Jeff Lezinski,
Executive Vice President, Product Management,
Odessa

Business leaders, regulators and shareholders across sectors are paying more attention to environmental, social and governance (ESG) issues. The equipment finance industry is no exception. Legislation such as the European Green Deal and the U.S. Inflation Reduction Act actively incentivize companies to adopt greener business practices. Their customers and shareholders will increasingly scrutinize their environmental and social impact, making ESG best practices critical.

However, for many financial services companies leasing equipment, it may not be immediately obvious how ESG applies. Their products are financial instruments, after all, not concrete physical goods. How can they participate in the green revolution?

Here are three trends equipment finance companies should be considering as they look to shore up ESG practices.

ENVIRONMENTAL IMPACT REPORTING
You can’t improve on ESG issues if you don’t know what your impact on the environment and society is today. That’s where reporting comes in. Equipment lessors and lessees should be looking into products that will help them take stock of their environmental impact and identify areas in need of improvement.

The challenges associated with ESG reporting are multifold: there is no single universal standard, and the content is new from a disclosure standpoint. On March 6, 2024, the SEC adopted final rules to disclose certain climate-related information in filings. However, this does not exactly align with other standard setters globally who have been working on ESG reporting requirements, including the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB). This patchwork of standards leads to added compliance complexity for global financial services firms.

One step equipment lessors are starting to take is adopting CO2 emissions reporting and even integrating it into their financing offers. That is, when they lease a piece of equipment, they may want to factor its environmental impact into pricing. If equipment will be especially harmful in terms of emissions, it may be less valuable in the long run. Emissions reporting provides a simple metric to begin integrating ESG concerns into financial processes.

TRANSITION AND GREEN FINANCE
Equipment finance companies may not typically produce goods, but they make the financial instruments that enable the development and popularization of new goods. So, a suitable place for financial services firms to start is to examine the assets they’re underwriting and at least minimize their adverse environmental impact, if not actively invest in the products that will forge a more sustainable future.

For example, imagine a lessor whose portfolio has a high percentage of diesel trucks. That is not going to encourage customers, shareholders and regulators concerned about climate change. At the very least, that institution should look into transition finance, which means diversifying their portfolio toward assets that will not actively harm the environment.

At best, though, equipment finance companies can be leaders on the issue by devising products that actively incentivize the development of green assets. This approach is known as green finance. Consider a financial services firm creating specialized green loans and leases for electric vehicles, solar cells or wind turbines. By minimizing upfront costs, finance can spur innovation, not just mitigate negative industrial effects.

EQUIPMENT SUBSCRIPTIONS
A third trend equipment finance companies, lessors and lessees should consider is the move in equipment finance from traditional leases to subscriptions, or the “as-a-service” model. With traditional leasing, companies that finance equipment generally dispose of it at the end of a lease. Obviously, this churn has a relatively high environmental impact, producing a great deal of waste.

With short-term rentals via flexible subscriptions, equipment owners cannot expect that the asset will never come back into their possession (or only do so when it is devoid of value, incentivizing disposal). Instead, they will need to learn how to refurbish and reuse more equipment, investing in it for as long as possible to prolong its value. This shift of the industry toward the so-called circular economy will foster both environmental sustainability and financial flexibility.

The good news for equipment finance companies and their customers is that it’s still early days for ESG innovation in the industry. Rather than waiting for regulation to force short-term action, proactive companies can get ahead of the movement, even transforming it into a competitive advantage. ESG best practices aren’t just better for the world; they are also attractive to customers, shareholders and partners. That’s all the more reason for companies in our industry to start investing now in a more sustainable future. •

Jeff Lezinski is the executive vice president of product management at Odessa.