Funding obstacles complicate SMEs’ path to sustainability


The European Union (EU) aims to become a climate neutral continent by 2050. This sustainability objective undeniably influences all sectors, but particularly sensitively affects small and medium-sized enterprises (SMEs). It calls for a move towards sustainability, but experts say businesses are struggling to achieve it.

The greatest pitfall – finance

Recent research commissioned by Eurochambres and SMEunited reveals that 60% of SMEs operating in the EU have invested in sustainability goals in the last two years. Unfortunately, only 35% of funds dedicated to this came from external funding sources and only 16% of such can be assigned to sustainable funding (grants, subsidies etc.). 27% of European SMEs state, that there is a lack of financial resources to implement more green goals. There is a lack of assistance from the state and local self-government, as well as a complicated crediting system that makes everything very difficult. It is natural that under such conditions, a part of small and medium enterprise representatives lack the motivation to implement green policies. The difficulty of obtaining credit, the lack of sustainable financing methods and the long and uncertain payback period lead to the fact that some businesses choose to postpone the fulfilment of sustainability obligations as long as possible. The situation is even more difficult for those manufacturing green goods, because it requires awareness and adaptation to changes not only on the part of the manufacturer, but also on the part of consumers.

The main challenges

It has been established, that currently there are 15 different financing opportunities in the EU, aimed specifically at supporting SMEs for the purposes of making their business more environmentally friendly.

The main one is the green loan for business. Unfortunately, most SMEs fail to take advantage of such offers, as they face a series of obstacles, starting with the lack of information and ending with complicated applications and reports to credit institutions. SME owners and managers lack the time, knowledge, capacity and funds to address the climate crisis. However, their input is very significant, as small and medium enterprises make up as much as 90% of all the businesses of the world and creates two out of three jobs. It is obvious that the ecological achievements of the whole world will depend a lot on how green this business sector is.

How to help?

Because the biggest challenge preventing SMEs from moving faster towards sustainability is the limitation of financial resources, according to experts, the greatest attention should be given to facilitating crediting opportunities. A few significant factors are emphasised:

Simplifying sustainability reporting. When selecting the company and conducting its general evaluation investors use the environmental, social and governance (ESG) criteria. Unfortunately, a large number of SMEs still do not include ESG indicators in their mandatory financial reports. The latter are often evaluated as an additional worry and an unnecessary expense. UN Global Compact surveys have revealed, that only about 50% of companies with an annual turnover of less than 23 million Euro, report their sustainability performance, while among the large businesses with revenues exceeding one billion per year as many as 94% do so. Ignoring ESG complicates the opportunity to receive external funding for green purposes, therefore it is proposed for the sustainability reports to be simplified in response to the needs of and opportunities for SMEs.

Changing regulatory standards for sustainable loans. An EU-wide classification system, the taxonomy is described as a reliable and science-based transparency tool for assessing which economic activities can be considered environmentally friendly. Unfortunately, its standards for SMEs are too complicated. It is proposed, that taxonomy would not be taken into account when assessing the possibility of small and medium-sized enterprise to receive a green loan. In general, the guidelines for such loans should be reviewed and more adapted to small and medium-sized enterprises and specific sectors. This would increase their access to various sustainable financing tools.

Optimisation of state subsidy programmes. While green loans are the main external financing tool needed to optimise the sustainability of SMEs (in the last two years, they accounted for about 65% of all external financing received by SMEs), more attention should be paid to sustainable financing methods, especially state subsidies. Their programmes exist, but it is important to increase their availability, relevance and effectiveness, specifically taking into account the specifications of SMEs. The fact that the current system of subsidies and grants is not effective is evidenced by the numbers. In the last two years, only 16% of SMEs that received external financing for sustainability improvement took advantage of this opportunity, not involving the bank.

Reducing the administrative burden. Documentation requirements should not be an obstacle for a business to obtain financing. It is proposed to avoid re-collection of information. For example, if the required company’s data are recorded in the state registers, they shouldn’t be additionally collected in certain reports or application forms. Of course, it is very important to increase the financial literacy of the SMEs, by providing more accessible consultations and training.

Increasing information dissemination. It is proposed to disseminate the information about financing alternatives offered to SMEs, the most suitable choices and risks associated with them. A company that does not receive financing could be automatically referred to other financial institutions. This would save time and reduce the bureaucratic burden.
The European Union intends to achieve the goal of neutral impact on climate by 2050. This includes businesses that are encouraged to move towards sustainability. Small and medium enterprises feel great pressure regarding this issue, however, financial resources are insufficient for their activities to become more environmentally friendly.

Ekmel Çilingir | Chairman of the Supervisory Board of European Merchant Bank UAB