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

Since the Brundtland Commission defined sustainable development in 1987, sustainability has been considered the ultimate objective of Corporate Social Responsibility (CSR). CSR has long been viewed as a discretionary aspect of a firm, secondary to the primary objective of shareholders’ profitability. Historically, the literature focused on the drivers of sustainability disclosure, documented in nonfinancial statements relying on international standards (e.g., GRI) (Giannarakis et al., 2014; Bose et al., 2018), the purpose of profit versus non-profit companies, and the issue of shareholder versus stakeholder value creation (Freeman et al., 2004; Garriga & Melé, 2004; Parmar et al., 2010). A change in policymakers and market attention towards climate change and sustainability brought to relevant regulatory initiatives – e.g., Non- Financial Reporting Directive (2014) and Corporate Sustainability Reporting Directive (2023) – that introduced new standards for social and environmental disclosure for listed companies, banks and insurance companies. These trends underscore the need to raise awareness on the topic for all companies, including SMEs. While not currently directly regulated, they may face indirect consequences of climate change regulations targeting banks, particularly regarding climate change risks. To better understand the implications of the policy debate on sustainability for SMEs, this discussion paper focuses on the recent regulatory changes for banks, which serve as the primary financial providers for the short and long- term needs of SMEs. European banks are currently mandated to regard sustainability as a fundamental element in business and, among others, in their lending activity towards companies, including SMEs. SMEs face indeed added challenges in an intricate market landscape marked by the long-term effects of banking and sovereign debt crises, COVID-19 consequences, heightened geopolitical tensions, inflation, and climate change (Fenwick et al., 2022; Macchiavello & Siri, 2022).