This article was originally published in Enterprise Asia’s “The White Book 2011: Best CSR Practices Across Southeast Asia.” Enterprise Asia is a non-governmental organization whose mission is to champion entrepreneurship development across Asia and strive to cultivate a culture of honesty, fairness and corporate social responsibility. For more information on Enterprise Asia and their Asia Responsible Entrepreneurship Awards (AREA), please visit their website.
Financial Innovation for Implementing CSR in Small and Medium Enterprises
For entrepreneurs with small or medium enterprises (SMEs), it is a challenge to channel excess revenue into any programs that do not see immediate growth returns, so Corporate Social Responsibility (CSR) programs can seem like a luxury not often afforded to SMEs. However, fortunately for entrepreneurs, innovation is an innate characteristic of smaller, more flexible companies. This innovation grants a comparative advantage to SMEs to find alternative funding sources to institute CSR projects and to leverage those benefits to gain investment and grow business.
The advantages gained from environmental footprint and social development improvements can directly correlate to operational cost savings, lowered employee turnover and absence costs, and positive public relations marketing value. But another, often overlooked benefit of CSR initiatives, particularly for SME entrepreneurs, is the ability to attract investment and grow business by establishing a track record as an environmentally and socially responsible business.
According to a 2009 study by wealth management newswire WealthBriefing, 90% of wealth managers surveyed revealed that their responsible investment (RI) portfolios performed as well or better than other portfolios. The same study identified higher client retention rates for wealth managers who invest in RI portfolios, and it acknowledged a correlation between the entrepreneurial investment community and its targeted interest in RI portfolios. For SME entrepreneurs, this study indicates the significant potential for drawing higher, longer-term investments by prioritizing CSR as an essential component in business.
Yet, SMEs often find it challenging to realize new investor potential because few SMEs have financial surpluses flexible enough to accommodate the upfront costs associated with seeding CSR initiatives. This barrier can be overcome by utilizing a variety of funding sources, including innovative contracting, government incentives and dedicated social enterprise business development and investors.
Performance contracting is a popular and growing form of service contracting. Often used in energy efficiency retrofits, it places cost-saving performance risk on the service provider rather than the company purchasing the retrofit. This type of contracting has gained significant traction in North America and Europe, with the Institute for Building Efficiency reporting that revenues from energy service companies using performance contracts to retrofit buildings were $4.1 billion in 2008 and projected to reach $7.1 to $7.3 billion in 2011. Another innovative and increasingly popular plan is a power purchasing agreement (PPA), which reduces the liability of installing and maintaining equipment and is often used for high-tech installments like solar photovoltaic panels (PV). Many other financing options, like lease options and certificates of participation (COP), may be available in growing sustainability markets with low upfront capital and minimized risk for business purchasers.
Governments worldwide are realizing the need to reduce upfront costs and financial risks of business to institute socially and environmentally responsible programming. Singapore alone has over 30 government programs promoting sustainability incentives and it provides funding for a wide array of energy efficiency, alternative energy, water efficiency, transportation and other environmental innovation projects. All across Asia, governments, notably including quickly developing India and China, are targeting efficiency and innovation to make their country’s businesses more sustainable. Governmental tax incentives and rebates can be extremely advantageous to a business that is seeking capital to start any CSR programs.
Emerging sectors of investors that are interested in socially responsible investing (SRI) can also be central to CSR improvements in a business. Many of these investors can be found through associations and business development organizations that link investors with responsible business opportunities and provide assistance particularly to SMEs interested in green growth and CSR development. Examples of these groups include organizations such as Enterprise Asia, New Ventures, Small Enterprise Assistance Funds (SEAF), and The Association for Sustainable and Responsible Investment in Asia (ASrIA).
Many venture capitalists also see opportunity for profitable returns from environmental and social initiatives. For example, in 2010 ZheShang Nuohai Low Carbon Fund raised $32 million “to be China’s first dedicated private equity vehicle focused exclusively on the energy conservation, environmental protection and new energy sectors,” according to a report by the Asian Venture Capital Journal. The Impact Investment Exchange Asia (IIX), based in Singapore and launched in 2010, is an example of a trading platform created to meet the demand of investors reaching social enterprises.
While some of these funding opportunities may be non-traditional, the growth of these opportunities shows that there is potential for capital investment in CSR programs. As market innovators, SMEs are well poised to utilize various funding opportunities and turn them into profitable, environmentally beneficial and socially equitable benefits. Additionally, returns on initial CSR efficiency programs can then be converted into seed money for future investments with higher complexity and even greater benefit. With a proven CSR track record, a company can attract even more investments from the burgeoning SRI sector, creating a positive-feedback system of enhanced environmental, social and economic efficiency.
