Sustainable finance: funding options for eco-friendly small businesses

In our current maelstrom of increasing financial burdens, the post-pandemic haze and the cost of living crisis, there’s a lot of pressure on small business owners. But both now and in the years to come, one issue looms above all the others: climate change.

While reports of the climate crisis often feel daunting, it’s important for small business owners to understand how they can play a part in the drive towards sustainability. This can include seeking sustainable sources of financing.

After all, sustainable finance helps protect our planet, and also opens doors to new innovations and opportunities. So, how can you open these doors and secure the funding your business needs for its eco-friendly initiatives? 

In this guide, we’ll explore the funding options specifically tailored for small businesses that are ready to make a positive impact on the environment.

What is sustainable finance?

Sustainable finance supports initiatives that contribute to an environmentally responsible world. The aim is to encourage business owners to become (or continue to be) sustainable and to consider the long-term impacts of their business initiatives.

It also refers to a group of environmental, social, and governance (ESG) factors that sustainability-minded investors use to make their investment decisions. We’ll talk about these in greater detail below.

Caring about these environmental issues is ethically responsible, and also makes good business sense for UK small businesses. 

You can gain a competitive edge, attract environmentally-conscious customers, reduce operational costs, and build stronger relationships with stakeholders who prioritise sustainability. You may even save some money along the way, as “Almost Off Grid” did when they halved their energy bill by going sustainable.

Startups 100’s Kind Bag has achieved remarkable growth for the third consecutive year, surpassing expectations by generating a staggering £940,000 in revenue.

Find out more about Kind Bag's 45% year on year growth.

To understand a bit more about why sustainable finance is important, we also have to dive deeper into the environmental issues we’re facing today for the full picture:

• Climate change causes shifts in weather patterns, rising temperatures that lead to rising energy costs and extreme weather events. All of this is likely to cause supply chain disruption and damaged infrastructure – not in a thousand years, but within our lifetime. While this seems like such a big issue for small businesses to tackle, something that costs very little but has a big impact is inspiring others to come along with you on your sustainability journey, communicating the benefits of eco-friendly practices, and fostering a culture of environmental responsibility.
• Pollution, including air, water, and land pollution, poses risks to both human health and the environment. Small businesses can play their role in minimising pollution by adopting sustainable practices, reducing waste, and promoting responsible use of resources. 
• Deforestation refers to the permanent removal or destruction of forests by humans. This act puts the survival of many animal species at risk. Small businesses can combat the effects by sourcing sustainable products, using recycled materials, or supporting reforestation initiatives. Taking these steps helps protect valuable ecosystems and it also signals to customers and stakeholders that your business is committed to preserving the natural world.
• Loss of biodiversity threatens the delicate balance of ecosystems and has far-reaching consequences. For example, it is said that we’d only have four years to live if bees went extinct. Your business can play a role in biodiversity conservation by sourcing sustainable materials, supporting local wildlife initiatives, or implementing campaigns to protect and restore natural habitats.
• Resource depletion of our natural resources such as gas, oil, and coal are depleting at an alarming rate. Small businesses can contribute to resource conservation by embracing energy-efficient technologies, which will not only reduce costs but also demonstrate your eco-friendly commitments.

Green loans

Green loans are loans from banks that are specifically designed to incentivise or boost businesses that adopt eco-friendly practices.

By using a green loan, a business could commit to reducing carbon footprints, saving energy costs, and making a crucial environmental difference. The funds obtained through green loans are typically used for activities such as renewable energy projects, energy efficiency improvements, sustainable building projects, waste reduction initiatives, or other environmentally-focused endeavours.

By obtaining one, you could attract environmentally-conscious customers, boost your brand reputation, and truly set yourself apart from the competition.

There are several banks offering green loans to support environmentally-conscious businesses:

• Barclays Green Loans: Barclays offers green loans to businesses seeking financing for things like renewable energy projects, sustainable infrastructure projects, or energy-efficient equipment. 
• HSBC Green Finance: HSBC provides green financing options, including loans and other financial products to support the sustainability goals of small businesses. It offers financing for renewable energy projects, energy efficiency upgrades, green building developments, and other environmentally-friendly initiatives.
• NatWest Green Loans: NatWest offers green loans to support businesses in their transition to more sustainable practices. The loans cover various green projects, such as renewable energy installations, energy-efficient technologies, and resource management improvements. NatWest also just announced a strategic partnership with energy experts Perse and Absolar, which aims to help businesses with their energy expenses and transition towards a greener future.
• The Co-operative Bank Green Energy Loans: The Co-operative Bank offers green energy loans tailored to businesses in the renewable energy sector. These loans provide financing for solar power installations, wind farms, biomass projects, and other renewable energy developments.

Impact investing

When a venture capitalist or angel investor with a passion for saving the planet provides a sustainable business with funding, it is called impact investing. 

This is because impact investments are made with the intention of generating a measurable social or environmental impact alongside a financial return. 

Unlike traditional investments that primarily focus on financial gains, impact investments aim to create positive and sustainable outcomes in areas such as social welfare, environmental sustainability, and community development. 

The term was coined to highlight investments in environmentally-friendly initiatives such as resource conservation, climate change mitigation, sustainable agriculture, and clean technologies, to name but a few. 

The investments span various sectors, including renewable energy, affordable housing, sustainable agriculture, education, healthcare, microfinance, and community development. The focus areas depend on the investor’s priorities and the specific social or environmental challenges being addressed.

Government incentive programs

The UK government has recognised the importance of sustainable businesses and introduced various programs to provide financial support. These initiatives include grants, subsidies, tax credits, and other forms of assistance that are specifically designed to help eco-conscious entrepreneurs. By tapping into these programs, you can access the funding you need to turn your sustainability dreams into reality.

• In 2019, the UK became the first major economy to commit in law to net zero greenhouse gas emissions by 2050. 
• In 2021, the government set in law the world’s most ambitious climate change target: to cut emissions by 78% by 2035 compared to 1990 levels. 
• In 2023, the government released its Green Energy Finance Strategy, Mobilising Green Investment, where the ministerial forward states: “We not only need pioneering firms and entrepreneurs to create green products and services. We also need the right support structure to propel them to commercial success. That is why the Government’s new Green Finance Strategy is so crucial.”

Almost £5 billion of funding is available to help UK businesses become greener as part of the government’s commitment to reach net zero emissions by 2050 – and this is where all of the governments’ available funding opportunities for green businesses can be found.

Alternative funding sources

Traditional funding methods may not always be sufficient or available to support sustainable initiatives.

Fortunately, alternative funding methods are emerging as powerful tools for businesses and organisations striving to achieve sustainable financing. 

These methods offer innovative approaches that blend financial returns with social and environmental impact. Let’s explore some of these alternative funding methods:

Social impact bonds (SIBs)

Social impact bonds are performance-based loan initiatives designed to address social issues. 

With a SIB, private investors provide upfront capital to fund social programs. If the program achieves predetermined social outcomes, such as reducing local waste or pollution in a city, the government repays the investors with financial returns. 

SIBs incentivise collaboration and efficiency by shifting the risk of program implementation from the public sector to private investors. 

There is a full list of current SIB initiatives you can get involved with on the government website, or you can rally your team together to pitch one of your own.

Development impact bonds (DIBs)

Development impact bonds operate similarly to SIBs but focus on international development projects. DIBs involve partnerships between donors, development organisations, and investors. 

This will work well if you have international offices, and want to contribute to projects outside of the UK, such as reforestation. This initiative will see your business plant more trees, preserve forests, or protect certain pieces of land, for instance.

Blended finance models

Blended finance models combine public and private funding sources, philanthropists, nonprofits, and social enterprises to finance sustainable initiatives. 

This approach leverages the strengths and resources of various stakeholders to tackle social and environmental challenges. 

Blended finance structures can take different forms, such as public-private partnerships or a collection of impact investment funds. By combining resources and expertise, blended finance models enable investments that may not be feasible through traditional financing alone.

Philanthropic grants and funding

Philanthropic grants and funding from foundations, nonprofits, and philanthropists can be instrumental in supporting sustainable initiatives. 

These sources often prioritise social and environmental impact over financial returns. They offer grants or other forms of funding to businesses and organisations that align with their mission and have the potential to drive positive change. 

Philanthropic funding can provide crucial early-stage capital for innovative projects with high social or environmental value.

Crowdfunding and community finance

Crowdfunding and community finance platforms empower individuals and communities to directly contribute to sustainable initiatives. 

These platforms enable businesses and organisations to raise capital by presenting their projects to a broader audience. 

Crowdfunding campaigns can mobilise support from environmentally-conscious individuals who are eager to invest in causes they believe in. 

Challenger banks

Challenger banks are stepping up their efforts to promote environmental sustainability, making them a great choice for increasing your sustainability efforts.

Where big banks have been falling short for small businesses as of late, challenger banks have stepped up as the innovative sibling that loves to keep things modern and relevant. 

This year, Monzo took a significant step by purchasing carbon removals to offset the emissions produced by their debit cards and spending throughout 2021. This action alone removed a staggering 1,265 metric tons of CO2e from the atmosphere, according to its website. 

Monzo has chosen to support reforestation efforts in Kenya through The International Small Group and Tree Planting Programme (TIST). This specific project was assessed by a regulator to assure the bank’s customers, and to ensure its quality and impact potential.

As another example, here’s what Revolut had to say about sustainability: 

“At Revolut, we’re changing the way people use and interact with technology, and shaping the future of financial and lifestyle experiences. 

“But a company for the future needs to holistically align with the needs of the future – not just the economic needs, but also the environmental and societal needs of the world around us. We’re on a mission to put global sustainability at the heart of all we do at Revolut.”

Simply aligning with a challenger bank can help you become part of its commitment to environmental responsibility. 

Your banking choices can contribute to the restoration of ecosystems and the reduction of carbon emissions, fostering a greener and healthier planet for all. 

Let’s not forget the added perk of cashback rewards, making your banking experience even more rewarding in multiple ways.

Tips for securing sustainable finance

There are a few fundamental tips for securing funding that we’ve covered in other articles, including:

• Venture capital: how it works and how to attract it
• Joint ventures: could one work for your small business? (For SIBs and DIBs)
• Angel investment explained: plus how to attract an angel investor
• 10 steps to structuring your funding pitch

Once you’ve mastered these fundamentals, here are some specific tips for securing sustainable finance in particular. These will boost your credibility and pitch, and help you stand out as an eco-business warrior:

The ESG formula

As mentioned above, sustainable financing works from a set of guidelines known as ESG factors. 

They provide a foundational framework used by investors to consider the broader impacts of your business activities beyond just financial performance and to assess its risks and opportunities. 

When seeking sustainable finance, these are the baseline factors you must be able to communicate in your pitch deck or business plan:

• Environmental: the current impact of your business activities on the environment, such as carbon emissions, waste management, energy efficiency, pollution prevention, and natural resource conservation.
• Social: how your business is performing socially, including labour practices, employee welfare, diversity and inclusion, human rights, community engagement, customer satisfaction, and product safety.
• Governance: all things related to the ethics of a company, such as board independence, executive compensation, transparency, anti-corruption measures, shareholder rights, and compliance with legal and regulatory requirements.

Showcasing your impact

Here are a few practical ways you can demonstrate the positive changes your business is making for the environment:

• Data: use data and evidence to highlight the measurable results of your sustainability efforts.
• Energy efficiency: improve energy efficiency within your operations by implementing energy-saving measures.
• Renewable energy sources: consider transitioning to renewable energy sources such as solar power, wind energy, or geothermal energy. 
• Waste reduction and recycling: implement waste reduction strategies by minimising packaging, promoting recycling, and establishing a waste management system. 
• Sustainable sourcing: prioritise sourcing products and services from environmentally responsible suppliers, considering factors such as the supplier’s environmental certifications, ethical practices, and commitment to sustainability. 
• Transportation and logistics: reduce the carbon footprint associated with transportation by promoting sustainable commuting options for employees, such as carpooling, public transportation, or cycling. 
• Employee engagement: foster a culture of sustainability among employees by raising awareness, providing training on environmental best practices, and encouraging their active participation. Engage employees in brainstorming sustainable ideas and initiatives, and recognise and reward their contributions to sustainability efforts.
• Carbon footprint measurement and offsetting: once you have a clear understanding of your emissions (by assessing the emissions associated with your operations, energy usage, transportation, and waste), you can explore carbon offset programs or invest in renewable energy projects to offset your footprint.
• Collaboration and advocacy: collaborate with other businesses, industry associations, and local organisations to amplify your impact. Join networks, participate in local climate action initiatives, and advocate for policies that support climate change mitigation.
• Gain authority with certifications: consider obtaining third-party verification or certifications for your sustainability initiatives. These external validations, like Leadership in Energy and Environmental Design (LEED), B Corp, ISO 45001 or ISO 14001, can lend credibility to your sustainability journey.
• Check if your business is in line with UK regulations: The UK Sustainable Disclosure Regulation (SDR), led by the UK Financial Conduct Authority (FCA), aims to create a standard for sustainability in the UK. Following the requirements builds trust between you and your customers, and could make your business more appealing to investors.

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Find out more about Packfleet, the ethical courier service

Conclusion

This article has been your introduction to the wide new world of sustainable finance, and the positive benefits that can be had when choosing to make your business more eco-friendly.

By addressing climate change, small businesses can future-proof their operations, reduce risks, and seize opportunities arising from the transition to a low-carbon economy.

Sustainable finance can open up exciting opportunities for small businesses committed to environmental responsibility. By exploring government programs and following best practices, you could secure the funding you need to drive positive change while growing your business. 

Every small action counts, and by taking steps to reduce your business’s carbon footprint and promote sustainability, you are contributing to the global effort to address climate change. Additionally, embracing sustainable practices can lead to cost savings, improved brand reputation, and increased customer loyalty, making it a win-win situation for your business and the planet.

This is proof you can create a sustainable business that drives large financial returns, feels good to do, and creates a better world for future generations.