SMEs Facing Challenges with the EU’s Sustainable Finance Framework
Companies are making encouraging progress with initial climate and sustainability disclosures, especially in sectors like utilities and real estate, demonstrating how capital expenditures associated with the EU Taxonomy can facilitate the transition of key industrial activity.
Despite this, small and medium enterprises in the EU notably are struggling with the complexity of sustainable finance framework criteria, resource constraints, ensuring the compliance of stakeholders in their supply chains, reporting challenges and challenges in interpreting criteria such as "where feasible" or "key components”.
A new report released by the Platform on Sustainable Finance, an advisory body to the European Commission, has released a detailed report of market practices related to the EU sustainable finance framework. Highlighting the effective adoption of the EU sustainable finance tools, such as the EU taxonomy and the European Green Bond Standard, it includes case studies for different stakeholder groups.
It looked at the market of seven stakeholder groups, including large corporates, credit institutions, investors, insurers, public institutions, auditors and consultants, and SMEs.
It identified early adoption practices in three main areas: using the EU sustainable finance framework for business strategy, transition planning, and target setting; finance and transactions; and reporting, monitoring, and assurance.
Despite significant progress in adoption and compliance with the EU’s regulatory requirements, the report reveals many companies are finding that criteria outlined in the EU taxonomy, including the DNSH criteria and references to EU legislation, are often difficult for companies, especially SMEs, to understand and navigate. It finds that SMEs notably face limitations in terms of technical and legal resources compared to larger companies, making it challenging for them to conduct taxonomy assessments and reporting. Further SMEs often cover only a portion of the supply chain, making it challenging for them to identify their eligibility under the taxonomy.
To tackle these challenges the report recommends that SMEs should start making efforts to report voluntarily, beginning with key indicators relevant to their business models, activities, and client requests. They should also implement education and training programs and try and boost peer-to-peer engagement among market actors to share best practices, it says.
The report as such signals possible changes to the EU Taxonomy. It suggests that there is a need to further improve the usability of the EU Taxonomy and the wider sustainable finance framework to support financial and non-financial actors in transitioning their business models. Simplifying the criteria and providing clearer guidance can help companies, including SMEs, in their alignment efforts, it says. As an advisory body to the Commission, the findings are likely to have an impact on future policy directions, especially given the degree to which SMEs notably are being challenged meeting the requirements of the sustainable finance regime in the EU.
The findings in this report build on the European Commission’s 2023 Recommendations on Transition Finance, the 2023 EU Communication ‘A sustainable finance framework that works on the ground’, as well as on the 2022 Platform on Sustainable Finance (PSF) data and usability report.