Germany's SMEs worry EU sustainable finance regulation might overstretch their capacities

Many smaller companies in Germany are worried that the EU’s planned sustainable finance regulation could lead to more red tape and financing difficulties that they might find themselves unable to cope with. Rules that would oblige companies to comply with environmental and social standards in order to obtain loans and insurances would pose a great challenge for SMEs that make up the famed Mittelstand, warned Johannes Winklhofer, head of the Chamber of Industry and Commerce for Munich and Upper Bavaria, at a panel debate organised by the Munich-based Institute for Economic Research (ifo). The Mittelstand comprises small or medium-sized companies (SMEs) that are often family-owned, and whose highly specialised products and services are regularly international market leaders. The European Commission and the German government are both working on laws to anchor sustainable practices in investment and lending activities, including a European taxonomy meant to classify financial flows according to their ESG (environmental, social, governance) sustainability impact. 

While climate and environmental standards are already great priorities for many SMEs in the country, the planned EU regulation as well as the planned national regulation like Germany's supply chain law could create a "bureaucratic monster" that smaller companies would find hard to handle given their lower level of expertise and operational flexibility, said Winklhofer, who also heads the automotive industry supplier iwis. "SMEs will be overburdened. The smaller a company is, the less knowledge how to respond will be available." He argued that regulation should therefore prioritise closer scrutiny of large and listed companies.

The state secretary in Germany's finance ministry Jörg Kukies sought to allay fears that forthcoming regulation at European and national levels would ignore the principle of proportional burden-sharing. Kukies said that larger companies "of course" would face tighter regulation than SMEs and that the government aimed to ensure that credit and insurance costs do not inflate for smaller businesses. At EU level, Germany has often had to find compromises with other member states where the protection of small businesses isn't as much of a priority, he said. In debates about the forthcoming EU taxonomy this would often mean that the argument for proportionality in regulation is given less weight. However, investors are increasingly calling for a framework that allows for more transparency in classifying the degree of sustainability of projects they put their money in, the state secretary said. This assessment was backed by an announcement by international investors handling 20 trillion dollars in assets also made on Tuesday that called on emissions-intensive companies to devise a credible strategy for reaching net-zero emissions by 2050.

Sven Giegold, finance politician of the Green Party in the European Parliament, said a framework setting equal conditions across Europe for capital markets would be only fair to companies that already have committed themselves to more sustainable business practices. At the same time, many small investors also started to look for greener and socially desirable ways to place their assets. Giegold conceded that there would be the danger of excessive bureaucracy especially at the micro level. Although the taxonomy had already been agreed on in principle, "a lot needs to be done still regarding individual steps." In order to minimise the potential for conflict and confusion for SMEs, an EU-wide standard would be the best way forward, Giegold said, explaining that a similar approach had already proven successful in the harmonisation of European ecological agriculture labels. "I'm very much in favour of proportional regulation," he said, cautioning that the wider macroeconomic risks of unchecked global warming would in any event outweigh the costs of taking action now.