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Social Impact The forgotten ‘S’ in ESG
Fintech lenders must look to their social responsibilities as their achievements grow
Adam Marks VP business development, Fintex Capital
ESG has, today, become a key focus for the investment community in recent years, and as more institutional money comes into private debt, the more ESG will be at the forefront of investors’ minds. In a recent survey by Federated Hermes,
88% of institutional investors said that ESG factors play a central role when making long-term investment decisions and are seen as more important than traditional fi nancial metrics. Despite the growing importance of ESG,
the three strands have not always held equal weight. Whilst the movement generated around the climate crisis means lenders’ strategies heavily account for environmental and sustainability considerations, for example, the social aspect of ESG has at times been overlooked. This is the ‘forgotten S’ – and ‘S’ in the
private debt world can mean a number of diff erent things. Firstly, on the investment side, it means backing those who are supporting
One area in which private debt companies are working to increase their social impact is by providing capital to those underserved segments in society
people who do not have easy access to capital. Secondly, it means private debt companies supporting the community they operate in. Following the 2008 fi nancial crisis, banks and other traditional lenders withdrew from markets. New regulation saw a tightening of credit conditions, as banks needed to hold more provisions against certain types of loans. Furthermore, there was reduced appetite to lend in areas that were seen as high risk and low reward.
By late 2009 banks had considerably tightened their belts – LTV ratios had fallen, credit card availability was cut (by early 2009, off ers to households for new credit cards had dropped to around one-fi fth of their count in 2006) and in the UK consumer repayments were outstripping new borrowing. Overnight, a whole section of ‘subprime’ society had essentially lost access to fi nance. When traditional lenders withdrew from
the market, Fintech lending emerged. They had a low-cost base and used the latest technology such as open banking to better assess credit worthiness, ensuring they were lending responsibly. Many fi ntech-focussed fi rms saw these exciting new technologies as an opportunity to establish an alternative to traditional bank lending and ultimately democratise access to fi nance. One area in which private debt companies
are working to increase their social impact is by providing capital to those underserved segments in society. We have worked with a number of organisations, including auxmoney in Germany and Upgrade in the USA, to fund consumer loans to those who would otherwise be unable to access capital. Lenders are also increasingly able to apply sophisticated pricing models supported by AI to help lend to this segment. Small business lending is another area in
which private debt companies can make a real social impact. Small businesses are the lifeblood of the
British economy, with SMEs accounting for 99.9% of the business population (5.5. million businesses); following the 2008 fi nancial crisis, however, the big banks considerably reduced their lending risk appetite, meaning small businesses have had to look elsewhere to access vital fi nance.
30
www.CCRMagazine.com May 2022
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