Will current sustainability regulations lead to financing difficulties for German SMEs?

A study conducted by Professor Dr. Gunther Friedl, Dr. Maximilian Blascke and Markus Frank of the TUM School of Management examines current sustainability regulations and their impact on one of the most important pillars of the German economy, small and medium-sized enterprises (SMEs). The study was conducted on behalf of the Hanns-Seidel-Foundation.

Small and medium-sized enterprises (SMEs) are one of the main pillars of the German economy. However, the shortage of skilled workers and rising energy and raw material prices are seriously affecting companies.

In European legislation, additional Environment-Social-Governance (ESG) requirements such as the Non-financial Reporting Directive (NFRD) and Corporate Sustainability Reporting Directive (CSRD) regulations are coming into focus.

The associated reporting requirements could soon be extended to SMEs. In contrast to large corporations, SMEs have not been required to establish reporting structures.

Due to a lack of financial and human resources, these emerging reporting and transparency requirements will result in significant additional costs. The immediate reporting requirement will initially affect only an estimated 15,000 of the 3.5 million SMEs.

However, it is expected that the reporting requirements will gradually be extended to smaller SMEs. Many SMEs are already indirectly affected by these requirements, as they act as suppliers to large companies in the value chain and have to provide information to the large companies subject to the reporting requirements.

There is also an indirect risk of restrictions in the area of corporate finance, as banks increasingly require ESG information when granting loans. However, SMEs are often unable to provide this information.

For the 2022 financial year banks will have to disclose their Green Asset Ratio (GAR), i.e. the proportion of their sustainable business volume. Until 2025, loans to SMEs - regardless of their sustainability - will not be included in the rating. This means that in the short term, banks have less incentive to lend to SMEs. Legislation is needed in the short term to remove this disadvantage by changing the calculation logic.

However, additional ESG reporting also offers opportunities for SMEs in the short to medium term. Reporting alone can reduce information asymmetries and risks and thus enable lower interest costs, regardless of the sustainability of the SME. SMEs should therefore invest in ESG reporting as soon as possible in order to prepare for the upcoming regulations. Environmental issues are particularly important in this context, as both banks and legislators are focusing on them.

Read the full study Read the full study here (in German):

https://www.hss.de/news/detail/nachhaltigkeit-im-mittelstand-news10103/