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

According to the European Commission SMEs represent for over 99 % of all European businesses and are responsible for around 60 % of all business greenhouse gas emissions. Therefore, SMEs play a crucial role in sustainability transformation. However, SMEs have some key characteristics, such as lack of skills and knowledge, which may challenge the effective integration of sustainability into their business operations as compared to large companies. The financial system has a key role to play in promoting sustainable development. Corporate finance can redirect capital flows towards sustainable investments. Loan agreements are essential in promoting sustainability in businesses, and clear and measurable ESG clauses in contracts ensure lenders receive accurate data to monitor sustainability performance. This article discusses how proactive contracting and design-based methods can simplify ESG clauses in loan agreements, make them visible and monitorable through design-based methods, enhance understanding between parties, and achieve ESG objectives in day-to-day business practices.