Proactive legal design—making sustainability visible and monitorable in SME loan agreements

Abstract

According to the European Commission's Sustainable Finance Strategy, the financial system has a key role to play in promoting sustainable development toward a greener and more sustainable economy. Small and Medium-sized Enterprises (SMEs) represent over 99% of all European businesses and are responsible for around 60% of all business greenhouse gas emissions. Small and Medium-sized Enterprises are therefore crucial to the success of the European Union's sustainability transition. The share of sustainable finance for SMEs will grow both as a result of increasing sustainability legislation and the expectations of customers and stakeholders. However, integrating sustainability can be challenging for SMEs due to limited resources and expertise. The article highlights the importance of clear, transparent, and implementable contract documents as tools to enhance sustainability in financing. Proactive contracting and legal design approaches are discussed as means to transform contracts into management and communication tools, to promote sustainable business practices.