Green borrowers afloat

Cushioned from the credit crunch? Values-led green businesses can even gain financial advantage from it. Bevis Watts explains how.

It may have been an alien term until the middle of last year, but the ‘credit crunch’ is now only too familiar to us all.

Brought on by ill-advised sub-prime lending in the USA, it has prompted panic in the financial world, led to the contraction of credit markets and, worst of all, created the spectre of recession.

This unwelcome phenomenon has created its fair share of losers – among them, arguably, the government, the Bank of England, and some of the country’s best-known financial names. As the market for borrowing has clogged up, entrepreneurs and their businesses have been hit particularly hard, principally because they haven’t been able to access much-needed finance.

But one group of entrepreneurs appears to have benefited from all the uncertainty. Values driven businesses are increasingly able to access more competitive finance from sustainable banks, giving them a competitive advantage over their mainstream competitors. Take, for example, a housing association that’s looking to grow a portfolio of properties. The new conditions may allow it to steal a march on commercial property developers, by accessing less expensive finance through a sustainable lender like Triodos (who will only lend to enterprises that benefit people or the environment). This could mean a significant competitive advantage for the values-driven housing association, since the purely profit-driven conventional commercial property developer cannot borrow from this source.

The credit crunch ‘upside’ is the result of a banking model that social banks like Triodos have developed over a number of years. Rather than borrow from other banks to find money to lend on, as most financial institutions do, they have more money on deposit than they need to lend. So there’s no requirement to go to a moribund money market. Instead, all their lending is funded by their savers’ deposits – and thus social banks can continue to lend competitively, with plenty of money to draw from. It’s an approach that’s looking increasingly enlightened as high-street names such as Barclays and HBOS are forced to go to their shareholders to raise money through rights issues – money raising exercises created to build the levels of liquidity they require. At Triodos Bank, our position is particularly pertinent. We too have raised money through an issue, but for very different reasons, in 2007 – when the credit crunch was already in full swing. Triodos’s capital raising issue at that time actually raised double its target. The Bank now has very high levels of capitalisation and liquidity, which means that the businesses and charities who borrow from us are not subject to the same pressures as the customers of many other banks. Essentially Triodos, and other banks like us, are not as desperate to protect our liquidity, hold on to our funds or raise more of them. Rather we want to continue to lend at competitive interest rates. We have not raised our lending rates as others have done, and all things being equal, we do not plan to as a result of the credit crunch.

Social banks have also built considerable expertise in markets such as renewable energy and organic farming – sectors regarded as higher risk by banks less familiar with them. This not only means that social banks, in theory at least, have a greater appetite for investment in these markets; they can also be more competitive on terms, because they understand what and whom they’re dealing with. A gap has been created and social banks are filling it.

The credit crisis matters a great deal to UK businesses. Its impact will remain high and is likely take a long time to resolve. But it may not be all bad news. The events that have followed it suggest that social lenders not only offer a viable and more sustainable model for banking, but may also give significant advantage to green businesses, social enterprises and charities. Far from stagnating enterprise, the credit crunch’s greatest legacy may prove to be a shot in the arm for the UK’s environmental and social economy.

– Dr Bevis Watts is head of business banking at Triodos Bank.

Triodos Bank is a Forum for the Future partner.

27 June 2008

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