The convergence of embedded finance, AI-powered underwriting, and ESG (Environmental, Social, Governance) considerations is becoming part of mainstream credit decisioning in the UK. As platforms grow, regulations tighten, and lenders shift strategies, ESG credentials are emerging as an increasingly influential factor. Here’s how 2026 is shaping this transformation, and why it matters. 

UK Embedded Finance and SME Lending: The Upgrade

Embedded finance is booming: A recent market report estimates that the UK’s embedded finance market is on track to hit around US$35.13 billion by 2030, reflecting a robust growth trajectory between 2025 and 2030.  

This explosion isn’t just about BNPL or consumer payments. Embedded finance is increasingly focused on SME-oriented credit, B2B invoicing, and vertical-software platforms that small businesses already use (POS systems, e-commerce dashboards, accounting tools, etc).  In short, embedded lending is becoming a major channel through which SMEs access capital. 

Business lending is growing, but Gaps Remain: According to the Q2 2025 report, Gross lending to SMEs was £4.24 billion, up 8% YoY, with small businesses seeing the largest gains (+28%).  

The Bank of England’s most recent publications confirm that SME demand for external finance remains very low, continuing the trend from 2024. According to its July 2025 Financial Stability Report, UK households and businesses are generally resilient, but many SMEs still avoid borrowing unless necessary, citing risk aversion and preference for internal funding.  

That means there’s still a significant lending gap, particularly for smaller, newer or asset-light businesses that traditional banks might view as risky. Hence, there is a growing opportunity and appetite for embedded finance lenders and alternative finance providers. 

ESG Lending Momentum: Lender Sentiment & Strategic Shift

The majority of UK lenders now have ESG lending strategies.
A survey by Grant Thornton UK LLP of nearly 50 UK-based lenders (mid-market to large) reveals: 

• 73% now have a defined ESG lending strategy (up from 57% in 2022).  
• 81% of lenders expect a firm’s ESG status to have an increasing influence on their willingness to lend over the next five years.  

In other words: ESG is no longer optional. For many UK lenders, it’s becoming embedded into credit strategy and risk frameworks. 

Regulatory & Data Landscape: Cleaning Up ESG Ratings and Boosting Trust

For ESG-aware lending to scale credibly, lenders need reliable ESG data, and the UK has taken big steps toward standardising that data. 

• The Financial Conduct Authority (FCA) has welcomed legislation from the government to bring ESG-rating providers under its regulatory remit. The aim: improve transparency, governance, controls and reduce conflicts of interest in a market that previously operated largely by voluntary standards. 
• The statutory instrument lays the groundwork; detailed rules and guidance will be consulted on by the FCA. Once finalised, the regime will come into effect by 29 June 2028.  
• This regulatory move aligns with efforts at both the UK and EU levels to ensure ESG ratings and data are reliable, consistent and comparable.  

For lenders building ESG-aware credit models, especially those that are integrating real-time or alternative data, this is a critical step. Reliable, regulated ESG ratings/data reduces the risk that borrowers are mis-scored or that lenders are exposed to green-washing, inconsistency or inflated claims. 

From a borrower’s perspective, this also increases predictability: if ratings become more standardised, businesses will have clearer signals about what ESG practices can help or harm their financing access. 

ESG-Aware Embedded Lending

Putting together the pieces: growing embedded finance, stronger SME lending demand, shifting lender sentiment toward ESG, and a regulatory push toward transparency. We are at a tipping point for ESG-driven embedded credit in the UK. 

• SMEs and mid-market firms now have a route, i.e. embedded lending that can leverage non-traditional data sources such as cash flow, real-time business operations, invoice history, etc., rather than just historical credit or assets. This expands access, especially for asset-light or younger firms that lack traditional credit history. 
• Lenders: Many now see ESG not just as a reputational or compliance add-on, but as a central component to underwriting strategy and long-term loan risk management. 
• Regulators and data providers: Efforts are underway to bring comparability and transparency into the mix. Both aspects are foundational if ESG-based credit is to scale responsibly and fairly. 

This confluence could reshape what “creditworthiness” means. Well-run, clean-energy firms, socially responsible businesses, or companies with solid governance would be able to find easier, cheaper access to capital, even if they lack long credit histories. 

Some Emerging Challenges, and What to Watch

• ESG data coverage is still uneven: Many SMEs, especially smaller ones, may not have the resources or reporting maturity to generate robust ESG disclosures. Until data quality improves, some firms might be at a disadvantage. 
• Regulation will raise the bar for better and for worse: The FCA-led ESG ratings regulation will likely improve trust over time, but meeting regulatory compliance might be expensive for smaller rating providers. This could shrink the number of available ESG data sources. 
• Embedded lenders must build new data and risk infrastructure: To combine real-time business data, ESG signals, and automated underwriting requires investment in data collection, AI/ML modelling, compliance, and governance frameworks. This could prove to be a substantial cost in terms of time, money and man-power. Alternatively, embedded lenders can leverage powerful solutions from leading SaaS companies like Pulse. Pulse’s solutions are built on AI, machine learning and real-time data, with compliance, security and safety embedded already. Rather than building such infrastructure from scratch, integrating with Pulse’s plug-and-play, API-first solutions can allow users to leverage the benefits of real-time data, automated underwriting and a suite of powerful solutions under Pulse’s Unified Lending Interface (ULI). For example, Pulse’s automated underwriting solution: Einstein aiDeal, can auto-decision 95% of all incoming deals in under 45 seconds each, with customisable criteria. This confluence of automated, AI-driven credit decisioning and the integration of accurate and reliable ESG data can truly change the game. To learn more about Pulse, ULI, and its solutions, contact us today. 

What This Means for UK SMEs, and the Broader Economy

For SMEs & Mid-Market Firms
If you run a small or mid-sized business, ESG credentials are likely to matter more than ever. Demonstrating sustainable practices in energy, governance, social policies, and supply-chain transparency could genuinely improve access to finance, lending terms, or loan size. That might make sustainability investments not just ethically or operationally desirable, but also a financially driven strategic move. 

For SaaS companies and Embedded Lenders
This is a major opportunity. Embedded finance enablers (like Pulse), especially those already collecting operations, sales, cash-flow, or supply-chain data, are uniquely positioned to build ESG-aware credit products. By combining real-time data with ESG scoring and taking advantage of new regulatory clarity in ESG data, SaaS companies like Pulse could lead the next wave of embedded SME lending. 

Conclusion: ESG Becomes Increasingly Credit Relevant in UK Lending

 The data, whether from SME lending surveys, embedded finance market estimates, or lender strategy reports, point to a structural shift. ESG is no longer a minor value add. It will increasingly determine lending strategy, access, and risk management. 

For UK SMEs, SaaS companies, and lenders alike, 2026 represents a turning point. As ESG-aware embedded lending gains traction, “creditworthiness” is being redefined, not just by balance sheets and cash flows, but by sustainability credentials and governance practices too. 

If the regulatory push for transparent ESG ratings, the growth of embedded platforms, and the increasing willingness of lenders to embed ESG into underwriting all converge effectively, we may soon see a world where doing good and being green, or environmentally conscious, isn’t just morally important, but financially rewarded.