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The rise of ethical finance

Perttu Jalkanen, co-founder and CCO, AREX Markets

There is an ESG (Environmental and Social Governance) revolution underway, and it is already having an impact on how people approach their service providers, at least in the personal finance space.

For example, did you know that, globally, almost three quarters of consumer banking customers would rather deal with institutions that put purpose ahead of profits? Or that 58% would pay a premium to access services with strong ESG credentials? The influence of ESG on the markets is already widely noted – but it is starting to reach well beyond these spheres, especially following the high profile environmental discussions of COP26. Seeds are being sown for this focus to also grow in business finance environments too, and the ESG winds are increasingly blowing into accountants’ territories.

Ethical finance is already established, if not widespread, in the consumer banking space – typically through socially conscious institutions including cooperatives and credit unions, But as consumer and market trends accelerate, they will spill over into how people choose to run their businesses too. Here’s three reasons how ethical finance will seep into the accountancy profession, and why you should care.

  1. Simply offsetting ESG issues is no longer enough. When it comes to carbon emissions, offset has been a sticking plaster for many businesses for some time – allowing them to be seen to be doing the right things, but without truly addressing root issues or action. Similar ‘offsets’ have been ongoing within business banking, such as proactive business education programmes which still charge high fees to access some business finance products. Because of ingrained and longstanding processes, many such institutions are like huge oil tankers, unable to change direction quickly. However, business owners voting with their feet and heading to more agile and supportive competitors may provoke a rethink.

If the impact of ESG continues at current pace, it should soon be as important a consideration to a business when selecting suppliers, as it is that their business succeeds. This issue is already at the very core of ESG compliance assessment, rolling out through some of the biggest multinational businesses as we speak. This shift will continue to trickle down as their own suppliers are forced to assess their own environmental and social acts, and on again to their suppliers in turn, down a virtuous chain. Root and branch assessment and reform is already happening within big business at least when it comes to their own ESG compliance. It should be acknowledged and adopted by smaller enterprises now, before it is enforced upon them.

  1. New market entrants are challenging established institutions and old, imbalanced rules. Many of these market ‘dinosaurs’ were set up with the scales tipped firmly in their favour. For example, when it comes to offering business credit and finance options, this imbalance is so endemic that it’s almost unquestioned that the lender will take a hefty slice in interest on these transactions. Almost.

Alternative finance options like us see this as not only deeply unfair but also stunting the potential of smaller businesses, especially during their times of trouble. Just as Covid has forced a reappraisal of the office environment by companies who were long-term wedded to the model, so too growing and positive implications of ESG will influence the businesses companies want to work with. Businesses will soon have much clearer information about the purpose and actions of organisations they will be dealing with, and the ones with active social and environmental benefits will have an edge. Many of the new business breeds have been set up with more ethical principles at their core.

  1. It’s just good business. No-one, whether business owner or personal banker, wants to feel like they have been taken advantage of, or inadvertently backed something dodgy. In the stock markets this means funds are declaring they decline to invest in fossil fuels. On a level playing field, if all other terms are equal, most people would certainly pick a financial product or provider where they are certain the business roots are solid, and that the founding principles align. When it comes to longstanding business banking, this should come as a welcome change.

For too long, many have felt hamstrung by poor terms when it comes to company finance offers, or simply turned automatically to the local bank branch for support. Now, with new funding and finance options appearing all the time driven by the tenets of open banking, it is much easier for businesses to find new financial options to help them.

The role of the accountant in relation to SMEs is pivotal. Accountants will be key to communicating the ESG-driven benefits and compliance principles of new providers and suppliers to their clients. After all, compliance is still the accountant’s stronghold.

The ESG winds of change are blowing, and accountants need to acknowledge this will have an influence on their work. Whether it comes in the form of having information to hand about businesses and products’ ethical credentials, or only recommending to clients from a pool of such providers, professionals may soon find customers coming to them and seeking more proactive ESG-themed support. Accountants need to make sure their market knowledge is ready to respond.

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