustainability factor is to a company’s business model based on value drivers like revenue growth, margins, required capital, and risk. Certain factors are more relevant than others, and they can vary wildly based on sector, company, and geography.

Abouchere noted the excellent work done by the Sustainability Accounting Standards Board in helping to map those factors out by industry – something that serves as a great starting point for anyone exploring their ESG initiatives.

Huge thanks to Daouii Abouchere for such an engaging and informative session. We’ll have more from Lendscape Live 2022 on the blog soon.

Article written by:

Iain Gomersall