Firms that invest in sustainability are more resilient, research claims

Investing in sustainability increases the resilience of small and medium-sized enterprises (SMEs) because they become more creditworthy, according to new research conducted by Vlerick Business School and commissioned by ABN AMRO.  Although large companies are under scrutiny from regulators, consumers and the media to become more sustainable, the sustainability transition is unachievable without the involvement of SMEs. Especially since SMEs constitute more than 60 percent of the value-adding economic fabric in Europe.

The new study conducted by Professor David Veredas and doctoral researcher Dimitrios Kolokas, both from the Centre for Sustainable Finance at Vlerick Business School, investigates the impact of environmental, social and governance (ESG) performance on the credit risk of 350 SMEs as a measure of resilience.

The study focuses on the development of a model for SMEs that measures financial and ESG performance. The researchers scored SMEs on their ESG activities based on information taken from their websites and sustainability reports.

The study suggests that investing in sustainability pays off, as SMEs become more creditworthy. In fact, on average, an 11% increase in an SME’s ESG performance will decrease its credit risk by 3.5 percent. Less resilient SMEs do not enjoy the perks of long-term stakeholder relationships, including greater access to financial resources, and are vulnerable to greenwashing incentives.

Professor Veredas says, “The biggest obstacle for SMEs to invest in improving sustainability is capital. This situation is more prominent among less resilient SMEs with high credit risk and has resulted in greenwashing, whereby companies share disinformation regarding their ESG practices.”

However, by successfully attracting and investing capital in ESG practices, less resilient SMEs can reduce their credit risk by improving their ESG performance. SMEs need to understand that ESG practices not only benefit society, but make their companies more resilient as well.

These findings were published in the white paper Are sustainability-driven SMEs more resilient? A lending perspective (registration).