Three reasons financial technology works for green SMEs
For years, technology has been adopted by large organizations to streamline operations with little innovation. Advances in technology and data management capabilities now provide an opportunity to disrupt traditional financing, create new value in the green economy, at large scale and with reduced transaction costs. Fintech – short for financial technology – has become the new buzzword and it has already seen tremendous success in crowd funding and market lending areas.
Fintech is a boon for small and mediumsized enterprises (SMEs) that have a positive impact on the environment in addition to a sustainable economic case – such businesses are referred to as green SMEs. Today, green SMEs have a hard time getting funded because they do not fit into a given box within mainstream finance – they are not a separate asset class. In other words, there are few common tools to evaluate risks and returns involved in such investments. In turn, traditional finance will not allocate new resources to design new boxes if they don’t amount to a significant scale, creating a ‘catch-22’ scenario. All that is about to change.
This year’s international context holds much optimism for green SMEs thanks to a few milestones from 2015. In September, United Nations member states decided to support a new set of Sustainable Development Goals that include ending poverty, access to clean and affordable energy, access to water and sanitation and many other aspirations for a better more sustainable world.
In Paris last December countries adopted a global treaty that confirms a universal desire to stop the growth of greenhouse gas emissions and limit the effects of climate change, with finance as a key enabler for the green economy.
At the risk of hyping my own industry (I am a fintech founder myself), it is easy to see how this new context creates vast opportunities for financing environmental enterprises. Within a legal framework that looks far into the future, investors have more certainty that the impacts their investments will achieve will be as valuable as their financial returns over a longer timeframe.
Now is the time for SMEs that have a positive impact on the environment in any sector, be it energy, water, waste, retail and others, to take advantage of financial technology to become attractive to investors. There are three reasons fintech will work for green SMEs:1. TECHNOLOGY CAPTURES THE FULLNESS OF THE GREEN SME GLOBAL OPPORTUNITY.
SMEs can represent up to 95% of an economy while providing up to 70% of jobs and delivering on average 50% of GDP. In developing countries fintech innovations leapfrog traditional SME finance. Crowdfunding, crowd-lending, mobile payments, dealsourcing platforms and other financial technologies get entrepreneurs closer to their funders, diversify the type of funding and multiply the channels through which funding can be assessed and allocated.
Green SMEs have a huge untapped potential to create sustainable livelihoods and deliver economic growth. If green SME finance is not available locally, significant amounts are available to access internationally, especially through impact investment. Traditional financing involves a 1-1 relationship between investor and investee. Fintech connects entrepreneurs and investors across borders, with little intermediation and lower transaction costs. One can just look at mobile payments to see the expanded opportunities that technology brought to both individuals and entrepreneurs.2. THERE IS NEW VALUE TO UNCOVER IN GREEN SMES.
There are numerous organizations around the world that work with green entrepreneurs. They help design business plans, coach founders, provide seed funds, organize competitions and raise awareness on green products and services, their impact and their viability.
By themselves, these activities are incredibly helpful to SME entrepreneurs. However, there is a missing link between good business information about an SME and the decision-making processes that investors follow to allocate capital to certain enterprises. As we said before, green SMEs do not fit into a well-defined asset class.
Fintech disrupts the traditional flow of information and decision-making processes by bringing information closer and faster to many more investment decision-makers at the same time. Take for example crowdfunding platforms or mobile payment platforms. By standardizing information, lowering transaction cost, and spreading risk across many funders, they increase and diversify the opportunities available to both entrepreneurs and funders at the same time.3. THERE IS GREAT POTENTIAL IN AGGREGATION.
By themselves, SMEs are often too small
considering the transaction costs that the
investment process entails. Many investors
have a hard time sourcing good quality
green SMEs with attractive returns. Given
the lack of comparable data and benchmarks,
project origination and due diligence
can be time consuming and costly.
Fintech addresses this problem by standardizing information. Fintech platforms create the necessary conditions for aggregation. From establishing a dedicated country program that responds to the needs of local SMEs, to structuring a financing instrument with the full knowledge of the type and quantum of funding needed, standardization and data aggregation can provide a more accurate guide for scaling investments into green SMEs.
Later this spring, The Ground_Up Project aims to unleash the full potential of technology to aggregate and connect portfolios of green SMEs that have viable projects in energy, agriculture, tourism, transportation, water, waste, retail and other sectors. This will be a useful and valuable tool for investors looking to deploy capital towards financial returns and positive environmental impact.