Taking aspects of sustainability into account in all financing matters – this is the goal pursued by the European Union and the German government with their corresponding legislation. However, this has so far largely excluded lending to small and medium-sized enterprises (SMEs) as an instrument for a change toward increased sustainability. Both regulations and financing offers for required investments in sustainable change are geared toward large companies. Companies with fewer than 250 employees and annual sales of less than 50 million euros are not included. "This blind spot is highly problematic for the green transformation in Germany, as SMEs represent an important pillar of the German economy, accounting for 42.3% of gross value added in 2020", Zademach said. Private equity, bonds and shares are of little importance as financing instruments for SMEs in Germany. Instead, according to the authors of the paper, savings and cooperative banks accounted for the lion's share of the volume of loans that flowed to SMEs and the self-employed in 2021, at more than 54 percent. Against this background, the recently published study "Sustainable Finance" conducted by the German Chamber of Industry and Commerce also states: "Given the high importance of bank financing, the limits of funding options in terms of the volumes required, and the largely irrelevant nature of capital market financing, the capacity of banks to provide 'green' financing must be increased through SME-oriented regulation."
Loans for a more sustainable economy: Opportunities and limitations for German regional banks
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However, as Professor Zademach and his co-authors describe, unlike large financial firms, regional banks are less well equipped in terms of capacity and resources to integrate climate impact assessments into routine lending processes. "In addition, unlike large industrial companies, small and medium-sized companies typically do not have environmental, social and governance ESG ratings, are not required to disclose their climate impacts, and are often not even aware of such information", Zademach said. This, he said, made it difficult for regional banks to assess climate impacts when lending to SMEs; green banking is currently rarely considered in day-to-day SME lending.
Savings banks and cooperative banks would have a special status – for example, by being prohibited from being taken over by private competitors – combined with the mandate to also pursue social goals. But this mandate was currently not yet "green," as the authors write. Zademach says: "Members of cooperative banks could change that by defining such a mission. In the case of the savings banks, the municipalities and local politicians are responsible for expanding their goals." The special responsibility of regional banks is also rooted in the fact that they have great knowledge of their local clients through close contacts with them and are often the only lender available, especially in rural and peripheral regions, he said. Therefore, regional banks were particularly important for the real impact of green banking in Germany, he said. Unfavorable conditions or even loan rejections due to unsatisfactory ratings could jeopardize the acceptance of climate protection efforts. Against this backdrop, a categorical exclusion of polluting industries – as provided for by the so-called EU taxonomy – as well as a "cherry-picking" of green investments is not an option for the lending policy of regional banks – not only to fulfill their dual mandate, but also to contribute to the goal of climate protection. "Instead, regional banks should use their influence to support SMEs in their green transformation, for example by providing loans for the development of new and sustainable products. Better lending conditions for green businesses and investments further promote the green transformation in terms of financing as a channel of influence", Zademach said.
Climate impact assessments as a basis for lending would need to be easily applicable and integrated into routine lending practices to be cost- and time-efficient for regional banks and SMEs alike. Regional banks or smaller companies cannot produce sufficient information for biophysical assessments on their own, nor can they investigate all aspects of the business. But even though the regional savings banks and cooperative banks in Germany are legally independent, they do not operate in isolation from one another: The Sparkassen-Finanzgruppe or the Volksbanken Raiffeisenbanken cooperative financial networks act as linking elements. "Their high market share gives them access to an extensive customer database that allows comparisons for raw material use and energy consumption to climate impact assessments, among other things. For this, climate-relevant data must first be identified and collected by all affiliated regional banks, which requires a joint approach, but could also split the fixed costs of such an analysis", explains Professor Zademach.
The detailed article "Injecting climate finance into SME lending in Germany: Opportunities for and limitations of regional savings and cooperative Banks" in the journal "ZFW - Advances in Economic Geography" is freely available online at https://doi.org/10.1515/zfw-2022-0011.