Archives For SMEs



By Mark Gold, chair of the Global Forum for SMEs, ACCA

Despite representing more than 90 per cent of global businesses, and accounting on average for 50 per cent of gross domestic product and 63 per cent of employment, SMEs have by and large been marginalised in the debate about sustainable business – both in terms of policy and practice. ACCA Global Forum for SMEs  has published a new policy paper  that looks at why this is the case and how we can change that. We know that SMEs have been slow to adopt environment-related improvements with only 29 per cent of SMEs in the EU thought have introduced measures to save energy or raw materials, compared with 46 per cent of large enterprises (see here).

The picture is likely to vary across Europe but as an average, the potential for improvements are certainly there, as well as the resulting benefits. So why are SMEs still thought to be slow in terms of recognising the importance and benefits of sustainable business practice?

One aspect is certainly that all too often we end up talking about SMEs as one homogeneous group, which is usually unhelpful. If you consider that this includes businesses with zero employees (only the owner manager) and those that have up to 250 employees, it becomes clear how vastly different these entities are. Their levels of formability, internal capacity and specialisms, not to mention motivations can mean that they end up in fact having very little in common when it comes to sustainability. But all too often we have sought to engage them without appropriately recognising how diverse and disparate this segment or the business population is.

The second question is: are we able to capture all the activities that SMEs do in this area appropriately? Are we asking the right questions? If we ask a business owner what their CSR strategy or sustainability practice is they may draw a blank face. They won’t think to tell us about the local charity they are supporting, about providing young people with work experience nor will they think about the cost savings they are seeking to make in their energy consumption as relevant answers. So are we capturing all the ‘business as usual’ activities that they are already doing?

Finally, are we giving them the right tools to communicate these and to engage? We talk about sustainability reporting, assurance, environmental management systems not to mention all the ‘jargon’ that has developed over time in the sustainability field. It is no secret that much of this has been developed with large businesses in mind so it is therefore no wonder that we are not seeing many enough SMEs engaging.

What I know from my own practice that specialises in creative industries and deals with thousands of SMEs each year is that these are responsible businesses, with a positive impact on society and a careful approach to environment. We ought to be able to capture this better.


By James Bonner, independent sustainability consultant

It is not surprising that the majority of initiatives devised to incorporate environmental and social issues into business processes, and indeed pressure to adopt such programmes, are predominately aimed at large corporations and multinationals. Such sizeable organisations clearly have significant impacts on the environment and wider society, and furthermore are motivated to protect their brand and reputation, which can be at risk if such issues are neglected.

However, it is important to consider that social and environmental impacts are interconnected, complex and cumulative, and the effects they have, whether positive or negative, are a result of how society and the natural environment are treated as a whole/and by everyone (consider the feedback loop of natural capital in the blogpost ‘Natural capital as a material issue’). As such, the impacts of all of society, and furthermore all types of commerce – from individual traders to the largest multinationals – impact and affect social and environmental issues, to some extent, through their activities.

The European Commission state that ‘SMEs [Small and Medium Enterprises] are the backbone of the European economy and their contribution is essential for pursuing the EU goals towards sustainable growth’. However, the Commission goes onto discuss that while SMEs have a significant environmental impact (responsible for 64% of pollution in Europe) they find it more difficult to comply with environmental legislation than large companies. Such a viewpoint is echoed in a number of other studies (including from an Australian paper which agrees that ‘SMEs lag behind their larger counterparts in terms of environmental activeness and performance, and therefore require assistance to improve this area of their business operations’).

Additionally, while not implying that large organisations have become ‘sustainable’, or cannot do much to reduce their impacts, it is fair to say that a number of large companies have progressively undertaken steps and measures to improve their social and environmental performance (from CSR reporting to stakeholder engagement, partnerships to environmental management systems). It could be argued that there are ‘diminishing returns’ from focusing on such bodies – that while continued pressure and improvements to their business operations will reduce their sustainability impacts, more effective and sweeping benefits could be achieved by targeting smaller business entities that do much less to tackle such issues.

Furthermore, as they are increasingly required/expected to disclose their wider sustainability impacts, the significant environmental and social impacts of large multinationals are not necessarily a result of their own operations or activities, but hidden in their supply chains. Whether unsustainable environmental activities of suppliers of raw materials (e.g. in electronics manufacturing) or the unethical labour practices of production which is outsourced (e.g. in retail and clothing) – the really damaging environmental and social impacts can be from the small and medium companies which perform these activities for them as part of their wider supply chain, but do not garner the same attention/scrutiny as the large multinationals themselves.

With a changing global economic landscape, and a focus on stimulating new growth and economic development in many national economies, there is potentially an opportunity to engage with SMEs and entrepreneurs who are attempting to start out to set in place business models and processes which incorporate and integrate social and environmental considerations from the outset.  By informing/providing guidance on the benefits of considering such sustainability issues (reduced costs, enhanced reputation, new markets), and the potential costs of ignoring them (legislation, taxes, loss of customers), SMEs can be, like their larger counterparts, encouraged to manage their environmental and social impacts.

This blog post intends to primarily support ACCA’s Accounting for the future session ‘Practical Workshop: methods for SMEs to consider- environmental and social issues’ on Tuesday the 9th of October by discussing the social and environmental impact of SMEs- issues that, along with initiatives available that are focused on SMEs, will be discussed in greater detail in the session.

XXII Economic Forum in Poland

accapr —  18 September 2012 — Leave a comment

By Rosana Mirkovic, head of SME policy, ACCA

Between 4 to 6 September European politicians and business leaders gathered at the 22nd Economic Forum in the spa resort town of Krynica Zdrój, southern Poland.

Under the title ‘New Visions for Hard Times – Europe and the World Confronting the Crisis’, leaders discussed current models of integration, the economic system, and the substantial reforms required to tackle the on-going economic crisis. Much of the debate was dedicated to the competitiveness of the region and how its businesses can make greater impact on the global stage.

And as the title suggests, this was a high level gathering, attracting regional heads of state, international organisations and the major regional and global business leaders. Most impressively, there was a feeling of a genuine need for the government, business and the NGO sector to work together to address some of the socio-economic problems that remain, despite the remarkable period of transition the region has witnessed. With such a rich audience, the programme provided a similar tapestry of topics; from health, pensions and the ageing Europe, to future energy sources, technological innovations and the social media.

Inevitably, with the Forum’s host being so close to the Eurozone (currently expected to join the Euro in January 2016), the various angles on the Eurozone crisis were debated at length.

I was pleased to take part in a PwC panel debate ‘CEE Goes Global – the Expansion of Foreign Companies in Central and Eastern Europe’, which discussed the chances and the perspectives of the private entrepreneurs with their efforts to expand abroad and the obstacles they have to overcome in order to conquer new markets. The panel also debated the importance of such enterprises for the growth of their home regions and national economies. With larger corporations usually dominating such gatherings, it was especially pleasing to see that smaller, growing businesses were recognised for their dynamism and their increasing presence in international trade.

There was agreement among the panel that while national governments are keen to help the SME sector internationalise, their efforts tend to be mis-directed. The participants, who included presidents of boards of some of the major Polish exporting firms, agreed that government actions ought to be targeted towards making trade easier and less costly and removing barriers to growth and innovation. Other than that, there was reluctance to promote further state interference, and a real sense that entrepreneurs simply need to be left alone to do what they know best. Most interestingly, the extent to which the international expansion of Polish companies benefits the national economy, and as such warrant government support, was raised a number of times – as well as the effect of the country’s branding in boosting the international prospects of its companies. It’s difficult to imagine that either of the questions would be asked if a similar event was held in the UK, for example.

The overwhelming sentiment to note from the Forum however is the general optimism about the region’s future. Having witnessed moderate but steady growth throughout the economic downturn, some degree of retrospection was a common thread that tied together much of the conference’s programme, showing how far the region has come and most importantly, the role of business in opening up the region’s potential and cooperation even further.

By Manos Schizas, senior economic analyst, ACCA

As I write this post, it’s been a year and a day since the Independent Commission on Banking (ICB) published its report on the future of UK banking regulation. The establishment of the ICB was a response not only to the financial crisis but also to the unique challenge of maintaining the UK’s status as a global financial centre without taking on literally a world of risk.

Since then the Government has published its response to the ICB last December, as well as a white paper on financial stability in June. Within the banks the great groaning wheels of compliance have been set in motion. We’ve got seven years to go now until all UK banks are fully compliant.

Most important among the ICB proposals was the proposed ‘ring-fencing’ of activities crucial to the real economy, namely the taking of deposits and provision of overdrafts. This did not come as a surprise to anyone; many around the world had already called for the separation of retail and investment banking. So did ACCA, back in September 2008. The idea is that, if losses incurred in the world of wholesale finance cannot spill over into retail, then governments can rest easy that they will never have to bail out a bank brought to the brink by excessive risk-taking. Even better, banks that can no longer expect a bailout should adjust their appetites for risk accordingly, making more money available to lend to businesses.

Ring-fencing applies to SME credit in a fairly straightforward way (explained in detail on p. 70 here). In principle, it splits each bank into a ring-fenced and a non-ring-fenced portion, each legally separate from the other and with their own structures for managing risk. Any service likely to impact an SME’s viability if disrupted will have to be provided within the ring-fence. That’s current accounts, deposits and overdrafts by the looks of it, as well as some simple hedging products. SME loans, on the other hand, will have to be provided outside the ring-fence. The ring-fenced bank will be subject to higher capital requirements and can only deal with the non-ring-fenced bank on an arm’s length basis – i.e. on commercial terms as a completely separate entity. Small banks are exempt, but in fairness their current share of SME credit in the UK is tiny.

As a result of this structure, nearly all of the information relevant to an SME loan application will have to be generated within the ring-fence: behavioural scoring, for instance, is only possible on the basis of transactions; bank managers can only exercise discretion if they have a relationship with the client based on face-to-face interaction over time. This is the only proprietary information the banks have, since credit scores and published accounts are easily obtainable by their competitors. So far, there’s nothing threatening about this.

However, upon closer inspection it is clear that to assume any credit risk inside the ring-fence would be extremely difficult. Without capital regulation, business overdrafts could in principle be easily financed from deposits, but the cost of capital imposed by the ICB proposals and CRDIV (the European regulatory package governing capital, liquidity and leverage requirements for banks) would make this very expensive – banks would incur the substantial regulatory costs associated with a small business overdraft (in the form of additional capital and liquidity) even if the customer never used their facility.

Banks could still, of course, operate both within and outside the ring-fence at once, and might even be able to cross-subsidise their business within the ring-fence from what they make elsewhere, though not in real time. For instance, a division of BankCorp called, say, BankCorp Commercial, could provide loans outside the ring-fence and a division called BankCorp Retail could provide overdrafts and current accounts within the ring-fence. The two could be able to share information on a commercial basis, subject to the customer’s permission, and could even be made to appear to offer a seamless service, but would in all other respects have to be separate businesses.

But the question remains: if BankCorp Commercial can’t tap into deposits in order to lend, why would BankCorp want it to permanently cross-subsidise BankCorp Retail? The answer is: it wouldn’t. In fact, people at the Treasury clearly know this:

Banks may face a loss of diversification in the long term as banks will no longer be able to cross-subsidise or cross-sell services between the ring-fenced and non-ring-fenced bank. There will also be upfront transitional costs (such as establishing new subsidiaries) and ongoing costs of operating two entities rather than one (such as operating separate IT platforms).

This model would essentially split all major banks into two parts: a ‘Smart Bank’ (BankCorp Retail) and a ‘Dumb Bank’ (BankCorp Commercial). What makes a ‘Smart Bank’ smart is that it owns proprietary customer information and is therefore able to make informed decisions about their creditworthiness with some hope of a competitive advantage; however, it cannot carry any loans on its balance-sheet. The Dumb Bank has access to the wholesale markets and their cheap(er) funding, lower capital requirements, expertise in managing portfolios of loans and pooled risks, and access to financial engineering on an epic scale; but it cannot decide on the creditworthiness of individual SMEs. Essentially, it’s an investment fund that specialises in business loans.

So far, so good, one might think. Except for that fact that, as we saw earlier, the Smart Bank’s small business operation is almost guaranteed to be unprofitable unless it is able to charge someone a fee or commission for its services – either the customer or the Dumb Bank. This is because the vast majority of small and medium sized enterprises have very few dealings with their bank beyond maintaining a current account and possibly an overdraft. The Smart Bank could, in theory, charge all of its customers a fee for these services. But given the reluctance of most SMEs to pay for this, it would be more likely to make its money out of the few candidates that turn out to be suitable for a loan – either by charging them for the privilege of bringing their case to the Dumb Bank or by charging (gasp!) the Dumb Bank in return for originating loans. Or a bit of both.

Science fiction? Absolutely not. It’s already happening – SME loan funds are paying banks to originate loans for them as we speak. Elsewhere, peer-to-peer lenders are taking advantage of the fact that, as originators, they don’t need to hold on to regulatory capital (and the individuals carrying the risk don’t have to either) in order to undercut the banks. The incentives provided by regulation are as discreetly irresistible as gravity.

But if that’s the case, then why stop there? The Smart Bank could, in theory, originate loans for any Dumb Bank. Similarly, the Dumb Bank could buy loans originated by any Smart Bank, or even non-bank lenders, if the risk and return profiles are good and allow it to build a diversified portfolio offering decent returns. It could even buy securities made up of multiple loans in this way. Some Dumb Banks would have the same risk appetite as today’s high street banks. But newcomers need not.

In the medium term, there could be substantial advantages to this model in concentrated SME banking sectors such as the UK’s. Unlike today’s banks, competitors to the Smart Banks could spring up overnight, and risk carriers (the Dumb Banks) would have to compete aggressively for access to the best SME debt with each other and any other major investor interested in the asset class. Customers could switch easily between originators by simply moving their transaction data (which, I am told, is already possible) and without changing the carrier of existing loans.

Government could intervene in order to resolve market failure in ways that have hitherto been impossible. Its major disadvantage (a lack of know-how in assessing credit risk) would become irrelevant as it would only need to set itself up as another Dumb Bank – the best-capitalised and most cheaply funded of them all. If recent announcements of a British Business Bank ever produce a useful policy tool, it will almost certainly be under this model.

The problem is that this model works in exactly the same way as the ‘originate-to-distribute’ model that failed so spectacularly in the US mortgage market and beyond. The Smart Bank has only a weak incentive, especially in good times, to provide the Dumb Bank with high quality loans; the Dumb Bank has little incentive to perform the kind of expensive due diligence that would address this (theory here). The model also invites all of the problems associated with advisers working on commission that the FSA’s Retail Distribution Review was set up to address.

A government Dumb Bank could distort the UK SME loan market with its cheaper financing, like Fannie Mae and Freddie Mac did for the mortgage market in the US – although thankfully EU State Aid regulations should help rein it in.

But worst of all, the Dumb Banks, lacking access to a retail deposit base, would have to finance all SME loans almost entirely from the wholesale markets. A sudden tightening there, as in 2007, would bring the entire SME loan market crashing down in an instant.

This last point brings us to the heart of the matter. When people ask for retail and investment banking to be kept separate, regulators need to be able to see beyond the simple phrasing and realise that this means keeping the retail and wholesale financial markets from influencing each other. To be fair, they almost certainly do, but are not prepared to deal with the reduction in credit supply this would lead to. That’s one thing. But in the case of SME loans, the ring-fence just might achieve the exact opposite of what was intended. Wouldn’t it be ironic if the regulations enacted in reaction to the financial crisis were to end up producing some of the exact same incentives that contributed to the crisis in the first place?