In association with Leaseurope and Eurofinas
While businesses may care about the environment and have plenty of good intentions, enforcing strategies and roadmaps and putting them into action is more challenging. Some approach the transition with a quiet determination to push things through, while many simply don’t want to pay to protect the planet or see it as too difficult to action.
However, the prospect of exchanging “dirty assets” to green ones offers opportunities for the asset and equipment finance industry to potentially make profit whilst at the same time acting on caring values. Equipment finance is in the right place to support the energy transition as well as considering how to take on the added residual value and credit risk.
But how can we turn the ESG dream into a reality? Odile de Saivre, CEO of SGEF, and Sacha Balachandran, Head of Equipment Finance at HSBC are senior representatives and knowledgeable leaders from two global banking groups, where ESG is a critical part of the parent bank’s strategy. In our recent Asset Finance Connect ESG webcast, they talked to AFC’s equipment finance community leader John Rees about getting into the details to make their ESG strategies happen.
The growing impact of socially sustainable business
Social factors have gained greater attention since the Covid pandemic forced working and living practices to change, highlighting the social issues that were already there.
With social issues being brought to the forefront, Odile and Sacha highlighted the growing impact of socially sustainable business and its importance in staff management and motivation. The importance of building a socially sustainable workforce through talent acquisition and retention is critical to futureproof our businesses, according to SGEF’s de Saivre: “People are key in our business for today and for the future.”
Both Balachandran and de Saivre are passionate about the importance of recruiting, retaining and motivating staff, and making sure that company values are consistent with modern values.
As de Saivre notes, we cannot do business the way we were doing it before, with Covid shifting the boundaries between professional and personal life, along with the expectations of people of all ages. Business is changing, assets being financed are changing, and there is an acceleration in striving for a positive impact for the planet. In these changing times, de Saivre believes that businesses need expertise and mindset: “people who can think out of the box and are motivated to go to work; they can be the future leaders of the business.”
For Balachandran, ESG is vital in recruiting and retaining staff, along with the alignment of a company’s purpose and values: “Existing and new employees want to align their personal values with a company’s values and purpose, and see the impact they can have both personally and in their workspace.”
Great companies need to follow up on the claims they make to prospective employees on their alignment with sustainability and D&I objectives, with positive action to ensure that is what new employees actually experience when they start work. According to HSBC’s Balachandran: “Sustainability is about being relevant, reliable, resilient and responsible, and that touches not just the environmental piece, but diversity and inclusion as well. If you’re not addressing those points, then you should question how sustainable you actually are and what that means for an individual wanting to join your organisation.”
A company’s culture is of the utmost important, according to de Saivre, with SGEF’s Care and Dare strategy putting ESG at the centre of SGEF’s vision. The Care and Dare motto focuses on the future and the planet and goes beyond ESG. ‘Care’ highlights the need for “true alignment” with employees’ values and the impact these values can have.
To ‘dare’ is to push the boundaries, linking to entrepreneurial innovation that is needed in the industry. Whilst guidelines are needed, innovation and experimentation are essential to confront new ways of looking at things. The industry needs to dare and take risks, but this can be difficult to implement in a larger organisation due to understanding and accepting new risk factors. Individuals need to be allowed to experiment and take “new” risk in order to feed innovation and new transactions, according to de Saivre who commented that, “if you want to move forward, you have to dare.”
As part of HSBC’s leadership team, Sacha Balachandran promotes the encouragement of employees, giving them the space to be entrepreneurs (both internally and externally). As well as challenges, there are also benefits to working for a big banking organisation: you can attract diverse talent across the group (from different markets, jurisdictions, experiences) and can leverage the brand. This helps to build diversity of thought, experience and skills, which in turn has the ability to challenge the status quo.
In the Circular Economy Action Plan of March 11, 2020, the European Commission highlighted the move away from the prevailing “take-make-use-dispose” model of the linear economy into a circular economy to keep the resources used in the economy for as long as possible. Resources should be used efficiently, with every phase in a products’ lifecycle being designed to ensure the product, and its individual components, are used to their maximum potential.
Many asset and equipment finance companies have been promoting the transition to a circular economy for a number of years, focusing on refurbishing and recycling their assets and components to ensure that assets are used throughout their lifecycle and recycled accordingly.
The leasing industry is circular in its very nature since the primary goal of companies active in the sector is to ensure that the assets remain in good working condition for as long as possible. Leasing can actively promote a circular economy by encouraging customers towards use as opposed to asset purchase. This massively reduces the amount of wasted resources since customers no longer dispose of assets once they have finished using them. Instead, customers simply return the asset to the leasing or rental company, who are well placed to either re-lease the asset to another customer, re-sell the asset, refurbish it for a second/third life cycle, or (where appropriate) dispose of or recycle the asset safely.
Balachandran noted that HSBC Equipment Finance works with partners to support circularity in terms of reuse, refurbish, redistribution and resale of assets as they come to the end of their first life. While some assets can go beyond their normal maturity and are naturally easier to reuse, refurbish and remarket, for example, buses and construction equipment, there can be a challenge to fund the second and third life of some assets. You need to be very knowledgeable as an asset financier with the asset and its use, and how to extend the life of the asset.
SGEF and its vendor partners see that assets can be used after their first life and are willing to make sure that the secondary market is ready and under control in order to help to refurbish and remarket these assets. Developing a reselling strategy for reused assets presents a number of new opportunities. Many manufacturers are developing spare parts and refurbishing assets as it is becoming increasingly important to them and their ESG strategy. SGEF is becoming increasingly comfortable to finance the second or third life of assets.
Usage-based pricing models are being introduced across the industry as a more beneficial financing option for the environment. While HSBC supports businesses who have adopted the pay-per-use model, they have not actually used the model for funding themselves. However, Balachandran believes that there is a place for usage-based and subscription models from a portfolio approach.
SGEF are increasingly seeing ‘as-a-service’ models, particularly equipment and energy ‘as-a-service’, with SGEF financing some of these transactions. These are new offers and understanding the risk factors associated with such products are key to the product development.
Transition to greener assets
As we transition to new greener assets, we must find the right ‘balance,’ according to Balachandran. Balance cannot be understated and is very important as customers, clients and assets are all at different stages of their journey and therefore no one-size-fits-all approach will work. There must be alignment.
The move to greener assets presents a big dilemma for the equipment finance industry. On the one hand, green assets are good for the planet, but on the other hand these green assets are frequently more costly and potentially present a greater risk with differing or uncertain residual values.
To prevent customers doing a U-turn reverting to older assets and technology, many industry players feel that governments must step in to help the transition to greener assets. There needs to be wider collaboration with governments in terms of incentives, funding and risk sharing. De Saivre points to a “collective movement” of governments, manufacturers and financiers to help with this transition and enable the industry to move further forward.
Partnerships in the ecosystem
Both Odile de Saivre and Sacha Balachandran believe that collaborations are critical to ESG strategies and building ecosystems is extremely important.
“Partnerships are very important for ESG strategies,” according to HSBC’s Sacha Balachandran, “the reality is that you can’t do it alone.” While some partnerships are informal (education, upskilling), others are more formal (RV risk sharing).
During the webcast, SGEF’s Odile de Saivre noted that a new combination of expertise and techniques is needed to achieve a successful ESG strategy. Ecosystems will grow and develop, but businesses must be open to partnerships with new start-ups who are more agile and risk averse and can help to move businesses and their strategies forward.
Throughout the AFC ESG webcast, Odile de Saivre and Sacha Balachandran discussed how the equipment finance industry cares and how it plans to deliver on caring for the planet and its people.
We need to be brave to dare in this industry, but we also need to deploy some of that entrepreneurial innovation that is exhibited in the asset and equipment finance industry to succeed with ESG.