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SGEF: Sustainability focus heralds new ‘Golden Age’ for asset finance



Pandemic disruption underlined the need for the asset finance sector to be agile and reactive, and lenders who built strong bonds with their customers and vendor partners have reaped the benefits. Now the industry needs to adopt the same approach to deal with the challenges presented by the sustainability agenda, according to Jochen Jehmlich, CEO at Société Generale Equipment Finance (SGEF).

Speaking at an Asset Finance Connect Senior Executives Fireside Chat, sponsored by Solifi, Jehmlich predicted a potential “golden age for asset finance to come”, pointing out that the urgent pressure for businesses and the whole economy to adopt climate-friendly ways of operating means that all assets will need to become greener.

Jehmlich predicts a potential “golden age for asset finance to come”,

“Countries and governments have committed to reducing CO² emissions dramatically over the next few years. That means the whole economy has to run on electricity or hydrogen. It’s not about whether as lenders we should fund only solar panels or wind turbines—it’s about exchanging all assets for greener options.

“In areas like vehicle fleets and commercial equipment, everything will need to be replaced”

Jochen Jehmlich


While acknowledging the pandemic had come as a “big surprise and we were not super prepared”, Jehmlich said SGEF’s decision to offer a moratorium on payments and subsequently a staged approach to scheduling repayments had proved successful, with almost all customers back to regular payments by the end of 2020.

“We were proactively seeking a joint way forward. You build good customer relations in the bad times, and not the good times,” he noted.

Jehmlich also pointed out that, with offices shut overnight and overseas travel on hold, digital transformation had happened at a much faster pace than previously anticipated. Within a month, all employees were working virtually, and digital technology became a lifeline.

“Suddenly it was possible to sign a contract from home and all the hurdles the legal department had raised before were pushed aside. We have made a jump forwards in terms of digital working”


The focus on ESG issues at both organisational and country level is proving to be an equally disruptive event, as is already evident in the auto industry. There is also pressure from governments who are linking funding subsidies to investment in green technologies and approaches.

“There is a clear understanding that there is a connection between global warming and CO² emissions, and countries and governments have committed themselves to reduce CO² dramatically. It’s not that all our assets we finance today will get greener – they all have basically to be exchanged. All these replacements have to be financed, and we should be in a position to catch some of it,” Jehmlich stated.

SGEF, as part of a big multinational group, has already made a tranche of sustainability commitments, including dropping out of financing anything related to coal, withdrawing financing for oil and reducing and eventually ending lending for certain forms of gas.

“But we are not converting into NGOs – we are still profit driven organizations with a decent return on equity targets. We don’t want to end up with stranded assets or equipment with no value, but the question is how we make money with solutions that are attractive to our customers,” Jehmlich said.

Residual values

One key issue is identifying and managing the risks in financing a new generation of assets based on constantly evolving technologies. ‘We can see this already, for example with electric buses for communities. They are used to the idea there is an open residual and they give the bus back after a while. Whilst we would have been prepared in the past to take it, or the manufacturer would take it, nowadays nobody wants to take it because a bus can run for eight years. Nobody knows how the battery life cycle will look in eight years,” Jehmlich pointed out.

While the auto industry has been the first to experience complete disruption as a result of new technologies, Jehmlich forecast that other sectors will also undergo a revolution. For example, as pressure grows for agriculture to focus less on meat production and more on plant-based production, that could see the introduction of new types of equipment, perhaps smaller assets which target specific activities.

“So, we look for new [green] assets, try to find solutions to finance them, and try to integrate subsidies,”

Jochen Jehmlich

Pay per use

One option is the growing interests in “pay per use” equipment deals, priced on a consumption basis. This requires the traditional approach to calculating residual values and pricing risk in contracts to change.

“We are talking about the circular economy, where the lender funds a new asset which the manufacturer subsequently refurbishes for a second life as a used asset, and which at the end of its life is broken down into parts which are re-used. But no one will jump into this new environment without thinking carefully about which risks they will take,” Jehmlich explained.

Currently, the second life value for a solar panel, for example, is unknown. But while electric assets are likely to be more expensive at the beginning of their life, the maintenance and running costs are potentially lower, suggesting they may have a longer life.

“That opens up the way for lenders and manufacturers to build a long term relationship with the customer and to sell lots of services, for example, updating services,’ Jehmlich said.

However, he cautioned that the uncertainties over who will take the risk over the life of the asset mean a true “pay per use” solution was some way in the future. Currently it is limited to certain areas, such as photocopiers, where there is a high volume of customers sharing one piece of equipment and where levels of usage are reasonably predictable. Nevertheless, such deals have to take account of not only the credit risk if the customer defaults, but also utilization risk, for example if there are problems in a particular industry sector so that turnover falls or customers desert that particular company.

But Jehmlich closed the session with a glimpse of the future possibilities. SGEF is working with Philips on a project which will see the medical equipment supplier take over the whole operation of a clinic for a 10-year period. The customer will pay monthly instalments, and the supplier will take care of the equipment and ensure the technology is upgraded as required.

He also put the asset finance sector on notice that change is inevitable. “I’m always astonished when at a leasing conference, how much less talking there is about the digitialization of the asset finance industry. If you compare that would other parts of the universal banks, there complete areas have been completely disrupted. And banks have been expelled from some areas. So we have to be aware that once in a while, there could be a disrupter coming in showing us a much simpler form of the industry, one we can’t imagine right now. Compared to the whole banking industry, business leasing and asset finance is quite a conservative part that goes very slowly, but that must not be the case in the future.”

Analysis from John Rees

head of Asset Finance Connect equipment finance community

As head of SGEF, rated as the number one asset finance lender in the AF50 European rankings, with €9.8bn of new business across 35 countries, Jochen Jehmlich is very clear about one thing – it is no longer business as usual.

Covid-19 has already disrupted the sector, as some big businesses found they could no longer operate during the early days of the pandemic and so were at risk of defaulting on contracts. But as Jochen points out, by staying close to customers and building up relationships, it has proved possible to reschedule payments and bring lending back on track.

And in some ways, pandemic-induced change has been good for the industry. Digital working has become the norm, offering efficiencies and opening up new opportunities. And with supply chains squeezed, companies and their customers are more prepared to look at how to make the most of the assets they already have in hand, through better utilisation.

But the biggest change to come, Jochen predicts, is the requirement to respond to the intense pressure to move to a more sustainable model of working. The “use and throwaway” society, which consumes without thought for how goods are manufactured and what happens to them at end of life, is at an end. At first glance, this wipes out the traditional model of financing an asset for a finite time period, and then replacing it with a new item.

However, lenders have no choice but to look for new solutions, as government, business and the public make it clear that steps must be taken to address climate change and the adverse environmental impact of “dirty” industries like coal and oil.

That presents a challenge for asset finance providers, because the new “green” assets are based on evolving technologies and lack the track record necessary to assess risk and residual value.

As Jochen points out, this is already evident in the automotive sector and is set to spread to other industries imminently. One option is to move to a “pay-per-use” model, whereby multiple users have access to an asset and payment is assessed according to utilisation. While simple in principle, this is more difficult to manage in practice.

But as Jochen emphasises, the asset finance sector is going to have to find solutions to these dilemmas. And for those lenders who do, there are rewards ahead, with predictions of a ‘golden age’ for asset finance as businesses seek to replace older equipment with new, green alternatives. This is not the moment wait and see, because as Jochen explains, there are plenty of disruptors waiting in the wings to seize the opportunities that traditional lenders may be too slow or too timid to explore.

We are discussing what ESG means for the asset finance industry, and progress towards new models, in our equipment finance community. Register for our webcasts and join in the discussions.