How Financial Institutions Assess SME Sustainability Risk: A Supplier’s Guide

Whether you’re a manufacturer, a tech services provider, a construction firm, or a small professional services organisation, your relationships with banks and insurers increasingly depend on sustainability transparency. Some SMEs report directly under CSRD; many more provide sustainability data because financial institutions need it for their own disclosures. Either way, understanding how lenders and insurers evaluate sustainability risk helps your business present itself as a reliable, lower-risk partner.

Banks and insurers now blend traditional financial analysis with environmental, social and governance (ESG) insights. They examine how sustainability issues affect your resilience, how you manage workers in your value chain, and whether your practices align with their expectations under CSRD and the European Sustainability Reporting Standards (ESRS). This guide explains how the assessment works, the questions they commonly ask, and how SMEs can prepare without expensive consultants.

If your organisation is starting from scratch, the broader guide CSRD for SMEs: The Complete 2025 Guide is a useful orientation.

1. Why Financial Institutions Evaluate Sustainability Risk

1.1 CSRD pushes sustainability into core risk assessment

Large financial institutions reporting under CSRD must disclose how sustainability risks in their value chain — including SME clients — affect their business model. This includes environmental footprints, workforce conditions, and conduct risks.

1.2 Regulators expect risk-based ESG integration

European banking and insurance supervisors encourage integrating sustainability factors into credit underwriting, product pricing, and portfolio management. As a result, financial institutions increasingly request structured ESG information from SMEs.

1.3 More transparency reduces unexpected losses

Energy volatility, climate-related disruptions, supply-chain issues, social controversies, and weak governance can all increase credit or claims risk. Clear sustainability practices help banks and insurers understand your resilience.

2. What Financial Institutions Look For: The Three Risk Lenses

Most institutions assess SMEs using three types of sustainability risk. You don’t need perfect data — you simply need clarity, consistency, and a proportionate level of detail.

2.1 Environmental risks

Financial institutions evaluate:

Energy use and exposure to price volatility
Emissions (reported or estimated)
Physical climate risks such as floods or heatwaves
Waste and material usage (for relevant sectors)
Water use (only material for certain industries)

This helps them understand operational resilience and potential future investment needs. If your business is unsure how to estimate emissions, banks often accept simple approaches based on sector averages, as outlined in the Emission Factor Selection Guide.

Banks and insurers increasingly review:

Workforce stability and working conditions
Training and skills development
Health and safety performance
Labour practices in outsourced or contractor-heavy operations
Respect for human rights across your supply chain

These issues can influence operational continuity, reputational risk, and regulatory compliance. They are also core to ESRS requirements for value-chain workers, which is why institutions now expect more visibility from SMEs.

2.3 Governance and business conduct

Governance remains the strongest predictor of long-term stability. Institutions typically check for:

Clear roles and responsibilities for risk oversight
A publicly available Code of Conduct
Anti-corruption and whistleblowing mechanisms
Cybersecurity and data protection controls
Transparency with stakeholders

These topics align with the expectations in the Business Conduct topic hub.

3. What Questions Banks and Insurers Ask SMEs

Financial institutions typically send short questionnaires at onboarding, annual review, or during loan underwriting and insurance renewal. Below is a consolidated list that reflects what most SMEs receive in practice.

3.1 Environmental questions

What is your annual electricity and heating consumption?
Do you track or estimate Scope 1 and 2 emissions?
Have you taken steps to reduce energy use?
Do you face climate-related physical risks (e.g., flooding)?
Do you monitor waste volumes or material use?

How many employees do you have, and in what roles?
What health and safety systems are in place?
Do you provide training or upskilling opportunities?
Do you use contractors or temporary workers?
How do you ensure fair treatment and safe working conditions across your value chain?

3.3 Governance and conduct questions

Do you have a Code of Conduct?
How is risk overseen at leadership level?
What cybersecurity measures do you use?
Do you have anti-bribery and corruption policies?
How do you communicate with stakeholders about risks or incidents?

For SMEs evaluating how structured sustainability disclosures typically look, the simplified model in The VSME Basic Module Explained is a helpful reference.

4. The Sustainability Metrics That Matter Most

You don’t need to report everything under the sun. Banks and insurers focus on metrics that support risk-based decision-making.

4.1 Environmental metrics

Total energy consumption (kWh)
Scope 1 and 2 emissions (or estimated values)
Renewable vs non-renewable energy share
Waste generated (basic totals)
Exposure to climate hazards

Headcount and workforce structure
Accident/incident rates
Training hours or programmes
Worker turnover (optional but appreciated)
Contractor oversight practices

4.3 Governance metrics

Existence of governance policies and procedures
Frequency of leadership oversight
Data protection and cybersecurity audits
Conduct breaches (only if material)
Supplier or value-chain monitoring practices

These metrics align with CSRD themes but can be reported proportionately by SMEs — often with simple estimates supported by short explanations.

5. How Financial Institutions Use This Information

5.1 Credit underwriting

Banks use sustainability data to estimate resilience, future capital expenditure needs, stability of operations, and exposure to regulatory shifts (for example, carbon taxes or safety regulations).

5.2 Insurance risk assessment

Insurers analyse how environmental or worker-related risks affect claims exposure — especially in property, liability, and business interruption policies.

5.3 Portfolio-level reporting

CSRD requires large institutions to report how sustainability risks across their client base affect their strategy, financial position, and long-term trajectory.

5.4 Engagement and relationship management

SMEs with clear sustainability practices often receive smoother onboarding, lower administrative burden, and more open discussions about funding options or insurance requirements.

To understand wider value-chain expectations, SMEs may find it useful to read CSRD Supplier Requirements: What Small Businesses Should Expect in 2025.

6. How SMEs Can Position Themselves as Lower-Risk Partners

Step 1 — Prepare a simple sustainability profile

Include:

A short overview of your environmental practices
Basic emissions estimates
Workforce policies
Governance and conduct statements

This can be created in one or two pages.

Step 2 — Keep essential data ready

Record your annual energy use, workforce details, and any governance policies. A spreadsheet is enough.

Step 3 — Assign internal responsibilities

You do not need a sustainability department. One operational or finance team member can coordinate responses.

Banks and insurers often search for clear commitments on conduct, anti-corruption, equality, training, and safety. Public availability builds trust.

Step 5 — Communicate proactively

Explain the steps you are taking to improve — even small improvements matter. This supports stakeholder engagement, which banks look for in CSRD-aligned reporting.

Step 6 — Respond consistently across questionnaires

Create reusable templates. Consistency signals reliability.

Frequently Asked Questions

Why are banks and insurers suddenly asking for sustainability data?

Financial institutions reporting under CSRD must assess how environmental, social, and governance risks in their value chain affect their business. This means they need structured information from SME clients and partners. If you need a broader orientation, see CSRD for SMEs: The Complete 2025 Guide.

What if our company doesn’t have complete emissions data?

Most institutions accept reasonable estimates, especially for SMEs. Sector averages and supplier data are commonly used. Guidance on choosing data sources is available in the Emission Factor Selection Guide.

How do SMEs show strong governance without a large compliance team?

Provide a short Code of Conduct, clarify leadership roles for risk oversight, and maintain simple anti-corruption and cybersecurity procedures. These elements strongly influence institutions’ risk assessments and align with the Business Conduct topic area.

How can SMEs reduce the administrative burden of sustainability questionnaires?

Create a reusable sustainability summary: a one-page overview of energy, workforce, governance, and conduct information. Many SMEs also align their structure with simplified frameworks such as those described in The VSME Basic Module Explained.

Key Terms

Business Conduct: Policies and behaviours that show integrity and responsible decision-making.
Stakeholder Engagement: How organisations communicate with clients, workers, suppliers, and financial partners.
Value-Chain Workers: Employees, contractors, and others affected by your organisation’s operations.
CSRD: EU sustainability reporting directive influencing how financial institutions evaluate risk.
ESG: Environmental, Social, and Governance factors used in risk assessment.

Conclusion

SMEs do not need complex sustainability systems to meet the expectations of banks and insurers. What matters is clarity: understanding what institutions look for and demonstrating structured, proportionate practices. When you present your environmental, social, and governance information confidently, you position your business as a lower-risk, more resilient partner — and make financial relationships smoother and more transparent.