One of the biggest challenges facing green SME businesses is their ability to tap into available pools of sustainable finance. Although South Africa boasts a mature financial sector with a strong institutional construct, it is geared to support developed businesses rather than start-up and early growth-stage SMEs.
Exacerbating the challenge is the high cost of finance from non-banking financial institutions. It's not only the cost of capital that acts as a significant barrier to financial inclusion for the majority of SMEs, but also information asymmetries and deal readiness challenges.
Catherine Wijnberg, founder and CEO of business growth agency Fetola explained that the funding gap, particularly for SME businesses looking for financing amounts of less than R1 million, is significant. These deals are deemed to be too large for microfinance, too small for venture capital and too risky for traditional commercial banks. Fetola’s in-house research into the SME funding gap reveals that 71% of SMEs need less than R1 million in funding.
Fetola’s recently released study "The Circular Economy Accelerator Report: A Roadmap for the Success of Small Businesses, Leveraging the Power of Sustainability." reveals that green and circular economy SMEs find it even harder to access finance in comparison to other SMEs for a variety of reasons, including the fact that the green economy remains a relatively new sector, and because green business models are new they are often accompanied by a high level of innovation risk.
“While green businesses are often designed to start small and scale rapidly, they typically lack sufficient collateral on their balance sheet to attract flexible growth financing to allow them to mature and scale. Furthermore, green SMEs often don’t have a financial track record, or data on their green and sustainable performance that would satisfy potential investors.
The latter is perhaps not surprising: sustainability tracking and reporting is a complex and specialised skill and one that few entrepreneurs are familiar with. These limitations mean that businesses frequently fall outside the risk-appetite tolerance thresholds adopted by traditional lenders,” Wijnberg said.
Nedbank launched The Nedbank Green Economy Fund which intended to provide funding for up to 100 startups in the waste, water, energy and agricultural sectors – the four sectors targeted by Nedbank’s Green Economy Strategy to create sustainable jobs and build wealth while furthering the United Nations’ Sustainable Development Goals. The green SME funding gap is not unique to South Africa.
An OECD report titled ‘Financing SMEs for Sustainability Drivers, Constraints and Policies’ points out that not only do green SMEs have to navigate a complex ecosystem consisting of public and private financial institutions, policy makers, regulators, fintech companies, Environmental, Social and Governance (ESG) rating providers, consulting service providers and auditors, amongst others, but they risk losing out on sustainability-linked finance due to their limited capacity to produce data on their sustainability performance including ESG assessments.
The report recommends that ecosystem stakeholders have an important role to play in providing SMEs with non-financial support to help them embark on the path to net zero and address knowledge and capacity related constraints within these businesses. It goes on to say that the provision of non-financial support must go hand-in-hand with the provision of financing.
That’s precisely what Hloolo, an innovative new digital platform that has been officially launched this week by Fetola, Nedbank, JP Morgan Chase and the Embassy of Finland, aims to do. Hloolo is the third phase of the Circular Economy Accelerator (CEA), an ambitious multi-year initiative designed and implemented by Fetola in partnership with Nedbank, JP Morgan Chase and the Embassy of Finland. CEA was launched in 2021 to create a thriving circular economy ecosystem in South Africa. Phase three (Hloolo) is dedicated to closing the gap between green businesses and the world of finance and market opportunities.
“Nedbank is proud to be part of Hloolo, an innovative and ground-breaking initiative that builds on the phenomenal success of the CEA, in which over 100 small businesses have benefited from targeted circularity training and business growth support. As the business case for sustainability and circularity becomes increasingly stronger, Nedbank is committed to assisting SMEs to become more resilient and investment-ready which will help unlock commercial funding thus fast-tracking their growth and ultimately their impact,” said Maluta Netshaulu, Senior Lead Green Economy portfolio for Corporate Social Investment at Nedbank.
Nedbank’s Green Economy Strategy, he reveals, aims to make a positive social and environmental impact and contribute meaningfully to achieving the United Nations Sustainable Development Goals.