To begin 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.
EU Corporate Sustainability Reporting Directive (CSRD)
The EU Corporate Sustainability Reporting Directive (CSRD) is a significant legislative initiative by the European Union aimed at enhancing and standardizing corporate sustainability reporting across the EU. It represents a key part of the EU's broader strategy to achieve sustainability goals and transition to a more sustainable and resilient economy.
The new EU rules require listed companies and large corporations to publish reports on the environmental, social and governance risks they face, and on how their activities impact people and the environment. This is aimed at improving transparency and at helping investors and other stakeholders to evaluate the sustainability performance of companies, as part of the European green deal. As Malta’s largest listed entities prepare to apply the new rules for the first time in the 2024 financial year, for reports published in 2025, the MFSA is providing guidance on listed companies’ sustainability reporting requirements, particularly the transition from the Nonfinancial Reporting Directive (NFRD) to the CSRD.1
Key Points about the CSRD:
1. Purpose and Scope
The CSRD expands the scope of corporate sustainability reporting to cover a broader range of companies, including large companies and listed small and medium-sized enterprises (SMEs). It aims to improve the quality, consistency, and comparability of sustainability information reported by companies, making it more useful for investors, stakeholders, and the public.
2. Reporting Requirements
Companies are required to report on how their operations and business strategies impact sustainability factors such as environmental, social, and governance (ESG) issues. The CSRD mandates that companies report on their sustainability risks and opportunities, as well as the impacts of their activities on the environment and society. The directive requires companies to provide information in accordance with the European Sustainability Reporting Standards (ESRS), which are being developed to ensure standardized and comparable reporting.
3. Affected Entities
The CSRD applies to all large companies in the EU, including those with more than 250 employees, a turnover of over €40 million, or assets exceeding €20 million. It also applies to listed SMEs, although they will have more time to comply with the directive.
4. Assurance and Digital Reporting
The CSRD introduces an obligation for companies to obtain independent assurance on their sustainability information, similar to the existing requirements for financial information. It also promotes the digitalization of sustainability reporting, requiring companies to prepare their reports in a digital, machine-readable format to improve accessibility and transparency.
5. Timeline
The CSRD was adopted in 2022, and the first set of companies is expected to begin reporting under the new directive from 2024, with phased implementation for different company sizes.
6. Objective
The directive aims to help the EU achieve its Green Deal targets by ensuring that companies provide transparent and reliable information on their sustainability practices. This information is crucial for investors and other stakeholders to make informed decisions and for the broader effort to transition to a sustainable economy.
The CSRD marks a significant step forward in corporate sustainability disclosure, ensuring that sustainability information is given the same level of importance as financial information in corporate reporting.
A Pro-Active approach by companies to reduce the Environmental impact: What to do?
A proactive approach by companies to reduce their environmental impact and enhance ESG performance requires a comprehensive, strategic integration of sustainability into the core of business operations. It begins with a thorough assessment of the company's current ESG standing, involving a detailed analysis of its carbon footprint, waste management practices, energy and water usage, as well as social and governance practices. This baseline analysis should be complemented by a materiality assessment to identify the most significant ESG issues for the business and its stakeholders. By focusing on these critical areas, companies can ensure that their sustainability efforts are both impactful and aligned with their overall strategic objectives.
Once the assessment is complete, companies should set clear, measurable goals that reflect their commitment to sustainability. These goals should align with global standards such as the UN Sustainable Development Goals (SDGs) and the Paris Agreement, ensuring that the company’s targets are ambitious yet achievable. Key Performance Indicators (KPIs) must be established to track progress in areas such as greenhouse gas emissions, water usage, waste reduction, and energy efficiency. These metrics will serve as benchmarks for the company’s ESG performance and help maintain transparency with stakeholders.
Integrating ESG into the corporate strategy is crucial for long-term success. This requires embedding sustainability into decision-making processes at all levels, from the boardroom to daily operations. Leadership commitment is essential, with the board of directors and top management actively overseeing and driving ESG initiatives. Sustainable practices should be adopted across the business, including investments in energy-efficient technologies, the use of renewable energy sources, and the development of a sustainable supply chain. Companies should also embrace circular economy principles, focusing on reducing waste, recycling, and reusing materials throughout their product lifecycle.
Innovation plays a key role in advancing sustainability. Companies should prioritize the development of sustainable products and green technologies that minimize environmental impact. This includes designing products with a longer lifespan, using eco-friendly materials, and investing in technologies such as carbon capture, renewable energy, and water-saving systems. Engaging stakeholders is equally important. Transparent and regular reporting on ESG performance, using recognized frameworks like the Global Reporting Initiative (GRI) or the Task Force on Climate-Related Financial Disclosures (TCFD), helps build trust with investors, customers, employees, and communities. Active stakeholder engagement ensures that the company’s ESG strategies are aligned with broader societal expectations and needs.
Employee involvement is another critical factor. Companies should educate their workforce on ESG issues and the role they can play in achieving sustainability goals. Providing training on energy efficiency, waste reduction, and social responsibility helps build a culture of sustainability within the organization. Incentivizing employees to participate in sustainability initiatives, such as offering rewards for innovative ideas that reduce environmental impact, can further enhance engagement and commitment.
Strong governance structures are essential for effective ESG management. Companies should establish clear governance frameworks to oversee ESG initiatives, including the appointment of dedicated committees or officers responsible for sustainability. Ethical standards must be rigorously enforced, covering areas such as anti-corruption, data privacy, and fair labor practices. Continuous monitoring and improvement are also crucial. Regular audits of ESG practices, benchmarking against industry peers, and learning from best practices ensure that the company remains at the forefront of sustainability efforts.
Finally, collaboration and advocacy are important components of a proactive ESG strategy. Companies should engage with industry peers, NGOs, and government bodies to address broader environmental and social challenges. By participating in industry-wide sustainability initiatives and advocating for stronger environmental regulations, companies can contribute to systemic change while enhancing their own ESG performance. Preparing for future regulations, such as the EU’s CSRD, and engaging in scenario planning for potential environmental and social risks will further strengthen the company’s resilience and ensure long-term success in a rapidly evolving sustainability landscape.
By embedding these practices into their operations, companies not only reduce their environmental impact but also create long-term value, improve their reputation, and build resilience against future risks, ultimately driving sustainable success.
Footnote
1. https://www.mfsa.mt/our-work/sustainable-finance/
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.