SMEs at different stages of ESG journey, targeted help needed to reap benefits: Industry players

SINGAPORE – Singapore modular solar panel company Photovoltaic Foundry expects to see its revenue increase from $2 million to $3 million in 2023.

That is a 50 per cent growth and the realisation of a dream six years in the making for the company’s founder and chief executive officer Liong Hang Cek, thanks to a $650,000 green finance loan he received from DBS Bank.

With the loan, he was able to unlock another revenue stream: a power purchase agreement (PPA), which refers to a long-term electricity supply agreement between two parties.

Previously, Photovoltaic Foundry’s customers had only one option – to buy and maintain solar panels. With the PPA, potential clients now have a separate option – to buy the energy generated from the solar panels installed on their building at a discounted price.

The money from the loan is used to finance such projects.

“Typically, it’s hard for an SME to expand our balance sheet,” said Mr Liong, who started his company seven years ago. “This year, I expect revenue to grow substantially provided I continue to get green financing.”

Mr Liong said his company’s carbon footprint is “very negligible”, with six staff taking up an office space of less than 100 sq m, so much of their time is spent thinking about how to reduce their clients’ carbon footprint.

Being able to help other companies reduce their carbon emissions and improve their environmental, social and governance (ESG) score is, however, not the norm among small and medium-sized enterprises.

Stakeholders, such as banks advising companies on their green efforts, say SMEs are often unsure how to go about doing so for their own businesses.

Although there are green loans for SMEs offered by the various banks here, some businesses may not yet be at the stage where they can apply for these loans, due to their lack of knowledge about ESG and how to use it to transform their operations.

Mr Will Longhurst, who heads business development at HSBC Singapore’s commercial banking unit, said the bank has seen strong year-on-year growth in sustainable finance deals within the SME space here, as well as greater traction surrounding the social aspect of ESG – but challenges remain.

“We observed that there’s still a wide knowledge gap and lack of understanding of how SMEs can go about building greener businesses,” he said.

Mr Kurt Wee, president of the Association of Small and Medium Enterprises, said SMEs need help in understanding how ESG can affect their trade flow.

“They understand the concept of sustainability, supply materials and energy savings, but are not aware of how to embark on their ESG journey and how to link that to a practical business outcome,” he added.

He said the process for them could look more like a redesign of their business model and operations. Businesses involved in manufacturing, for instance, could begin by sourcing for sustainable raw materials, which may not require a tremendous amount of financing.

Apart from that, Mr Wee also advised businesses to start tracking their company’s ESG metrics. Currently, only listed companies are required to disclose their ESG data.

Ms Rapheal Erasmus, Citi’s Asia-Pacific head of sustainability and corporate transitions at its investment bank division, said that disclosure is important.

“It puts the obligations on companies to measure their own emissions and really think through how they are going to manage their risks and opportunities,” she said.

“Asia as a region is particularly exposed to climate physical risks, such as from floods, heatwaves and sea-level rises, which can have a large knock-on impact on economies.”

Many of the clients she advises at Citibank are bigger corporations, and conversations with them are of a slightly different nature from those with SMEs.

“Some are more forward-thinking, integrating their transition plan into their overall business strategy and pivoting to take advantage of the net-zero growth opportunity to realise value creation,” Ms Erasmus said.

The concerns of these bigger corporations eventually trickle down to the SMEs, most of which are either suppliers or part of the value chain of these companies.

CW Aero Services, which provides solutions for fleet management and the electrification of vehicles used at airports, is one of them.

CW Aero Services applied for and received a loan of about half a million dollars from DBS to finance its investments and projects. PHOTO: CW AERO SERVICES

The company, which counts Changi Airport Group as one of its clients, provides two main services. It replaces diesel-powered equipment with electric-powered motors, and aims to reduce carbon emissions of aircraft on the ground by using equipment such as tractors to ferry such aircraft around.

It also applied for and received a loan of about half a million dollars from DBS to finance its investments and projects.

CW Aero Services has 25 employees and records $5 million in revenue a year.

Mr Julien Valette, the company’s managing director, hopes that its green solutions will account for half of its business revenue and profits in the future.

“It will expand on how the ecosystem is moving,” he said, pointing to industry targets introduced by the Singapore Government and regulators to drive ESG progress.

While the company has not yet started tracking its ESG data, it is mapping out how to run the business more efficiently as a value-add to its customers.

“This is so that they themselves can reduce their carbon emissions. That’s where we have the biggest impact,” said Mr Valette.

The company is also working towards getting its ESG accreditation.

Mr Valette added: “We have the power to change things. Even as an SME, we’ve got to do as much as we can. Even if we have no regulatory pressure to do so, we see the ecosystem starting to change. We also get some benefits and more support if we go through that.”

Companies here can start their ESG journey by improving their own environment first – literally.

One way DBS hopes to get smaller companies to start thinking about ESG is through its Eco Renovate Loan, which was launched in October to help SMEs with their environmentally friendly renovation activities.

“We want our SME customers to have a better understanding about Scopes 1 to 3 emissions that are relevant to them and the applicable regulations,” said Mr Koh Kar Siong, group head of corporate and SME banking at DBS.

“They could look at refreshing their premises and whether the material and equipment they use are green, or if the energy they consume and water treatment they need contributes to a lower carbon footprint.”

He added: “That’s the starting point for our eco-renovation loan. It’s a very practical and immediate impact, as SMEs can immediately take it on.”

Scope 1 emissions refer to direct emissions incurred by a company, while Scope 2 refers to indirect emissions from the generation of purchased energy. Scope 3 emissions are indirect greenhouse gas emissions incurred by a company throughout its value chain, including from business travel or purchased goods and services.

SMEs that seek help from DBS are from various business sectors and industries, have fewer than 200 employees and have a sales turnover of $50 million and below, said Mr Koh.

The level of “hand-holding” that SMEs need depends on the individual company’s level of understanding, maturity and willingness to start the ESG journey, said Mr Koh.

He added that SMEs are at different stages of understanding ESG planning and implementation.

“I think it’s good that SMES are starting to realise the effect that’s trickling down the whole value chain,” he said.

“At least some are getting into it and are trying to continue to fulfil what’s required upstream by their partners and buyers.”