Scaling Sustainable and Transition Finance for SMEs

Clara Barrabés Global Head of Sustainable Finance, BBVA

Lessons from BBVA's programme-based approach to sustainable finance.

What are the main challenges for SMEs in accessing the sustainable finance market?

SMEs are not necessarily smaller versions of large corporates. They can have different capabilities, financing needs and banking relationships, and these characteristics may need to be reflected in the way sustainable finance solutions are designed and delivered.

From our experience, there are three areas that can make access to sustainable finance more challenging for SMEs.

The first relates to the level of sophistication and customisation often involved in sustainable finance

Over time, the market has developed robust standards across a range of instruments — from green and social loans and bonds to sustainability-linked financing — which have been fundamental in supporting the credibility and integrity of sustainable finance. Applying these standards can involve identifying eligible activities or investments, demonstrating compliance with technical criteria, selecting material KPIs and calibrating targets, as well as different requirements around documentation, reporting, monitoring and verification.

For some SMEs, these processes can be particularly demanding. Smaller companies often have fewer dedicated sustainability resources, less developed ESG data systems and more limited historical information. They may also find it more challenging to provide some of the technical evidence or external certifications required, while the costs associated with structuring, reporting and verification may be significant relative to the size of the financing.

The second relates to the type of financing SMEs may require

Particularly among smaller businesses, financing needs may be less frequently associated with large, clearly identifiable investment projects and more often linked to general corporate purposes. This can make access to certain sustainable finance solutions more challenging where eligibility depends on identifying, documenting and tracking a specific green or social Use of Proceeds. General-purpose sustainability-linked structures can therefore complement Use of Proceeds instruments and potentially broaden the range of sustainable finance solutions available to SMEs.

The third is the challenge of achieving scale — including from the lender's perspective

The way banks serve large populations of SMEs can differ from the more individualised relationship and structuring model that is possible for larger corporate transactions. As a result, extending sustainable finance to a broader SME population may require solutions that rely less on transaction-by-transaction structuring and make greater use of common methodologies, reliable data sources, digital processes and replicable structures.

This is also where programme-based approaches can offer interesting possibilities for the market. By creating common frameworks that can be applied across multiple borrowers, while preserving appropriate links to their individual circumstances, they can help reconcile the need for scale with the integrity of sustainable finance.

Taken together, the objective is to preserve the principles and integrity that underpin sustainable finance, while finding proportionate and scalable ways of applying them to a different borrower profile. In other words, the opportunity is not to lower the bar for SMEs, but to make it possible for more of them to reach it.

“The opportunity is not to lower the bar for SMEs, but to make it possible for more of them to reach it.”

This is why proportionality and scalability matter. Proportionality can help ensure that the way sustainable finance standards are applied reflects the resources, financing needs and level of sustainability maturity of SMEs. Scalability, in turn, can help banks extend those solutions to a much broader population of smaller businesses through more standardised methodologies, reliable data sources and replicable processes.

How is BBVA putting this approach into practice through its ESG Target Loan?

At BBVA, these challenges have led us to explore how we can make sustainable finance more accessible to SMEs while preserving the principles and integrity that underpin the market. Our approach has focused on two closely related dimensions: proportionality for the borrower and scalability for the bank.

This thinking has shaped BBVA's ESG Target Loan, a general-purpose financing solution linked to sustainability KPIs and specifically designed for SMEs. Rather than being linked to a predefined green or social use of proceeds, the financing is connected to improvements in the borrower's sustainability performance. The approach builds on the Sustainability-Linked Loan Principles, incorporating proportionality considerations reflected in emerging industry guidance for SMEs and a programme-based model designed to facilitate scalability.

On proportionality, we have focused on adapting how the principles are implemented in practice. KPIs remain material and relevant, but predefined sector references and methodologies can support their selection. Sustainability Performance Targets remain focused on improvement beyond business as usual, while their calibration can reflect the SME's starting point, historical performance, available benchmarks and, where relevant, the effort required to achieve them.

We have applied the same approach to the other elements of the structure. The preferred financial mechanism provides a benefit when the target is achieved and a neutral position when it is not. Reporting can draw on information already available through public registries, certifications or reliable third-party sources. And where those sources provide sufficient independence, reliability and traceability, additional external verification may not be necessary.

On scalability, we have focused on identifying which elements can be developed at programme level rather than transaction by transaction. Common methodologies, predefined KPIs and improvement pathways, external data sources and standardised monitoring processes can then be applied across groups of eligible SMEs. For us, programme-based does not mean one-size-fits-all. It means standardising parts of the process while keeping the sustainability objective relevant to the individual borrower.

This is the balance we have sought through the ESG Target Loan: a more proportionate approach for SMEs and a model that can be deployed by BBVA at greater scale, while remaining grounded in the principles of sustainability-linked finance.

What does this look like in practice?

The ESG Target Loan can take different forms depending on the sustainability objective, the data available and the characteristics of the SMEs involved. Under the same programme-based approach, we have developed applications including Carbon Loans, Aqua Loans and ESG Performance Loans, which can be adapted to different sectors and geographies.

Carbon Loans

Link financing to progress in measuring and reducing greenhouse gas emissions. In Spain, for example, BBVA is developing a solution that can use carbon footprint information from the Ministry for the Ecological Transition's public registry. In Peru, the Huella de Carbono Perú platform can support companies as they progress from measuring their emissions towards verification, reduction and, as their capabilities mature, quantitative decarbonisation pathways.

Aqua Loans

Apply the approach to water in sectors where it is particularly material, initially focusing on agri-food, textile and hospitality. A methodology developed with Veolia helps calculate the company's water footprint and establish an improvement pathway, taking into account factors such as sector, location, water stress and the company's starting point.

ESG Performance Loans

Link financing to the evolution of an external ESG score. One application uses the S&P Global ESG Score as a common framework for measuring improvement, with pathways that reflect the borrower's starting point and ESG maturity.

We are also exploring how the approach can be extended further. Our pipeline includes applications for the agricultural sector and potential social solutions, for example linked to quality of employment. They can also accommodate different levels of maturity, supporting companies as they move from measurement, to management, to measurable improvement.

These are different applications of the same underlying model: using common methodologies and reliable data to create scalable solutions, while keeping sustainability objectives relevant to individual SMEs.