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How asset finance must embrace the E in ESG

As climate change continues to take its toll on the planet and scrutiny increases on corporate values and company structures, there’s more pressure than ever on businesses to demonstrate commitment to environmental, social and governance (ESG) principles, writes David Woodroffe, SVP, Solution Management, Asset Finance at FIS.

When it comes to the environmental part of ESG, the challenge is effectively doubled for the asset finance and leasing industry. Not only do finance providers need to fund more sustainable or reusable assets with as long a life cycle as possible, but also their customers have their own environmental requirements and objectives. As consumer behaviour continues to change, younger generations in particular are proving their green credentials by boosting the growth of the sharing economy.

David Woodroffe, SVP, Solution Management, Asset Finance at FIS.

In many countries, government initiatives are now also handing out tax penalties for assets that don’t meet strict criteria. And for firms that lease assets to businesses, regulatory requirements for ESG are taking shape, too.

Currently, finance regulation is also putting most of the emphasis on the environmental side of ESG and asking lessors to show they are greening their commercial portfolios and financing more sustainable businesses.

But rather than simply meeting short-term regulatory requirements, lessors should be looking to drive new, more responsible ways of thinking and acting deep into the leasing process. They must aim to future-proof more of that process, too, so they can quickly adapt to further regulatory change.

Servitisation and service aggregation

One solution to the sustainability challenge is servitisation, also known as pay per use. Rather than purchasing and taking full ownership, this finance model lets customers pay to use (or rent) items as and when they need them.

So far, so sustainable. But although leasing has always been about 'usership' over ownership, the switch to servitization makes pricing processes more complex and harder to govern. For the most agile businesses, this provides a key opportunity to become leaders in the servitization space.

To date, providers have typically based the price of assets on the cost of owning them outright and divided that full retail value into instalments. When no one customer pays for an asset in its entirety, it’s much harder to relate payments to the value of the equipment.

It will also be up to financiers to find enough customers to use an asset over its lifetime and generate enough revenue to pay for its total cost. You can no longer fund and forget. To maximize value, you need to keep ensuring maximum usage. The best way to do that is to offer additional services to support the asset.

In auto finance, for example, the financier could become the aggregator of a full range of services that keep cars on the road including battery replacement, annual taxation, insurance, tire changes, etc.

As the owner of thousands of assets, firms can source and provide these services more efficiently and cost-effectively than individual users while still increasing their margins. They can also help promote the re-use of assets as part of a circular economy, which in turn has been driven by semiconductor shortages.

 Modular asset finance technology

Moving to servitisation puts new pressure on asset finance systems. And the uncomfortable truth is that very few technology providers can yet service the shift to a sustainability-conscious, servitization-heavy environment.

Most systems have been developed to manage one customer using one asset for a set duration. But as pay-per-use becomes more prevalent, more asset finance providers will need a single, holistic view of each of their customers and a detailed view of each asset – the different customers that have leased it and the revenue it provides.

Then there’s the supplier view to consider. In their growing role as service aggregators, lessors will need to pay multiple suppliers of services. With customers making individual contributions toward those services, this revenue needs to be aggregated and redistributed to the right supplier at the right point in time.

Finally, you need a lessor view of your whole business. This should show whether you’re generating enough revenue to cover your costs and earn enough profit from all your customers, contracts and assets.

Bond yields were significantly higher, raising mortgage rates and immediately impacting the many thousands who were refixing or entering new deals.

In most traditional asset finance systems, one or two of these views may be possible but rarely all. Today, however, a modular system built on a common code and architecture can optimally support your different objectives.

As well modularity, the best modern systems let you easily adapt the underlying software applications and write your own code for whatever new functionality you need. Through APIs, they also integrate seamlessly with other third-party technologies and allow you to benefit rapidly from the latest innovations in asset finance services.

[Editor: APIs, or application programming interfaces, allow developers to write code that can access data and interact with software that is external to the system.]

Ultimately, the right technology will help you create a framework for meeting ESG requirements that embrace its principles and makes them integral to your leasing process. It will also let evolve your approach as regulatory requirements shift or grow.

Whatever your – and your customers’ – ESG objectives, you can realise them lease by lease and meet profitability targets, too. But you need to make your leasing process sustainable first.