Sustainability-based loans and investments can offer favourable terms, but businesses that want to take advantage of the growing availability of green finance need to ensure they meet strict criteria for reporting on environmental, social and governance (ESG) factors.
By Chris Torney
Banks and other financial institutions are increasingly linking the availability of capital to the ESG performance of businesses looking to raise finance. For larger organisations that are more likely to have robust sustainability-reporting systems in place, this isn’t usually a major challenge. But new research from Sage, carried out in collaboration with the International Chambers of Commerce, warns that a lack of adequate sustainability reporting among small and medium-sized businesses (SMBs) is preventing them from obtaining much-needed funding.
Sage’s report, SME Sustainable Finance Stocktake: Turning Ambition into Action, shows that while almost a third of SMBs (27%) are interested in applying for green finance, fewer than one in 30 have actually done so in the past 12 months – and just one in 200 SMBs has successfully obtained some form of sustainability-based capital.
Elisa Moscolin, executive vice president of sustainability and foundation at Sage, is concerned. “SMBs are on the frontline of climate action, but too many are still locked out of the finance they need to grow sustainably. The barrier isn’t intent; it’s access to the tools that can help them scale their businesses while building resilience,” Moscolin says. “By using AI and digital accounting tools, SMBs can report faster, build lender trust and unlock finance at scale. That’s the path from ambition to action.”
Finance providers are facing increasing pressure from regulators, shareholders and other stakeholders to link funding to sustainability performance, Moscolin points out. “Institutions are under pressure from rules such as the EU’s Sustainable Finance Disclosure Regulation or central-bank stress testing to demonstrate they are managing climate risks in their portfolios. There is also evidence that shows sustainable investment funds tend to outperform, while being seen as a climate leader enhances brand value and helps attract talent.”
But the shift towards green finance presents a significant opportunity for smaller organisations, not just a challenge. Julie Parry, director at the Nottingham office of UK accountancy group UHY, says: “For SMBs, green finance isn’t just about compliance but also a strategic lever,” she says. “It offers favourable loan terms, for example, with lower interest rates and longer repayment periods for borrowers that are capable of meeting ESG goals. It also improves access to capital, as investors increasingly favour businesses with strong sustainability credentials.
“Supply chains can become more resilient too, with larger companies demanding ESG data from suppliers to meet their own reporting obligations. Overall, these benefits provide a competitive advantage; sustainability reporting builds trust with customers, partners and employees.”
Moscolin adds that Sage’s approach is based on the idea that green finance is not solely about funding. “It’s about financial solutions, data and the tools that help businesses operate sustainably and contribute to a low-carbon economy while scaling their operations. We call this a 'virtuous circle' that connects sustainability reporting, sustainable finance and enhanced climate action for SMBs worldwide.”
Overcoming reporting barriers
Much of Sage’s work in this area, Moscolin explains, relates to simplifying sustainability reporting for SMBs to both increase their access to green finance and “provide them with the tools and knowledge they need to take meaningful climate action”. And this is not just about finance and investment, she adds: “Accurate sustainability reporting helps SMBs reduce costs, attract investment, win contracts and future-proof their operations, while also contributing to broader environmental and social goals.”
Matt Smith, CEO of social investment organisation Key Fund, says that SMBs should look to integrate ESG considerations throughout the business, but adds that companies should adopt an approach to measuring sustainability performance that is “proportionate, realistic and tailored to their size and sector”.
“Affordable software solutions are available to automate sustainability reporting and carbon tracking too, helping businesses accurately measure sustainability and meet lender requirements more efficiently,” he explains. “Traditional lenders often have more rigid investment criteria; therefore, SMBs should explore financing channels outside of mainstream banks.”
“While the initial costs related to ESG reporting may include software, consultancy and staff training, the long-term benefits are substantial,” UHY’s Parry adds. “Sustainability reporting can lead to operational savings, for example, by identifying inefficiencies in energy and resource use. Risks can also be mitigated by anticipating regulatory changes and reputational risks. With employees increasingly seeking purpose-driven employers, reporting can also be attractive for hiring talent.”
Because green finance is no longer a niche offering, Parry argues: SMBs’ ability to report on sustainability is fast becoming a prerequisite for growth, investment and resilience. “By embracing ESG reporting, small businesses can unlock capital, strengthen supply chain relationships and future-proof their operations. The journey may start with a spreadsheet but it ends with transformation.”
