Abstract
Background Environmental sustainability and energy savings are crucial for economic development, yet European SMEs account for 63.3% of total CO2 firms emissions. Understanding how these businesses behave when transitioning to a Circular Economy is essential for policymakers to design appropriate measures and incentives for preventing negative environmental externalities. Methods The study analyzed data from the fifth wave of the “SMEs, resource efficiency, and green markets” survey conducted in late 2021, which included 14,008 enterprises across 27 European Union member states. To categorize the companies, researchers applied a K-modes clustering algorithm—a machine learning method designed specifically for categorical data— to evaluate six qualitative business characteristics and nine environmental actions. Results The analysis identified three distinct business behavior clusters. Cluster 1 (6,195 firms) primarily provides services to other businesses and focuses heavily on energy savings and waste minimization. Cluster 2 (4,002 firms) is the least environmentally proactive group, predominantly selling products directly to consumers, with 21.14% taking no environmental action at all. Cluster 3 (3,811 firms) is the most active and diverse group, exhibiting the highest participation in minimizing waste and saving energy but also reporting the most difficulties. Regardless of the cluster, the primary barrier to sustainability is the complexity of administrative or legal procedures, followed by the high costs of environmental actions. Consequently, the support most requested by these companies consists of grants or subsidies along with greater cooperation between companies across sectors and consultancy. Conclusions The transition to sustainable practices remains a significant challenge for most European SMEs, who often perceive current macro-level environmental regulations (such as the Circular Economy Action Plan) as bureaucratic hurdles rather than sources of help. To effectively foster a sustainable economy, policymakers must focus on simplifying administrative procedures, providing financial support, and encouraging inter-firm cooperation and technological consultancy.