Climate performance and debt structure: The case of European SMEs

Abstract

SMEs play a vital role in the European economy, making significant contributions to employment, innovation, and regional development. However, they face unique challenges in aligning their operations with Europe's ambitious climate goals due to constrained resources and limited access to financing. Using an exhaustive sample of European SMEs, this study examines how environmental factors, including carbon emissions intensity, regulatory fines, and green subsidies, affect SMEs' reliance on debt financing. The results reveal that higher carbon emissions intensity and regulatory fines significantly increase leverage, reflecting the financial constraints and risks associated with poor environmental performance. In contrast, green subsidies reduce debt reliance, highlighting their role in alleviating financial pressure and supporting sustainable transitions. Our sub-sample analysis also explores differences between medium-sized and small firms, revealing that firm size moderates the impact of environmental factors on financial gearing. This study contributes to the discourse on sustainable entrepreneurship, highlighting the need for targeted interventions to support small and medium-sized enterprises in achieving financial resilience while aligning with climate objectives.