Incorporating sustainability KPIs in credit ratings: the next frontier for small businesses

January 8, 2025

Today, banks and financial sector intermediaries have a number of sustainable credit solutions. Most of these solutions, however, examine the sustainable impact of projects that will be financed in the future. To make the case for better credit terms, issuers have to work with lenders to establish KPIs that measure sustainable performance, and also a means of evaluating that performance, including through independent third-party auditors. For listed companies, this is an exercise that can be accomplished through long-term business planning and prudent treasury management.

Financing existing operations under a sustainable investment ethos can be problematic for some sectors. It is also particularly difficult for smaller, privately-held businesses to distinguish the sustainable footprint of their activities, when they are likely too small to be followed by analysts or research companies, with too few resources to pay for ongoing third-party certifications, such as B Corp.

While it's tempting to think of sustainability as something that is headline-grabbing, it is really a theory of management and operations that succeeds in small details. As we have talked about many times on this blog, sustainability is something that must be lived, owned and practiced at every level of the company, and all employees must be empowered to measure, critique and improve that on a daily basis.

I truly believe that the biggest successes of the economic cycle (and by that, I mean the next 30 to 50 years) will be about waste avoidance rather than profit-making. Companies cannot continue to grow at the same rates they have for the last 30 years without having terrible consequences on people and the planet. Therefore, the management strategy of tomorrow must be based on mastering resource consumption and zero waste policies. And in this sense, waste must be construed broadly... time, energy, raw materials, talent... all of these are precious resources that must not be wasted.

And, companies must be judged on how efficient they are at not only preventing waste but also reusing resources in an efficient way. The waste hierarchy begins with waste avoidance, then it moves to waste reduction, reuse, recycling and energy recovery. Only at the very bottom of the hierarchy do we find landfill and incineration.

Today, many companies have precious resources going into landfills and incineration. In some cases, this is because of poor internal triage. In other cases, it is due to the lack of technology of waste removal companies (or rather, gaps in the waste removal value chain) that do not carry good recycling practices completely downstream.

We have written previously in this blog about sustainable supply chain finance, whereby a Tier 1 manufacturer will impose a strict system of measuring sustainability performance and, depending on that performance, allowing downstream suppliers to benefit from the same favorable financing terms as the Tier 1 manufacturer.

But what solutions are available in the situation of a small business, removed from this type of arrangement, with limited selection of suppliers, wholesalers and logistics providers? At the end of the day, the sustainability performance of the small business will be highly influenced by the bigger actors in its value chain. So the small bakery’s sustainability performance will be in large part determined by which suppliers, wholesalers and logistics providers it chooses, which is more a function of price than anything else.

Small businesses today need to not only master sustainable procurement, but sustainable waste management. And they must have tools available to measure that performance on a day-to-day performance... not accounting, inventory or purchasing software, but software that reliably tracks raw materials use and savings.

Banks today have limited means to assess this information. Creditworthiness for small businesses is essentially a question of revenue and assets. But what if companies were able to prove that they have successfully lowered their impact on the environment, whether it be through electricity consumption, water consumption, data consumption, waste production? Shouldn’t they be more rewarded with more favorable credit terms? Trade groups, investors and cooperatives all have a role to play in benchmarking sustainable operations: best practices that can be measured and registered on a daily basis.

All of these factors are relevant to consumers, and producing it is one of the biggest data opportunities facing technology companies today.

CPM