Answer ... The ESG regulatory regime in Malta comprises a number of EU regulations, national laws and codes of practice. The array of ESG-related regulations developed by the European Union constitutes the backbone of Malta’s ESG regulatory regime, with the main substantive EU ESG regulations being:

• the Taxonomy Regulation (2020/852);
• the Low Carbon Benchmark Regulation (2019/2089);
• the Sustainable Finance Disclosure Regulation (2019/2088) (including the regulatory technical standards);
• the Non-Financial Reporting Directive (2014/95/EU), to be replaced by the Corporate Sustainability Reporting Directive (2022/2464); and
• the five European Commission delegated regulations and directives integrating sustainability risks and factors into the following EU legislative regimes:
• • the Undertakings for Collective Investment in Transferable Securities Directive (2009/65/EC);
  • the Alternative Investment Fund Managers Directive (2011/61/EU);
  • the Markets in Financial Instruments Directive (MiFID II) (2014/65);
  • the Solvency II Directive (2009/138); and
  • the Insurance Distribution Directive (2016/97).

While there is no single national law which is ESG specific, a variety of rules and regulations may be considered to align with principles enshrined in the environmental, social and governance aspects of ESG, including but not limited to:

• the Sustainable Development Act (Cap 521 of the Laws of Malta);
• the Environmental Protection Act (Cap 549 of the Laws of Malta);
• the Renewable Sources Regulation (SL 545.11);
• the Climate Action Act (Cap 543 of the Laws of Malta);
• the Equality for Men and Women Act (Cap 456 of the Laws of Malta);
• the Code of Principles of Good Corporate Governance (Appendix 5.1 to the Capital Markets Rules, issued by the Malta Financial Services Authority (MFSA));
• the Corporate Governance Code, issued by the MFSA and applicable to entities regulated by the MFSA (‘MFSA Corporate Governance Code’); and
• the Voluntary ESG Code of Good Practice for the Remote Gaming Sector in Malta (‘MGA ESG Code’), issued by the Malta Gaming Authority (MGA).

Answer ... The ESG framework in Malta is primarily based on the mandatory ESG-related laws developed by the European Union referred to in question 1.1. In support of the regulatory developments taking effect at EU level, a number of national laws have been or are expected to be amended in accordance with the EU ESG-related regulations.

Over and above hard regulation, there has recently been an attempt by local regulators to encourage the sector within their respective remit to look beyond compliance with hard law and to adopt a corporate culture that has ESG at its core. To this end, on 5 August 2022, the MFSA launched the MFSA Corporate Governance Code, which applies to all entities authorised by the MFSA (including banks, fund managers, investment firms and insurance companies), with the exception of listed companies, setting out principles on corporate social responsibility, ESG and sustainable finance. The MFSA Corporate Governance Code encourages regulated entities to integrate ESG into their business strategies on a ‘best efforts’ basis. Insofar as listed companies are concerned, the Code of Principles of Good Corporate Governance applies on a ‘comply or explain’ basis and is predominantly geared towards recommending the adoption of corporate governance standards by such entities.

More recently, on 8 November 2023, the MGA announced the launch of the MGA ESG Code. The code will:

• complement and build on existing efforts by the industry; and
• serve as a reference point for MGA-licensed entities to regularly assess, report on and improve their ESG practices.

The MFSA Corporate Governance Code and the MGA ESG Code will:

• prepare MFSA-regulated entities and MGA licensees, respectively, for the upcoming Corporate Sustainability Reporting Directive reporting requirements; and
• serve as a voluntary ESG framework for entities that fall outside the scope of the EU regulatory regime.

Answer ... The MFSA is the national competent authority in Malta designated as responsible for:

• implementing the body of EU ESG-specific legislation; and
• overseeing ESG reporting obligations by regulated entities operating within the financial services industries and markets.

The MFSA consults frequently with industry stakeholders with a view to:

• facilitating the implementation and application of legislative initiatives as they come into force; and
• contributing to the gradual transition towards an ‘ESG-first’ culture.

In addition to the MFSA’s leading role in the ESG regulatory ambit, the Malta Stock Exchange (MSE) has a role to play in:

• advocating for sustainable finance in the local capital markets; and
• developing frameworks for the admission of sustainable financial instruments on a designated segment of the MSE.

On 25 February 2021, the MSE published a set of by-laws for the establishment of the MSE Green Market. In evaluating an application for a green bond, the MSE will:

• review the green bond framework and the external reviewer’s reports to assess whether the prospective issuer has satisfied the eligibility criteria set out in the MSE bye-laws; and
• thereafter, assess whether eligibility is retained throughout the term of the green bond.

While the MSE is, thus far, the supervisory body responsible for overseeing the admission of green bonds to the Green Bonds Market Segment of the MSE, the MSE continues to explore the possibility of developing a framework for other sustainable finance instruments.

The MGA, as the regulatory body responsible for the governance and supervision of all gaming activities in and from Malta, is responsible for overseeing ESG reporting by MGA licensees in accordance with the MGA ESG Code. The MGA will:

• review the ESG reports submitted by MGA licensees; and
• reserves the right to withdraw any formal recognition granted through the MGA ESG Code Approval Seal if false or misleading information is found to have been submitted.

Answer ... The MFSA has signalled its commitment to embrace and support the regulatory initiatives surrounding ESG under the European Green Deal and Sustainable Finance Action Plan, reiterating its drive to increase awareness of sustainable finance among the entities under its supervisory purview and ensure due compliance with the ESG-related regulatory framework. To this end, in 2022, the MFSA set sustainable finance as one of its priorities going forward.

Consistent with the approach being adopted at EU level, the MFSA aims to avoid a fragmented approach across sectors:

• looking at sustainability from a cross-sectoral perspective;
• underlining the need for coherence; and
• setting the right founding elements for such a fundamental structural shift in the financial landscape.

In doing so, applying the principle of proportionality to the Maltese financial services sector is regarded as an important consideration that must be addressed locally in the context of ESG implementation.

Given that the ESG regulatory framework is still at development stage, and that –understandably – the industry is still adjusting to relatively new considerations, the MFSA is focused on communicating with and educating the industry, with a view not only to ensuring compliance with regulatory requirements being imposed, but also – more importantly – enhancing businesses’ overall commitment to ESG and sustainable finance.

Answer ... The first prominent local initiative was the establishment of the Malta Sustainability Forum (MSF), first organised in 2019 by a leading local bank, which aims to raise awareness on the topic of sustainability with the aim of empowering citizens to make conscious decisions towards a more sustainable economy. The MSF brings together prominent holders of public office, leading industry executives and activists to discuss the ways in which the 17 UN Sustainable Development Goals can be achieved in Malta through the provision of local and international perspectives.

In 2022, 13 local business organisations announced the launch of a new alliance, called the Malta ESG Alliance (MESGA) – a private sector initiative aimed at tackling the ESG challenges that the Maltese community faces. The first ESG theme prioritised by MESGA is that of decarbonisation. To this end, members have embarked on different tangible and measurable projects with a view to reducing their respective carbon footprint.

Answer ... The Non-Financial Reporting Directive (NFRD), which has been transposed into Maltese law, requires ‘large public interest entities’ (ie, entities with a balance-sheet total of more than €20 million or a net turnover of more than €40 million) with more than 500 employees on average to disclose non-financial information in their annual reports. Following its transposition into Maltese law, due by July 2024, the Corporate Sustainability Reporting Directive (CSRD) will extend the scope of the reporting rules under the NFRD to all ‘large companies’ as well as companies with securities listed on the regulated markets (save for companies qualifying as micro-enterprises), in accordance with the staggered application timeline set out in the CSRD. A ‘large company’ under the CSRD is one that meets at least two of the following criteria:

• a balance-sheet total of more than €20 million;
• a net turnover of more than €40 million; and
• more than 250 employees in the financial year.

Maltese entities operating in the financial services sector are subject to obligations relating to the integration of sustainability risks and factors emanating from the five European Commission delegated regulations and directives referred to in question 1.1. Additionally, such entities are captured by the sustainability disclosure requirements established in the Sustainable Finance Disclosure Regulation (SFDR) if they qualify as ‘financial market participants’ or ‘financial advisers’ within the meaning of the SFDR. The following entities are ‘financial market participants’:

• alternative investment fund managers (AIFMs);
• undertakings for collective investment in transferable securities management companies (UCITS);
• investment firms and credit institutions providing portfolio management;
• managers of qualifying venture capital funds;
• managers of qualifying social entrepreneurship funds;
• insurance undertakings providing insurance-based investment products (IBIPs);
• pan-European personal pension product providers;
• manufacturers of pension products; and
• institutions for occupation retirement provision.

‘Financial advisers’ are:

• insurance undertakings or intermediaries providing insurance advice with regard to IBIPs and AIFMs;
• UCITS management companies;
• investment firms; and
• credit institutions providing investment advice.

Answer ... Although in the early stages of their ESG journey, a number of Maltese companies that are not presently subject to ESG rules and regulations are beginning to integrate sustainability into their business strategy on a voluntary basis with a view to demonstrating their long-term commitment to ESG by putting in place sustainability-related policies and procedures, among other things. Maltese companies – particularly listed companies, whether subject to specific ESG rules or not – are being encouraged to publish ESG credentials on Malta’s ESG portal, established by Malta Enterprise (Malta’s economic development agency) and the Ministry for the Environment, Energy and Enterprise. The data portal is designed to demonstrate how participating entities rank against each other on key sustainability metrics, in turn:

• facilitating investors’ access to transparent, tangible and comparable ESG data; and
• allowing them to incorporate ESG credentials into their investment decisions.

Answer ... A combination of the growing demand for ESG investments and rapidly evolving markets creates room for greenwashing, which has the potential to adversely impact investors looking to make sustainable investments. The launch of various ESG-specific financial products and labels has inevitably caused concern that entities may be misclassifying their products for marketing purposes, raising fears of greenwashing and mis-selling. Moreover, as product choice expands, investors are faced with diverging standards as to what classifies as ‘green’ or ‘sustainable’, exacerbating comparability difficulties among products. While the introduction of the union-wide classification system by virtue of the Taxonomy Regulation is expected to attenuate greenwashing and comparability problems – at least insofar as the situation in the European Union is concerned – this is presently in its development stage and the local market is still adjusting to the new classification system.

Another key issue is noted among local financial market participants and financial advisers that fall with the scope of the SFDR. In-scope firms face onerous obligations in light of the ‘Level 2’ disclosure requirements supplementing the SFDR and the Taxonomy Regulation. The collection and assessment of ESG-related data with a view to fulfilling the reporting obligations in terms of the regulatory technical standards have become very challenging. This is the case in particular in respect of firms that offer ESG-specific financial products, where granular detail describing the ‘ESG’ objectives or characteristics of the products is required. While greater transparency is expected to mitigate the greenwashing problem, unduly onerous disclosure obligations may potentially deter market players from offering ESG products in the first place.

Answer ... The EU ESG reporting regime is primarily composed of two sustainability reporting frameworks, establishing the principal EU disclosure obligations applicable locally:

• the sustainable finance reporting framework (by virtue of the Sustainable Finance Disclosure Regulation (SFDR) and the regulatory technical standards), complemented by the Taxonomy Regulation; and
• the corporate sustainability reporting framework (by virtue of the Non-Financial Reporting Directive (NFRD), to be replaced by the Corporate Sustainability Reporting Directive (CSRD)), complemented by the Taxonomy Regulation.

Local financial services firms covered by the SFDR framework must comply with a number of entity-level sustainability-related disclosure requirements, as well as requirements specific to the financial products which they offer. Disclosures relating both to the integration of sustainability risks into investment decisions or advice and to the consideration of adverse impacts of investments decisions or advice on sustainability factors are to be made on the entities’ website and in pre-contractual documentation. Furthermore, firms that offer ESG-focused financial products that classify as ‘light green’ (Article 8) or ‘dark green’ (Article 9) for SFDR purposes are subject to additional disclosure obligations in terms of the Taxonomy Regulation and the Level 2 disclosure requirements set forth in the regulatory technical standards.

As regards the corporate sustainability reporting framework, at present, companies falling within the scope of the NFRD must disclose non-financial information in their annual reports. This directive introduced the concept of ‘double materiality’, requiring companies to report not only on sustainability risks which may negatively affect their business, but also on their impact on society and the environment. Upon the transposition of the CSRD into Maltese law, an enhanced corporate sustainability disclosure framework will take effect, pursuant to which in-scope companies will be required to disclose ESG data in their annual reports in line with mandatory EU sustainability reporting standards. The reporting requirements of the CSRD will be phased in over time for different categories of companies, with the first reports due in 2025 for financial year 2024. The Taxonomy Regulation and its delegated acts complement the NFRD and in due course the CSRD, requiring undertakings falling within their scope to report the extent to which their activities are associated with economic activities that qualify as ‘environmentally sustainable’ in terms of the Taxonomy Regulation.

Answer ... A growing number of Maltese companies that are not presently subject to ESG disclosure regulations – especially listed entities falling outside the scope of the NFRD – are beginning to disclose ESG-related information. In particular, the launch of the first ESG data portal in Malta is encouraging companies to voluntarily disclose to the general public specific credentials relating to:

• environmental matters (eg, net carbon emissions/revenue; energy consumption/revenue);
• social matters (eg, permanent versus temporary contract ratio; female workforce); and
• governance matters (eg, board size; number of independent directors).

With a view to establishing a voluntary ESG reporting framework for the financial services industry, the Malta Financial Services Authority (MFSA) has issued a code of corporate governance, encouraging financial services providers regulated by the MFSA to integrate and report on ESG on a ‘best efforts’ basis (‘MFSA Corporate Governance Code’). Similarly, gaming companies holding a licence issued by the Malta Gaming Authority (MGA) are captured by the voluntary ESG reporting framework set out in the Voluntary ESG Code of Good Practice for the Remote Gaming Sector in Malta (‘MGA ESG Code’). The MGA ESG Code focuses on the disclosure of ESG topics that are considered to be most material to the remote gaming industry, most of which concern social and governance matters.

Answer ... As a preliminary step, the board will need:

• to assess whether the company in question is covered by the ESG reporting framework currently in place; and
• if so, to seek to understand what the applicable disclosure obligations entail – particularly whether ESG-related matters are to be disclosed in the annual financial statements of the company and in pre-contractual documentation, among other things – or if not, to seek to voluntarily disclose sustainability-related information as considered applicable and appropriate to the company in question.

Boards have a critical role to play in ensuring that companies are aware of, and can navigate, the ever-evolving ESG reporting framework. In fulfilling their responsibilities, directors must understand and evaluate the risks, opportunities and challenges that arise from ESG factors. In particular, the board should undertake to:

• identify and assess the most material risks associated with the company; and
• ensure that these are accurately disclosed to investors and other stakeholders in accordance with the applicable reporting framework.

The board or any specific committee set up for this purpose should have sufficient competence to be able to understand and manage ESG data, and to assess and measure the data so collected.

Answer ... When reporting on ESG-related matters, the board should ensure that ESG claims are accurate, providing investors with an honest view of the company’s performance on ESG issues. Investors should be able to rely on ESG-related statements issued by companies and to make informed investment decisions, taking into consideration the ESG information published by such companies, where relevant. Inaccurate and unreliable data reporting by companies will likely hinder investors’ sustainability efforts and may potentially lead to ‘greenwashing’ claims.

Answer ... The design and implementation of ESG strategies in Malta are still at an early stage. However, an increasing number of Maltese companies are, among other things:

• investing in sustainable business models through increased commitment towards commercial projects that have a positive impact on the environment or that tangibly support the social dynamics of the Maltese community; and
• seeking to embrace a more robust corporate governance framework.

Local businesses are increasingly conscious of the ESG challenges that are pertinent to their business model, assessing those long-term risks – principally climate-related risks – with a view to building a resilient business model and a robust sustainability-related risk management system.

ESG considerations are becoming an integral part of the strategic objectives of an increasing number of businesses, whether focused on:

• reducing the use of energy and resources in their day-to-day operations with the aim of hitting ambitious, measurable climate targets; or
• placing diversity and inclusion in the workspace and employee wellbeing at the forefront of their strategies, policies and procedures.

Answer ... While the Companies Act, in setting out the duties of directors, does not expressly oblige directors to have regard to sustainability factors when discharging their duties, the responsibility for addressing ESG issues nonetheless falls on the board of directors. ESG considerations are becoming increasingly relevant to corporate strategy. In transforming its strategy to one which has ESG at its heart, management should:

• obtain insight on the company’ ESG impact;
• identify the demands of various stakeholders; and
• enhance investor transparency.

Interestingly, the proposed directive on corporate sustainable due diligence seeks to extend the directors’ duty of care under national law, with a view to ensuring that the duty to act in the best interests of the company encompasses sustainability matters. Among other things, directors of in-scope companies are responsible for adapting their corporate strategy to take into account their adverse impact on sustainability factors, as identified from the company’s due diligence processes.

Answer ... The mechanisms in place to supervise management of ESG issues vary depending on the nature of the company and its maturity level in terms of ESG integration. ESG governance assessments are being undertaken to ensure that the ESG structure is appropriate to the company in question. As this is a relatively new area of focus for the board and the company, directors may need to consider assigning various aspects of oversight to specific committees in order to facilitate the smooth implementation of the company’s ESG strategy. Boards that leverage the audit committee’s financial disclosure oversight expertise by assigning it responsibility for overseeing ESG disclosures can get ahead of the growing demand for this information.

Data validation is a means through which ESG strategies can be monitored, ensuring an objective review of the company’s ESG strategy. Finally, given that companies are beginning to set ESG-related targets, commitment reviews are expected to gain in popularity, ensuring that the company has the mechanisms in place to monitor these commitments over time – specifically, key performance indicators and the process to review them.

Answer ... Boards are the drivers of change, ideally placed to ensure better management of ESG risks and opportunities, as well as the development of ESG practices within their companies. Through its oversight function, the board is responsible for ensuring that the company’s ESG strategy:

• is appropriate;
• takes account of material sustainability risks and opportunities; and
• is likely to deliver results.

The board should guide management’s process for identifying the ESG issues relevant to the company, assessing them for materiality and deciding what to disclose and where.

Answer ... For Sustainable Finance Disclosure Regulation purposes, in-scope financial services firms must explain whether the entity’s approach to remuneration is consistent with the integration of sustainability risks – for instance, whether its policy encourages excessive risk taking with respect to sustainability risks. It is envisaged that, in light of recent EU developments in the sustainability sphere, ESG-aligned remuneration will become more prevalent in the near future. In fact, as part of its Sustainable Corporate Governance Initiative, the European Commission is pushing for the alignment of directors’ remuneration with a more sustainable long-term approach.

Insofar as listed companies are concerned, the Code of Corporate Governance encourages directors’ remuneration to be tied to corporate social responsibility where this is considered to be appropriate. Among other things, the remuneration statement to be disclosed in listed entities’ annual report should include information on:

• the current remuneration policy for directors and senior executives, which should contribute to the company’s business strategy, long-term interests and sustainability;
• formal and transparent procedures for establishing the remuneration packages of individual directors;
• both financial and non-financial performance criteria, including, where appropriate, criteria relating to corporate social responsibility; and

• the methods applied to determine the extent to which the performance criteria have been fulfilled.

Answer ... Companies should consider developing an ESG strategy that is guided by an overarching ESG vision and mission. The integration of ESG into business processes and practices is required to effectively implement an ESG strategy. To this end, companies should set measurable and clear ESG goals and identify key ESG priorities. In order to stay on track with their ESG objectives, companies should monitor their progress on ESG matters and, in doing so, should consider communicating with key stakeholders in order to:

• evaluate goals;
• compare best practices;
• update data continuously; and
• make the necessary adjustments.

Answer ... ESG loans are permeating the local market at a more effective rate than other means of sustainable finance. Local credit institutions have generally limited themselves to offering green loans over other possible ESG loans, focusing on borrowers seeking to finance, among other things:

• green energy products such as photovoltaic panels, wind turbines and solar energy systems;
• sustainable modes of transport such as bicycles and electric and hybrid motor vehicles; and
• energy-saving equipment such as double glazing, thermal insulation products and energy audits.

In line with other initiatives to encourage a just transition, credit institutions in the local market generally offer borrowers taking a green loan:

• preferential interest rates;
• a waiver of early repayment fees; and
• preferential or waived processing fees.

The need for security also varies depending on the credit institution.

Prospective borrowers are generally expected to provide lenders with the evidence customarily required whenever a loan is sought, whether ESG related or otherwise, whereby proof of identification and income is required. Some credit institutions may ask for additional documentation, depending on the individual circumstances, taking into account the ‘sustainable’ purpose of the loan.

Answer ... Since the launch of the local framework for the issuance of green bonds in 2021, the Maltese green bond market has witnessed the listing of the first – and so far only – green bond, which was issued by a government-owned entity in July 2023. The general sentiment is that this first green bond issuance will:

• pave the way for corporate issuers to tap into the local green bond market; and
• promote interest in the passporting of green bonds into the local capital markets.

Social bonds, sustainability bonds and sustainability-linked bonds (SLBs) do not currently form part of the list of sustainable instruments available in the local market. However, the expectation is that in the near future, the local sustainable finance market will become more diversified, with the introduction of additional sustainability-linked debt instruments.

With respect to loan financing, ESG-related loans have so far managed to penetrate the local market at a quicker pace and with greater success than other ESG-related debt instruments.

Answer ... In February 2021, the MSE announced that the Malta Financial Services Authority (MFSA) had approved the MSE bylaws for the establishment of the MSE Green Market. In terms of the MSE bylaws, for a project to be considered eligible for green financing, it must meet a set of criteria based on the Green Bond Principles – a voluntary set of principles intended for use by market participants, formulated by the International Capital Markets Association. In this respect, a green project must make a substantive contribution to one of the six environmental objectives identified in the Taxonomy Regulation. Additionally, qualifying green bond issuers must ensure that they have in place clear policies on the utilisation of the proceeds of the bond for the relevant green projects; and on the management of such proceeds. Reporting mechanisms certified as being in conformity with the established green bond standards by qualified, accredited external valuers must also be employed. At present, no similar structure exists for social bonds, sustainability bonds or SLBs in the local market.

Another key recent development took place at the EU level on 20 December 2023 with the entry into force of the European Green Bond Standard Regulation, which lays the foundation for a common framework that bond issuers will need to follow if they wish to use the designation ‘European green bond’ for their environmentally sustainable bond issuances. We are yet to see how the local capital markets will respond to this recent development.

Answer ... Transparency is key to develop an effective sustainable market and maintain its integrity. The local market would lose its credibility if there were instances of companies deliberately misleading investors with a bond that was not truly ‘green’. Issuers are encouraged to accurately disclose the use of proceeds earmarked to support sustainable activities and how the green bond proceeds are allocated post-issuance. Issuers can protect the credibility of their green bond by defining the green bond eligibility criteria clearly and in line with evolving guidance and standards. By adopting a transparent approach with potential investors, issuers will avoid misunderstandings over whether and to what extent a project meets the eligibility criteria and over how the proceeds will be used.

Aside from the above, issuers should consider aligning their green bond framework with ESG objectives that are connected to the company-wide business strategy. While not strictly required or obliged to do so, by demonstrating their long-term commitment to a corporate strategy that embraces ESG, companies will be more likely to attract strong investor demand when issuing sustainable instruments.

Answer ... The number of institutional investors and activist shareholders putting sustainability at the forefront of their investment decisions, recognising the impact of ESG factors on the risk-return attributes of investment, is undeniably on the rise. The introduction of the EU-derived ESG disclosure regulations – most notably the Sustainable Finance Disclosure Regulation – has proved to be a starting point for many investors and activist shareholders, prompting stakeholders within the financial services sector in Malta to be more ESG conscious by integrating ESG risks and factors into their investment decisions. To this end, institutional investors are increasingly demanding information on how companies and funds are managing sustainability risks and factors, and on how they integrate these into their business decisions. Generally, the pressure to raise the bar in respect of sustainability-related disclosures is increasing.

Answer ... In Malta, shareholder activism has been on the rise in recent years; though by all accounts, it is less prevalent than in many other EU jurisdictions. Notably, in Malta, most companies tend to have their share capital controlled by a relatively small number of shareholders, inevitably reducing the margin for activist minority shareholders to build pressure in respect of ESG issues. Notwithstanding the foregoing, it is expected that shareholders will become increasingly desirous of a board composed of members who are ESG competent. Shareholders are likely to increase pressure to ensure that nomination policies and procedures are such that potential nominees have the required skillset to adequately analyse ESG issues, as well as to make the appropriate ESG-related disclosures.

Answer ... Shareholders have started to recognise that greater attentiveness to ESG factors de-risks operations, making business more sustainable and creating opportunities. The COVID-19 pandemic brought about a shift in shareholders’ priorities, having brought to light the inequality in wealth among individuals as well as other social issues. This development led to discussions on the direction of the social aspects of ESG, particularly those relating to public health and diversity and inclusion. Shareholders are also becoming more climate conscious. It is expected that sustainability in the climate and environmental realm will resonate with shareholders in the local sphere and, in the coming years, will become a top priority for shareholders.

Notwithstanding the foregoing, the areas of focus among shareholders vary depending on:

• the size and nature of the company; and
• the industry in which the company operates.

The ESG areas of focus will reflect the sustainability risks and sustainability impacts that are considered most relevant to the company in question. Taking the gaming sector as an example, the Malta Gaming Authority (MGA) has, through the Voluntary ESG Code of Good Practice for the Remote Gaming Sector in Malta, set out the ESG matters that are considered to be of greatest materiality to the industry, enabling shareholders of gaming companies to better understand what their focus in terms of ESG should be. A similar approach adopted by the relevant regulatory authorities of different industries would be welcomed by the respective market players and stakeholders.

Answer ... A primary driving force in influencing support for ESG is Malta’s youth demographic. Within the local context, and similar to how actions have been taken internationally, the influence exerted by the youth demographic has centred on economic pressure and civil society activism. With regard to the former, younger consumers have tended to prioritise sustainable practices when taking decisions as to the products and services they purchase. Such pressure will ultimately lead to a cascade effect once the current members of the demographic achieve greater economic freedom – a fact which local enterprises have taken note of and reacted to through the launch of a number of sustainable practices with respect to, among other things, packaging, transportation and working conditions. More visible but arguably as effective is direct youth activism on ESG-related issues, highlighted by the increasing number of protests over the past few years on issues ranging from climate to good governance and social issues, which have been largely led by the youth demographic.

Answer ... Consumer pressure and civil society activism have been the routes through which ESG activism has manifested itself most prominently in recent years. Shareholder activism is expected to continue to increase. The recalibration forced by the COVID-19 pandemic greatly accelerated the pace at which this aspect of ESG activism has grown in Malta, with post-pandemic policies serving as a springboard for further action. With greater awareness and education on the subject of ESG and a developing regulatory environment, the need to change our ways from top to bottom for the sake of ourselves, society and our environment is now widely acknowledged by the local market and society at large.

Answer ... With greater awareness of and interest in ESG issues, stakeholders are capable of activating businesses’ ‘ESG consciousnesses’ and driving them to unlock the potential of ESG and become catalysts for change. As a workforce strategy, ESG has become a tool to gain a competitive advantage in attracting and retaining talent. Companies that fail to meet the expected ESG performance standards, particularly in respect of societal issues, are likely to see a knock-on impact on their reputation. Moreover, a rising number of customers have pledged to engage in business only with those corporates that adhere to ESG standards, thereby pushing businesses to conduct proper due diligence relevant to ESG issues in respect of their business relationships and to shift to a more sustainable supply chain.

Answer ... The local ESG landscape has taken longer to gain prominence in Malta than in other similar jurisdictions. While the development of ESG-related disclosures and ESG-focused strategies has increased in pace, ESG financing still lags behind – whether due to a lack of issuer and investor appetite, as may be the case with green bonds, or the lack of a legislative framework, as is the case with social bonds, sustainability bonds and sustainability-linked bonds. We nonetheless expect that the upward trend in ESG uptake will increase in the near future, as evidenced by the increased momentum that the field has witnessed recently.

On the legislative front, there are a number of developments, currently at various stages of the EU legislative process, anticipated in the next 12 months, including:

• the entry into force of the proposed amendments to the regulatory technical standards supplementing the Sustainable Finance Disclosure Regulation;
• the adoption of the proposal for a directive on corporate sustainability due diligence; and
• further developments on the proposal for a directive on green claims.

Answer ... Locally, ESG integration has primarily focused on satisfying ESG disclosure requirements in view of the vast array of EU regulations that have come into force or are currently at the proposal stage. With a view to guaranteeing effective ESG implementation, ESG should become integral to a company’s business model. To ensure that ESG integration does not become tantamount to a ‘tick the box’ reporting exercise, boards should ensure that ESG considerations permeate the entire organisational structure. To this end, companies are encouraged to regard their sustainability reporting requirements as a tool to create value, demonstrating their commitment to ESG matters to the market. Companies should ensure that their ESG-related statements are accurate and not overly aspirational. Representations made may become actionable; and accordingly, it is pertinent for companies to exercise caution when publishing ESG information, disclosing appropriate risk factors and disclaimers as and when relevant.

The lack of sufficient and standardised ESG data is noted as a potential sticking point among market players. At present, there is a profound disconnect between the ESG data that market players need in terms of their ESG reporting requirements and what is available to them. This limitation has an inevitable effect on firms’ ability to perform frequent and rigorous analysis of sustainability-related disclosures. That said, the process of ESG reporting is expected to gradually improve as standardised and comparable ESG data becomes more easily accessible to the local market and further expertise is gained.

The authors would like to thank Liam Axisa, Junior Associate at Camilleri Preziosi, for his contribution to this chapter.