“Norm clash” prevents financing in sustainable entrepreneurship

Sustainable companies that invest in new innovation experience difficulties in obtaining loans from traditional financiers, such as banks. One explanation may be that these innovative companies tend to break established norms in business life, making it difficult for traditional financiers to value them.

Industry plays a crucial role in achieving the UN's sustainable development goals. Already today, there are many successful companies in Sweden that actively work with these sustainability goals, but a prerequisite for them to have a real impact on society is that they are granted financial resources to scale up their operations.

The author of a new thesis in Entrepreneurship and Innovation, Linda Hällerstrand, has conducted interviews with key people from a total of 53 Swedish companies with a clear sustainability profile. What the companies have in common is that they are innovative and develop new sustainable technology in the bio-based industry, such as bioplastics, bioenergy and recyclable materials. All companies have good creditworthiness, but nevertheless experience major limitations in access to external financing.

“Many companies seem to have no access to traditional bank financing, which greatly inhibits their growth potential. This is despite the fact that the companies show several years of market establishment, a high degree of technological maturity and are mentioned in the media as important players for the sustainable transition,” says Linda Hällerstrand.

Different frameworks

There are various frameworks to support financiers in assessing sustainable companies, such as so-called ESG-frameworks. However, most frameworks focus on limiting the financing of unsustainable business activities, rather than promoting sustainable innovations.

“Many of these companies have ambitions not only to minimize harm but to contribute to an industrial transition, for example by developing new carbon capture technologies, new fuels and biomaterials. As a result, they often fall outside the radar of financiers and frameworks.”

The thesis shows that companies prefer traditional loan financing, for example from banks, because it guarantees a long-term perspective and retains ownership of the company. So-called venture capital also attracts companies. Venture capital refers to capital invested in high-potential but high-risk start-ups that are in a development phase.

Deviating from norms

She emphasizes that the financiers do not primarily seem to lack reliable information to make a risk assessment of the companies. According to Linda Hällerstrand, it is rather that companies tend to deviate from financiers' traditional norms and expectations of what constitutes a financeable company. This limits funders' evaluation processes, and can contribute to missed opportunities to support sustainable innovations.

“The lack of funding from traditional lenders may be due to the fact that companies tend to deviate from funders' ingrained norms and expectations of what constitutes a financeable business.”

As an alternative to traditional lenders, there are industrial financiers, i.e. other, larger companies. Industrial financiers are showing a growing interest in sustainable companies. However, this type of financing is associated with risks for sustainable businesses. These risks include the loss of majority ownership and influence in their own company, as well as lock-in effects due to the larger company demanding exclusive rights to the smaller company's technology and knowledge development.

Seek new financiers

The thesis concludes with some recommendations to the various actors. The sustainable companies are recommended to continue to strengthen their innovation capacity in order to maintain their leading positions in the industrial sustainable transition. Furthermore, Linda Hällerstrand encourages companies to also turn to new types of financiers. This could include new players in impact investing (investments aimed not only at financial returns but also, for example, sustainability values).

Traditional financiers are advised to develop new evaluation models and introduce targeted criteria to better include the long-term value of sustainable businesses. Finally, politicians and other policy makers need to realize that there may be a need for a change in policy intentions, and increased education in the financial sector to change the view of sustainable innovations and to include more norm-breaking entrepreneurship.

Linda Hällerstrand has previously worked as a financial advisor at Almi Företagspartner Nord.

• Avhandlingen “Sustainable Ventures And External Financing:Empirical Insights On The Financing Access Gap” i fulltext External link.