Sector in Focus: Malta Gears up for Sustainable Finance

Malta’s financial sector and capital market play a fundamental role in the transition to a more sustainable future.

The need to integrate sustainability into finance and business strategies has become ever more important in the post-pandemic era, and Malta’s financial services sector is gradually going green. Initiatives range from the launch of a green bond market and the development of sustainable investment products to the wider integration of environment, social and governance (ESG) commitments into business models and the scaling up of reporting expertise on sustainability matters. While Malta is still in the early stages of greening its financial sector, there is strong will to make sustainable finance a key driving force in the further development of the financial centre.

Green Market & More

The Malta Stock Exchange was one of the first to take green action when it launched its Green Market in February 2021. The Green Market allows for the listing of Green Bonds, and issuers must meet the Exchange’s Green List criteria, which are based on the International Capital Markets Association’s Green Bonds Principles. Issuers must invest in projects which contribute towards one of six environmental objectives that include Climate Change Mitigation, Climate Change Adaptation, Pollution Prevention, Sustainable Use of Water, and Marine Resources amongst others.

Malta’s banks are acknowledging that sustainable finance will be the anchor for future growth and have introduced green financing products. Meanwhile, asset managers are integrating ESG along the value chain as ESG funds are growing in popularity. In the past several years, the dynamics of the sustainability debate has shifted, and investors increasingly want to contribute to cutting global warming and adding to human development, without compromising on financial returns.

Growth Potential

Specialist forms of green finance are flourishing globally, including carbon markets, impact investing, social bonds, and green fintech. These are all segments, which could be developed in and from Malta in the coming years. Attention is also turning to Malta’s well-performing insurance sector. Insurance companies can advance sustainability through their underwriting decisions, their investment choices and by engaging with clients on ESG issues. There is also significant growth potential in the creation and provision of new insurance products for the green economy.

“Sustainable finance is not a choice anymore, it is a necessity if we want to achieve the Paris Agreement goal of net zero by 2050. While this is a matter of urgency, we also need to define where we are on our sustainability journey. Data is the keyword to establish a credible finance market.”

Phyllis Farrugia
Senior Advisor (Strategy & Policy) at the Malta Financial Services Authority

ESG Regulation

While many sustainable strategies are still in their infancy, ESG-related requirements are set to expand as regulations are being introduced. Various legislative initiatives being taken at an EU level in conjunction with the European Green Deal are aimed at building a financial system that supports sustainable growth. A key piece is the Taxonomy Regulation, which will partly enter into force at the start of 2022. It establishes an EU framework for classification of sustainable economic activities. It aims to provide transparency to investors and businesses and to prevent “greenwashing” by defining the criteria under which a financial product or activity can be described as “environmentally sustainable”.

The European Commission is also aiming to replace the Non-Financial Reporting Directive (NFRD) with the Corporate Sustainability Reporting Directive (CSRD). Under the new directive, which is planned to take effect in 2023, all large companies and all companies listed on EU regulated markets (except listed micro-enterprises) will be required to report on ESG metrics.

The Malta Financial Services Authority (MFSA), the regulator of all financial services in Malta, looks at sustainable finance with a cross-sectoral viewpoint in order to ensure a consistent transition. The MFSA provides the industry with regular updates on EU legislative initiatives. To ensure that sustainability becomes an integral part of business strategy, the MFSA works closely with licence holders to implement and comply with the various new requirements.

“ESG and sustainable finance are all about being committed towards a sustainable economic model. Every economy which does not make this transition, is an economy with an expiry date. However, economies cannot make this transition if the economic enablers, such as financial companies, don’t make this transition themselves.”

Steve Ellul, Advisor, Ministry for Energy, Enterprise and Sustainable Development

Sustainability Consulting

While not all businesses will be affected by the new regulations, even smaller companies are increasingly reporting ESG information because they understand its importance in communicating their business strategy and purpose. Malta’s professional services industry – analysts, accountants, and lawyers – are already reporting that demand for ESG-related advice has increased, while the island’s consultants are working with companies to help them include sustainability in policies, practices, and capital projects.

“We need to encourage SMEs and help them to transition into more sustainable processes. The Corporate Sustainability Reporting Directive also targets listed SMEs. From the Exchanges part, we discounted the listing fees for the green bond market to encourage issuers to move towards green issuances.

Stephanie Galea, Head of Business Development and Marketing, Malta Stock Exchange

What does the future hold?

Globally, the number of ESG regulations and standards has nearly doubled in the last five years, and the current regulatory initiatives are widely seen as just the beginning. There is no doubt that ESG will continue to feature high on the agenda of consumers, investors, regulators, policymakers, corporates and businesses alike. The expectation is that it will become a core part of many business strategies, irrespective of company size or profit. Now is the time for companies to work together with regulators and civil society to establish standards and help define what sustainable finance is and how it can drive value as well as further ESG objectives. While ESG-measures are likely to represent an increased cost to businesses, they also offer an opportunity for the development of new products and services.
As Malta advances on its sustainability journey, it has plenty of room to grow, innovate and shape a more sustainable form of finance.

“We need to incentivise our businesses to move towards sustainable practices, but not just through fiscal measures, but also by raising awareness about the opportunities that sustainable finance brings with it. There has been a plethora of ESG-related regulation in the past year. This is a clear sign that now is the time to do things differently.”

Dr Malcolm Falzon, Partner at Camilleri Preziosi Advocates