Sustainable lending to European SMEs: Implications for bank performance

Green SMEs are vital in transitioning to a sustainable economy, but face persistent financing constraints. Banks remain cautious about lending to these firms despite policy efforts due to perceived risks and uncertain returns. This study examines how lending to green SMEs affects banking performance in the Eurozone using an exhaustive sample of banks between 2013 and 2023. We employ fixed effect panel regression and report that higher loan exposure to green SMEs enhances NIM and Z Score, indicating that sustainable lending can be profitable and stabilizing. Green lending standards improve profitability but do not directly affect solvency, suggesting that certification alone does not reduce financial risk. These findings highlight the strategic value of sustainable finance for banks while reinforcing the need for tailored risk frameworks to support green SME lending. The study provides actionable insights for entrepreneurs, banks, regulators, and policymakers, demonstrating that green SME financing can align financial returns with sustainability objectives.