EU Proposes New Standard to Boost SME Access to Green Finance

The European Union Platform on Sustainable Finance (PSF) has set out a new proposal to make it easier for small and medium-sized enterprises (SMEs) to raise funding for their climate transition and sustainability projects. The new "SME Sustainable Finance Standard" proposal is created to make accessing sustainable finance less complicated and facilitate SMEs in reporting on sustainability initiatives.

The PSF, a specialist committee that counsels the European Commission on sustainable finance policy, emphasized the essential role of SMEs in the EU's sustainability transformation. SMEs generate more than half of the EU's GDP and are responsible for greater than 63% of enterprise-linked CO₂ and greenhouse gas (GHG) emissions. Nevertheless, even though they are such important economic actors, SMEs tend not to have access to the kind of financial resources they need to transform into sustainable business models.

As stated in the report, SMEs are confronted with a number of obstacles to obtaining sustainable finance. These are large minimum loan sizes, intricate banking rules, and the absence of uniform definitions of green or sustainable loans. A majority of SMEs are also not aware of the sustainability financing opportunities, and they are constrained by the lack of harmonized reporting requirements relating to sustainability. These challenges have hindered the ability of small businesses to converge with the sustainability objectives of the EU and receive investment for green projects.

Although the EU Taxonomy was initially put in place to categorize economic activities for sustainable finance, the PSF recognized that its conditions are too intricate for SMEs to implement. The new SME Sustainable Finance Standard attempts to rectify these by simplifying the framework for SMEs to obtain green financing and report applicable sustainability information.

The standard outlined in the proposal has crucial performance indicators (KPIs) which will enable SMEs to prove their sustainability commitment in a pragmatic and achievable manner. Also, the standard shall help SMEs' financing institutions by simplifying it for them to tag loans or other financing arrangements as sustainable or transition-related.

One of the key aspects of the suggested standard is the application of minimum environmental and social protections for SMEs. It defines that companies applying for sustainable financing should not be involved in activities categorized as excluded according to the EU Benchmark Regulation for Paris-Aligned Benchmarks (PAB). Additionally, SMEs themselves should not be part of these excluded sectors or offer specific services or products that enable such activities.

Another key point of the proposal is the voluntary encouragement of sustainability reporting by SMEs under the Voluntary Standards for SMEs (VSME). This would enable SMEs to voluntarily or upon request make disclosures of such key sustainability indicators as financial institutions and value chain partners may have requested. The PSF also suggested that the VSME framework that is being constructed for entities not within the remit of the Corporate Sustainability Reporting Directive (CSRD) needs to include indicators that are harmonized with the SME Sustainable Finance Standard. The harmonization will enable SMEs to include sustainability metrics in their reporting processes, further enabling their access to green financing.

To further ease the use of the new standard, the report suggests creating an online tool that will help SMEs determine if their activities or future investments fall within the SME Sustainable Finance Standard. The tool would be founded on current sustainable finance standards and would provide SMEs with a better idea of how they can bring their business practices into alignment with EU sustainability objectives.

First, the SME Sustainable Finance Standard will target climate-related finance, with an extension of its scope to other environmental goals in the future. The framework is designed to change over time to cover wider sustainability issues while keeping SMEs competitive in the fast-changing economic environment.

Helena Viñes Fiestas, Platform on Sustainable Finance Chair, highlighted the significance of this new standard in helping SMEs navigate a pivotal moment of economic and environmental transformation. She said, "Our new report provides a practical solution for SMEs with a triple challenge: staying competitive in the face of the twin ecological and digital transformations, decarbonising their business, and gaining access to the finance they require to make this transition."

The launch of the SME Sustainable Finance Standard is an important milestone in the journey toward making sustainable finance accessible to small businesses. Since SMEs are the backbone of the EU's economic and environmental future, this initiative seeks to equip them with the financial instruments they need to support the green transition effectively. With the new framework in place, SMEs would be able to access sustainable financing more easily, decrease their carbon footprint, and adapt their business models to align with the EU's ambitious climate targets.