Sustainable Finance and the Impact on the Financial Services Sector in Malta

What is ESG?

With the effects of negative environmental consequences of economic growth and globalisation, ESG has arisen to the top of the regulatory agenda. An acronym short for Environmental, Social and Governance, ESG refers to a set of standards for a company’s behaviour used by socially conscious investors to screen potential investors.

Sustainable finance refers to the process of taking ESG considerations into account when making investment decisions in the financial sector, leading to more long-term investments in sustainable economic activities and projects.

More than ever, Maltese companies are investing in sustainable business models. Entities are committing to commercial projects that render a positive impact on the environment, tangibly shifting the mentality of the social dynamics within the Maltese community and ensuring a robust corporate governance framework.

What has Malta done about it? Is ESG regulated?

Essentially, there is no exclusive local law which is specific to ESG, there are however an array of rules and regulations which are closely linked to the aspects of ESG. Moreover, the ESG regulatory framework in Malta is predominantly based on EU regulations. By way of example these include:

• the Environmental Protection Act (Cap 549 of the Laws of Malta);
• the Renewable Sources Regulation (SL 545.11); and
• the Climate Action Act (Cap 543 of the Laws of Malta);
• the Taxonomy Regulation;
• the Low Carbon Benchmark Regulation; and
• the Sustainable Finance Disclosure Regulation (SFDR).

By adopting the Paris Agreement on climate change and the UN 2030 Agenda for Sustainable Development in 2015, governments from around the world including Malta chose a more sustainable path for our planet and our economy.

From a European level, the EU Commission (hereinafter the ‘Commission’) presented the European Green Deal which is a growth strategy aiming to make Europe the first climate-neutral continent by 2050. This was back in 2019 and the green deal triggered the action plan on financing sustainable growth, which set out the following key actions:

1. Establishing a clear and detailed EU taxonomy, a classification system for sustainable activities;
2. Creating an EU Green Bond standard and labelled for green financial products;
3. Fostering investment in sustainable projects;
4. Incorporating sustainability in financial advice;
5. Developing sustainability benchmarks;
6. Better integrating sustainability in ratings and market research;
7. Clarifying asset managers’ and institutional investors’ duties regarding sustainability;
8. Introducing a ‘green supporting factor’ in the EU prudential rules for banks and insurance companies;
9. Strengthening sustainability disclosure and accounting rule-making; and
10. Fostering sustainable corporate governance and attending short-termism in capital markets.

In implementing the action plan, the Commission developed a package of legislative instruments comprising of the EU Taxonomy Regulation, the Disclosure Regulation and the Benchmarks Regulation. All three regulations are directly implemented into local legislation. Concisely, the Taxonomy Regulation establishes a classification system which determines how far an investment is environmentally sustainable or ‘green’. The SFDR aims to improve transparency in the market for sustainable investment products, prevent greenwashing and to increase transparency around sustainability claims made by financial market participants. Lastly, the Benchmarks Regulation introduces new benchmarks that the carbon footprint of underlying assets is aimed at assisting investors who are looking into sustainable investment products.

The Malta Financial Services Authority (‘MFSA’) has identified sustainable finance as one of its key priorities in its 2019 Strategic Plan. The Commission’s roadmap left room for adjustments, and within the framework of the European Green Deal, the Commission announced a renewed sustainable finance strategy. The new strategy proposes actions in numerous areas, for example, to name a few:

• Highlighting the necessity for the financial system to become more resilient to the risks posed by climate change and environmental degradation – and the steps needed to achieve this; and
• The aim to support SMEs, individuals and the real economy on the path to sustainability.

In addition to the MFSA’s leading role in the ESG regulatory ambit, the Malta Stock Exchange (MSE) has a role to play in the development of ESG rules in the local capital markets, as the supervisory body responsible for overseeing the admission of green bonds to the Green Bonds Market Segment list of the MSE.

Are there any ESG obligations imposed on entities?

On the 16th December 2022, the MFSA issued a letter addressed to Board Members and Compliance Officers of fund managers, self-managed schemes and third-country fund managers marketing their funds in Malta through the AIFMD national private placement regime, outlining their expectations in relation to ESG requirements.

Maltese entities operating in the financial services sector are subject to the sustainability disclosure requirements established in the SFDR if they qualify as ‘financial market participants’ or ‘financial advisers’ within the meaning of the SFDR.

If a financial services entity operating in Malta, falls under one of the scopes of a financial market participant or a financial advisor, it is obliged to comply with a number of entity-level sustainability related disclosure requirements, as well as requirements specific to the financial products which it offers.

Apart from the SFDR, there is also the Financial Reporting Directive (NFRD), whereby at present, the companies falling within the scope of the directive must disclose non-financial information in their annual reports.

About the Authors

This article has been authored by Dr Francesca Anastasi, Legal, Risk & Compliance Advisor and Dr Chanelle Meli, Regulated Industries and Compliance Advisor. Contact us on https://www.csbgroup.com/contact-us/ for more information.