The European "green transition" program seems unstoppable and will gradually involve even unlisted SMEs, either through relationships with listed companies within the value chain or through dialogue with credit institutions.
But what are we talking about, concretely?
The acronym ESG stands for Environmental, Social, and Governance, and refers to all aspects related to environmental and social impacts and the quality of governance that every company should assess in its organization. Given the breadth of topics it covers, it is often perceived as nebulous by SMEs or, in any case, distant from everyday needs and problems.
However, regulatory pressure has increased significantly with the aim of raising awareness in the industry on sustainability and good governance issues. At the European level, as part of the Green Deal, two regulatory packages have had the greatest impact on businesses: the European Taxonomy Regulation1 and the Sustainability Reporting Directive2. The former classifies economic activities according to six environmental sustainability criteria to promote "green" investments, while the latter defines ESG reporting rules (i.e., drafting of the sustainability report) at the European level.
To facilitate small and medium-sized enterprises within the complex regulatory framework, the Ministry of the Treasury (MEF) launched a public consultation at the beginning of 2024 aimed at fostering dialogue between unlisted SMEs and the financial sector, particularly banks, on ESG issues. The consultation, which ended in August, will result in a methodological document called “Sustainability Dialogue between SMEs and Banks” (still in the "consultation" version) that has specific objectives of:
· facilitating the exchange of information, considering criteria of standardization, proportionality, and cost-effectiveness;
· raising SME awareness of sustainability information;
· laying the foundation for training initiatives dedicated to SMEs on sustainability.
But why were banks asked to be the first to engage with SMEs on these issues?
European financial institutions are required to comply with Pillar III regulations, which, in the ESG context, provides for the calculation and publication of two key indicators: the Green Asset Ratio (GAR)3 and the Banking Book Taxonomy Alignment Ratio (BTAR)4. It becomes crucial for banks to have tools and methodologies to accurately assess SME performance in ESG matters and thus increase exposure to the more "virtuous" companies.
Through the methodology provided by the MEF, banks therefore aim not only to collect the information that SMEs are required to provide on E, S, and G aspects but also to calculate quantitative indicators for obtaining an "ESG rating."
And what's in it for the SMEs?
A better ESG rating could translate, for the company, into easier access to credit, with simpler processes, faster evaluation times, or, in the best cases, lower financing costs. These are significant factors, especially during a period of credit contraction and still high interest rates.
More generally, better ESG performance also helps improve an SME's reputational risk, increasing the ability to operate within more competitive value chains.
Of course, all this is true if the company can rely on tools that make the collection and reporting of information as simple and immediate as possible, in addition to the ability to accurately plan future investments.
Technesthai, with its financial planning product - Dynamic Business Planner (DBP) - has activated the ESG module with the specific goal of helping SMEs in ESG reporting. The module already incorporates the ability to create a sustainability report aligned with MEF methodology and compliant with European regulations, as well as to activate specific investment plans to improve ESG performance.
Find out more on our website...