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The Importance of SMEs in Exchange Infrastructure

iStock 1371200684 - Global Banking | Finance

446 - Global Banking | FinanceBy Jesús González Nieto, Head of BME Growth

Small businesses are the backbone of our economy. In the UK, SMEs account for 99% of the business population and are responsible for around half of GDP and employment. The situation is similar across Europe as SMEs contribute to over half of Europe’s GDP and employ around 100 million people. In Spain in particular, SMEs represent a striking 65% of the country’s GDP and employ as much as 80% of the workforce

The economic importance of SMEs is undisputed and it is therefore crucial that they have the right opportunities to grow within capital markets, allowing them to compete on an international level, as well as retain their integrity and agility to learn and grow.

Creating market opportunities

The barriers to raising capital on a stock exchange have universally been very high for SMEs, which has resulted in limited access to finances, growth and investment opportunities. This situation has been further exacerbated by the geo-political situation over the past few years, with the global pandemic, supply chain disruptions, energy prices, as well as growing conflict in Europe and the Asia Pacific region.

However, despite these challenges, it has never been more important to support SMEs with entering the market. It is becoming increasingly clear that SMEs have a critical place in global markets and are paving the way for future investment trends. Naturally, due to their varying sizes, SMEs have different needs and face different challenges than large enterprises. This is why having dedicated exchanges and support, such as BME Growth in Spain or Sparks in Switzerland, will be key for helping SMEs secure the financing they need. In fact, BME Growth has listed 25 companies in the last 18 months, helping to raise equity of more than EUR 1,4 billion through 126 transactions.

Creating specific services that support SMEs has numerous benefits for exchanges as well. For instance, supporting SMEs can lower listing costs and improve the market environment for all companies, which will ultimately result in a rise in listings. Additionally, it encourages transparency, regardless of the size of the company, for all stakeholders who want to hold listed companies accountable for their reporting and revenues. Providing support throughout the listing process also increases healthy competition amongst exchanges.

This topic is now beginning to resonate at the EU policy level as well, as the European Commission is currently preparing a set of regulations, known as the “Listing Act”. The new regulation will enable exchanges to set up a more efficient and flexible environment, adapt the documentation that a small company needs to produce within the exchange ecosystem, and speed up the registering processes with the relevant authorities in different countries.

The growing role of ESG

Environmental, social, and corporate governance (ESG) has become a new imperative for organisations of all sizes. Many businesses are focusing on ESG because they think it will improve their long-term profitability, while others are under increasing pressure from their own investors to do the same. Many asset managers have also incorporated ESG into the way they make investments. In many cases, institutional and retail clients of asset managers are pressuring them to start taking ESG seriously. Under these internal and external pressures, companies seek ways to implement ESG strategies and for SMEs entering the market, it’s critical to start off on the right foot.

One way for companies to fund their sustainability projects has been by issuing debt in the form of green bonds or sustainability-linked bonds (SLBs). The proceeds from green bonds can help businesses finance projects with clearly defined environmental benefits. And while SLBs do not have any limits on the use of proceeds, they contain a set of pre-agreed sustainability key performance indicators (KPIs), which issuers need to achieve, otherwise it impacts the coupons they pay to investors.

However, organisations face the issue of global regulation on ESG investing not being harmonised. There is a range of ESG standards, as well as ratings that make it difficult to properly judge how companies are tracking against ESG goals.

It’s key that all ESG investing depends on quality data. Without coherent ESG data at an issuer level, investors will struggle to demonstrate that they are satisfying their ESG responsibilities. Some regulators have recognised the scale of the challenge. The EU’s Taxonomy Regulation will create a standardised set of science-based criteria determining which economic activities are sustainable. By creating a single benchmark, EU regulators will help investors navigate the myriad of different ESG standards and avoid greenwashing. The Taxonomy Regulation will play a vital role in helping to strengthen ESG data quality.

Getting ESG strategies right will boost SMEs’ chances for a successful market entry and ultimately help them achieve a higher market value due to increased awareness of their listings. For exchanges, encouraging SME growth will enable them to accelerate their own growth and reputation on the stock exchange market.

Global Banking & Finance Review


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