The initial wave of mandatory sustainable finance regulatory requirements in Europe is directed primarily towards large businesses and financial institutions.
At first glance, this may appear to exclude the majority of companies in Europe - particularly in Germany, a country known for its famed Mittelstand which accounts for the largest share of the country’s economic output and nearly 60% of total employment.
Increasingly, this won’t be the case.
Take, for instance, the proposal for a Corporate Sustainability Reporting Directive (CSRD). As the successor to the Non-Financial Reporting Directive, the CSRD has been adapted to encompass a wider range of businesses and will become mandatory for 55,000 enterprises across Europe by fiscal year 2023. That makes up over 75% of Europe’s GDP. This reporting requirement will affect both public and private companies that satisfy 2 out of 3 of the following requirements:
Even in the immediate term, Mittelstand companies cannot ignore the incoming regulatory wave. Portfolio companies of large businesses or financial institutions will be affected by current regulation, and will start to feel the pressure to report on sustainability as it gets pushed down value chains and investment criteria.
The EU Taxonomy is a clear example of this effect coming into action: while many in the Mittelstand don’t currently have mandatory reporting obligations under the Taxonomy, over a third of Mittelstand investments are financed by debt.
In an environment where Taxonomy eligibility and alignment is becoming crucial for securing favorable loan rates and conditions, these enterprises are unwittingly becoming exposed to the Taxonomy pressures felt by their lender banks.
This trend was reflected when we spoke with Marc Dönges from the Mittelstand-Digital Centre in Berlin, who affirmed that:
Just like digitalisation, sustainability is one of the megatrends that medium-sized companies must think about jointly today in order to become resilient and holistically fit for the future. This results not only from upcoming sustainability reporting requirements, but also from the increasing expectations of customers with regard to corporate social responsibility (CSR).
There are also pressures within supply chains, where large regulated companies are increasingly requiring their suppliers to align their practices with the new sustainable finance requirements or else get left behind.
Suppliers of large OEMs will experience this change with each new purchase.
Large companies have the necessary resources and access to expertise that will enable a relatively smooth adaptation. The Mittelstand, by comparison, lack both and yet face the same magnitude of risk over the coming years.
They face future penalties and punishments, the potential loss of key contracts, stranded assets, and losing pace with competitors harnessing climate innovation opportunities.
There’s light at the end of the tunnel - technology solutions are being built that will allow Mittelstand companies to keep pace with sustainable finance regulatory pressures and ensure they remain competitive during the transition to net zero.
Rather than being forced to commit limited resources entirely to compliance, proactive companies will instead be able to focus their efforts on investing in new, sustainable business models and ensure their businesses become attractive targets for the tidal wave of new green financing opportunities.
AI-powered technology is one of the critical tools to help support the adoption of sustainable finance regulation and to accelerate the transition to a sustainable economy.
Get in touch with us if you’d like to learn more about how our technology can help you with your EU Taxonomy or CSRD reporting needs.