Sustainability investment benefits SMEs

Research reveals good ESG performance can reduce credit risk

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Research by Belgium’s Vlerick Business School has found that small to medium-sized enterprises (SMEs) benefit from investment in sustainable initiatives through their increase in creditworthiness.

The study analysed the environmental, social and governance (ESG) performance of 350 Belgian SMEs and measured this against their level of credit risk. It found that on average, an 11 per cent increase in ESG performance led to a decrease of credit risk by 3.5 per cent. 

According to the study, good ESG performance may benefit firms by increasing cash flows: this can be done via an increase in a firm’s client base, or an increase in shareholder utility, as some investors value ESG products and services as well as financial performance.

David Veredas, professor of financial markets at Vlerick and one of the study’s authors, said that capital is the biggest obstacle for SMEs that intend to increase their sustainable endeavours. 

“This has resulted in greenwashing, whereby companies share disinformation regarding their ESG practices,” he said.