European Climate Change and ESG regulation and Banks’ Lending to SMEs

Sustainability in the banking industry presents unique complexities that affect lending to SMEs. ESG considerations permeate the core operations of banking and ESG risks impact banks’ risks exposure. Understanding the effects of climate regulation on the banking sector is key for SMEs as they are not exempted from the transition to a more sustainable economic system. In the foreseeable future, the possibility to access external funds from banks and other channels for SMEs will also depend on their climate and ESG profile. Data will be a key issue in the design of the lending processes of banks. A lower availability of funds can be detrimental to the companies’ investment strategy and can hinder the transition process to a more sustainable business model. SMEs are thus called to design strategies to improve their ESG profile and to collect and disclose relevant data.