Interview with Raffaele Oriani

SMEs and sustainability. Why the ‘NEW NORMAL’ is actually a return to the real economy

SMEs and sustainability. Why the ‘NEW NORMAL’ is actually a return to the real economy

Anticipating change means accepting new challenges and new opportunities. How will Italian companies manage to innovate in this context of digital change?

It is crucial to anticipate change in a highly dynamic and competitive post-pandemic context. Innovating and being able to adapt quickly to the needs of an increasingly digital market is now a must. Italian businesses need to be ready to embrace new business models, simplify decision-making processes and open up to new markets, including niche markets which might never have crossed their minds before the pandemic.

Companies need financial support, since this digital ‘revolution’ calls for new capital from investors willing to assume risks and wait. This is a process that cannot be put off, a challenge for all businesses grappling with liquidity problems.
The post-pandemic financial structure, above all that of SMEs, may be highly fragile, with excessive exposure and indebtedness. In order to plan for the future and achieve all the innovations needed to compete at a global level, new instruments are required to provide businesses with both time and capital.

Sustainability has been a topic of great debate among academics from a range of fields, a key concept connected with many economic, commercial and social sectors. Are we looking at an increasingly sustainable future?

Finding a way out of this unparalleled crisis must become an opportunity to start afresh and invest in sustainability. Anyone who thinks that sustainability will be a passing fad or remain in the background has failed to grasp the depth and origins of the pandemic. Sustainability will be the driving force behind this rebirth.

The concept of sustainability has very firm foundations and encompasses several key aspects for escaping from the economic crisis: resilience, competitiveness, risk mitigation, good governance and respecting the needs of all stakeholders.

Economic, social and environmental sustainability will therefore become a fundamental assessment criterion (in some cases an absolute priority) for many businesses and investors in the post COVID-19 era. After the pandemic, it will be essential to focus on responsible innovation that takes due account of economic sustainability, tackling climate change, corporate social responsibility and responsible investments.

How will doing business evolve after and during COVID-19? What will change in terms of sustainability and innovation?

The real question is what the company of tomorrow will be and what role it will play. We will witness a paradigm shift on all fronts. Companies that manage to survive will need a period of stabilisation to reinvent themselves and define a joint recovery strategy. We will thus see a ‘back to real’ situation, which will be reflected in greater attention being paid to concepts that had been forgotten, such as company identity and strategic objectives.

Working life will also change, with smart-working and social distancing having shown how we are entering a new era: that of work 3.0. Communication and our way of approaching problems will also change and act as tools for a fresh, stronger and more aware start.

How can we help SMEs face this ‘NEW NORMAL’?

It is worth remembering that the Italian entrepreneurial fabric, which reflects entrepreneurial traditions connected with local areas and family histories, is quite different from the European model. Italian small and medium-sized enterprises, with turnover of less than €50 million, employ over 82% of workers in Italy and represent 92% of active companies.

These numbers show how, once the crisis is over, many companies will face great difficulties in remaining competitive without help. This is because the prolonged lockdown and subsequent problems we are still experiencing have shed light on certain structural issues in our entrepreneurial system.

For SMEs, crowdfunding, peer-to-peer credit platforms and micro-credit represent innovative solutions for accessing financing schemes that are better tailored to the needs of small and medium-sized enterprises and micro-businesses.

These instruments, although much more advanced in Europe and developing countries, are still rare in Italy. Such kinds of initiatives may provide ‘breathing space’ to businesses in the most severely affected sectors, such as sales, catering and tourism, while we await recovery.

From this perspective, private equity funds, which normally focus on longer-term returns by investing in companies’ risk capital, can not only help businesses to survive during these difficult times but also support them along a growth path as soon as the conditions are right. Therefore, once we put COVI behind us, funds and entrepreneurs will be able to benefit from the increase in value.

Has the time come to reconsider the general approach of the financial system? Will there be a return to the real economy?

Financial markets and the real economy have been following parallel paths for some time. The gap between economics and finance was highlighted dramatically during the major financial crisis of 2008-2009.

Over the last few years, policymakers have sought to define measures, above all of a fiscal nature, to direct financial flows more towards businesses and the coverage of their management and investment needs.

As things stand, it is more important than ever for the financial system to support the real economy, by returning to its original function, which consists in transferring the savings of entities with a surplus to those with a deficit, such as companies and consumers. This is the only way to support the growth which we hope to see once the health emergency comes to an end.

The global financial market is highly dynamic. How do you see the coming months? What will be the driving forces behind finding a way out of the crisis?

At the moment, this is hard to predict since the performance of financial markets with be closely tied to the progress of the pandemic. The gradual return to normal which we expect next spring must be associated with an adjustment to return prices to pre-COVID values.

However, this will only be possible if the financial system is able to support businesses, contributing not only with new debt but also with new risk capital. In order to escape from this crisis, what we need is a road to recovery, but above all innovation to help draw up new long-term development trajectories. And this is why we need patient capital, which is able to wait for long-term returns.

Raffaele is a professor of Corporate Finance, MBA director and associate dean for post-graduate programs at LUISS Business School