SMEs and Green Finance: Navigating the EU Taxonomy

Finn Goodall
August 15, 2024

Navigating the EU Taxonomy: Empowering SMEs in the Green Finance Landscape

In the beginning of the year, the EU Platform on Sustainable Finance (PSF) released a pivotal report titled “A Compendium of Market Practices.” This report sheds light on the early sustainable practices being adopted by businesses and financial institutions under the influence of the EU’s Sustainable Finance Taxonomy, which plays a crucial role in driving the green transition.

At Trinomics, in collaboration with Oxford Research and Syntesia, we had the privilege of contributing valuable insights to this report. Our comprehensive study on the costs and benefits associated with SME Taxonomy alignment disclosure was commissioned by DG GROW and forms a key part of the findings.

Trinomics' Contribution

Our study delves into the potential benefits, reporting challenges, and the disproportionate costs faced by SMEs when aligning with the Taxonomy framework, as highlighted in the PSF report. Here are some of the key findings:

SMEs face disproportionately high costs in complying with potential Taxonomy reporting requirements.
The allocation of sustainable finance to SMEs remains insufficient, posing a challenge to the objectives of the EU Green Deal.
Although 30-70% of SMEs in bank portfolios are Taxonomy-eligible, sustainable loans account for only 5-6% of the total SME lending portfolios.
A mere 9-10% of SMEs have successfully obtained green or sustainability-linked loans, emphasizing the need for improved accessibility.
SMEs encounter significant challenges in interpreting, collecting data, and reporting in line with the Taxonomy, highlighting the need for further simplification and improvements tailored to SMEs.
Further, in our study on SME disclosure on taxonomy alignment, we estimate that the expenses for SMEs assessing Taxonomy alignment range from €22,500 for micro-enterprises to €125,000 for medium-sized enterprises.
The potential costs of Taxonomy reporting for EU SMEs are projected to outweigh the benefits, underscoring the necessity for cost-effective solutions that enable SMEs to fully capitalize on the financing opportunities offered by the green transition.

The findings of our study highlight the urgent need for targeted support and simplified processes to enable SMEs to report in line with the Taxonomy. While the challenges are significant, addressing these barriers is essential for SMEs to effectively contribute to and benefit from the green transition. Providing cost-effective reporting solutions, and thus improving access to sustainable finance, will be key to ensuring SMEs can play a full role in achieving the EU Green Deal’s objectives.

The author of this article, Finn Goodall, is a Green Finance Consultant at Trinomics, a consultancy firm specializing in bespoke policy advice on energy, environment, and climate change issues.

Finn was part of the Trinomics’ Green Finance team that authored and supported the study “SME Disclosure on Taxonomy Alignment: Cost/Benefit Analysis” that was published by the European Commission’s DG GROW.

Finn holds M.Sc. in Environmental Management and Policy from Lund University with several years of experience in ESG, green finance, and sustainability consulting.