Europe (Calogirou et al. 2010), accounting for 60-70 percent of total industrial waste (Mitchell et al. 2011) and 9-29 percent of inland energy consumption (Reuter et al. 2021). In the UK, 14 percent of SMEs are involved in the top six emitting sectors, which cumulatively account for 57 percent of total business driven emissions (British Business Bank 2021). At the same time, SMEs are important contributors to eco-innovation (Keirala 2019) and while there is evidence that a large majority of European SMEs are taking steps to be more resource efficient in waste, energy or water (EC 2018), they still face several size-related constraints in their efforts to “green” their operations, including access to finance (OECD 2021).

**In many European countries CGSs play an important role in supporting SMEs’ access to finance.** CGSs are an integral part of the system of financial intermediation in many countries in the region. Credit guarantees are provided by national/local organizations supplemented on a supranational level by the European Investment Bank Group.<sup>3</sup> The 48 CGSs in Europe that make up the AECM had a total outstanding guarantee volume of EUR 312 billion—or 1.8 percent of the combined GDP of AECM countries—while supporting 5.9 million SMEs in 2021.<sup>4</sup> National/local CGSs are typically active as not-for-profit organizations set up according to four models: public guarantee institutions, public-private partnership initiatives, mutual guarantee schemes, and other types of private guarantee schemes. The specific choice of one or the other model mainly reflects the economic and legal frameworks of the respective countries as well as historical and cultural factors, with public schemes representing the large majority across countries. CGS can play an important role in supporting SMEs’ investment in climate change mitigation and adaptation.

**The transition to a low-carbon economy as well as the physical effects of climate change and environmental degradation are a source of financial risks for European CGSs.** There is growing global recognition that climate change, natural disasters and environmental degradation can lead to transition and physical risks for the financial sector (see, for example, NGFS 2020). CGSs are primarily vulnerable to climate risks through credit risk in their guarantee portfolio. Transition risks originate from efforts to mitigate climate change and improve local environmental conditions by decarbonizing the economy, which may create economic adjustment costs for SMEs in a broad range of sectors, ultimately resulting in stranded assets. Physical risks stem from both the gradual and abrupt impacts of climate change and natural disasters—such as droughts, floods, and hurricanes—on the value of assets and property owned by SMEs.

**Both transition and physical risks can have detrimental effects on the European economy and related financial instruments, including the SME loan portfolio of banks.** The European Central Bank (ECB) and European Banking Authority (EBA) have recently caried out initial climate risk assessments and exploratory stress tests of banks. For its stress testing exercise, ECB has investigated disorderly transition scenarios and a physical risk scenario in which temperatures

> 3 For an overview of European CGSs see, for example, Chatzouz et al. (2017) and Vienna Initiative (2014).

> 4 AECM Statistical Yearbook 2021. Available at https://aecm.eu/publications/statistics.

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