Key takeaways:

• ESG must prioritise social impact and governance to address critical local challenges

• SCF is key to bridging the $120 billion financing gap for African SMEs

• Collaboration between banks, fintechs, and local lenders can drive sustainable, inclusive growth

A global and sustained focus on climate change has placed the “E” in ESG (Environmental, Social, and Governance) at the forefront of investment decisions. Yet, in Africa, where carbon emissions account for just 2% of the global total, this focus on “E” alone risks overshadowing investment in the “S” and “G”. 

What Africa really needs from ESG

Africa’s challenges are different from those of Western economies. Issues like poverty, hunger, and economic inclusion are arguably more immediate than reducing carbon footprints. 

Yet, the frameworks used to measure ESG compliance often fail to reflect this reality. For African SMEs – critical engines of job creation and economic growth – accessing ESG-linked funds remains challenging due to the emphasis on environmental standards alone.

A significant portion of this challenge stems from the heavy manual and documentary requirements required to prove ESG credentials. Unlike larger corporations with dedicated teams and resources to navigate these complexities, African SMEs often lack the capacity to fulfill detailed reporting and verification processes.

Proving compliance requires extensive documentation, audits, and certifications, all of which come at a high cost. For businesses still focused on establishing stable growth, these requirements can be both impractical and prohibitive. As a result, many are left out of the very funding opportunities that could help them expand and contribute more meaningfully to their communities. 

The scale of the challenge – and the opportunity – is enormous. SMEs employ up to 85% of people in some African countries. Still, they face an enormous financing gap of $120 billion. 

Access to SCF can help bridge this gap, providing working capital to fuel growth and expand local economies. But to do so effectively, ESG metrics need to align with Africa’s context, considering social impact and governance as equally important as environmental goals.

What do we mean by Supply Chain Finance?

According to the International Chamber of Commerce, SCF is the use of financing and risk mitigation techniques to optimise working capital management and liquidity invested in the supply chain. It’s an ecosystem of products, mostly for open account trade and triggered by supply chain events.

For corporates, the appeal of SCF lies in its ability to optimise cash flow by extending payment terms to suppliers while still ensuring suppliers get paid promptly. This improves liquidity, reduces supply chain risk, and fosters stronger supplier relationships. For banks, SCF presents an opportunity to deepen relationships with corporate clients with financing that not generates new revenue streams and boosts client loyalty. 

By adopting SCF solutions, both corporates and banks unlock value trapped within the supply chain to ensure a resilient, flexible, and sustainable flow of capital.

< Read: How SCF is shaping the future of African trade >

Breaking down barriers to funding

For African SMEs, obtaining finance is often a struggle. Traditional lenders prefer larger, more established companies due to the perceived risks. SMEs often lack the financial track record or collateral required for loans, and the absence of sophisticated reporting makes it difficult for them to prove compliance with ESG standards.

SCF, coupled with the right technology infrastructure, can level the playing field, enabling SMEs to access funding based on real-time data instead of outdated, back-dated financial reports. 

For example, rather than focusing solely on tracking emissions, the right SCF platform can evaluate metrics such as growth in company revenue, the range and impact of the products or services provided, the number of jobs created, and the robustness of the management structure. These metrics provide a comprehensive view of overall impact and potential, making it easier for investors to align their capital with the opportunity in the region.

In turn, this transparency helps financial institutions fulfill their own ESG mandates, and what follows is a mutually beneficial cycle that drives growth and impact.

Collaboration: the key to scaling solutions

To truly unlock the potential of SCF for African SMEs, collaboration between banks, fintechs, and local lenders is essential. 

Currently, the bulk of SME financing across Africa is carried out by lower-tier banks and NBFIs, and the prevailing market myth is that building out capacity to execute financing at scale for these parties is a near-impossible task. But SCF, enabled by digital tools and strategic partnerships, offers a powerful way to achieve this balance. 

A recent pilot between Finverity and Investec shows that with the right digital tools and partnerships, it's possible to enhance SCF capabilities and track ESG metrics. 

By combining local expertise with technology innovation, such collaborations pave the way for a more inclusive financial ecosystem that supports economic growth and strengthens value chains across the continent. In only five days, the pilot helped smaller banks and NBFIs serve the SME sector directly and funded a cumulative US$500m.

Through automation, streamlined onboarding, and access to real-time data, fintechs can empower smaller financial institutions to make quicker, more informed lending decisions, even with limited resources.

The ready availability of SCF means that more African SMEs can access the working capital they need to grow, even in regions where large banks have historically struggled to serve. 

As more banks and fintechs join forces to deliver innovative SCF solutions, African SMEs and banks will truly deliver against the “S” and “G” of ESG. In other words, these new partnerships promise to drive sustainable growth that directly benefits local communities and businesses.

For more information on Supply Chain Finance in Africa, its opportunities and its challenges, watch our recent webinar.