All eligible companies must tailor exact measurements for ESG

Following two years of Covid deprivation and sluggish business, saddled by a war that Russia inflicted on Ukraine - all this pushed inflation that sent oil, gas and other commodity prices, plus interest rates to unprecedented heights. Now, when some sort of financial stability is slowly returning, little did operators feel the sudden obligation to report under rules of ESG.

In Malta, an alliance was founded among a group of companies with a chairperson - all trying their best to smooth the upward path towards full obligations set by the EU rules.  In fact, as if by stealth, several pieces of regulation were introduced in the European Union directly to address the industry’s role in funding environmentally and socially sustainable activities.

Notice the new nomenclature, culminated in an EU Taxonomy Regulation. This is no walk in the park. In brief, it is the most notable and advanced regulatory framework so far, as it uses comprehensive science-backed criteria and numerous thresholds. When announced, most objectives of the EU Taxonomy will gradually enter into force this year.

This is a unique classification system, covering a list of environmentally sustainable economic targets. It could play an important role in helping the EU scale up sustainable investment and successfully implement the European green deal. Many hope that it would provide companies, investors and policymakers with appropriate definitions for economic activities that can be considered environmentally sustainable.

Early this year our energy ministry has appointed an ex-banker to head a Project Green with a tidy piggy bag of €700 million ostensibly aimed to improve the use of green spaces. In the past, ESG reporting was a largely voluntary effort, yet now it has become a vital expectation of compliance from business sectors. Such growing pressure to meet ESG targets and reporting presents both significant challenges and golden opportunities for selection process in asset and private equity world.

The challenges arise from ESG disclosure are making it imperative for the local banking community to seriously educate its portfolio of customers.  Naturally, one expects local banks, which are now reporting improved profits to set aside a tidy sum to educate and guide their clients.  A missed opportunity is the lack of bank participation in green energy projects which can harness the sea in the EEZ, so as to generate offshore clean energy from floating solar and wind power.

Perhaps at the eleventh hour, local banks and the Development bank will be given the fiat from Castille to start building a broad ecological and green energy policy, before the EU taxonomy forces us to comply.

That will be the day, when medium sized companies succeed to improve public reporting about their performance across a variety of Environmental, Social, and Governance (ESG) issues.  Effective ESG disclosure helps external stakeholders (like bank managers, authorities, EU funds or potential customers) better understand risks around operations, emissions, or supply chain issues that management may have previously kept private.

In Malta, it is true that environment degradation has been the subject of many protests by NGO’s and public-spirited bodies.  It so happens this week there is a planned National protest by 250 academics. Academics are flanked by Moviment Graffitti, Friends of the Earth Malta, Flimkien għal Ambjent Aħjar, Din l-Art Ħelwa, Nature Trust Malta-FEE, Għawdix, BirdLife Malta and Ramblers’ Association Malta.

Mirroring part of ESG obligations, this unprecedented protest group will try to raise awareness for an ESG model that enhances quality of life. Apart from specific claims, they are demanding institutional and policy reforms in the fields of environment, planning, and ODZ land abuse.  Back to ESG, there are a variety of frameworks which apply, including the Global Reporting Initiative (GRI), the Principles for Responsible Investment (PRI), and the Sustainability Accounting Standards Board (SASB), among others.

For instance, a small technology company may wish to disclose its total carbon emissions. This is a step in the right direction. That is why, there is the need for ESG yardsticks, in the form of scorecards, which are used to gauge performance within an organization. In fact, in Europe one finds more and more entities creating in-house scoring systems to monitor and conscientiously report on their own performance.

ESG disclosure helps stakeholders (like investors, auditors, creditors, employees, prospective customers, etc.) understand how a company is managing ESG risks and opportunities. Ineffective or misleading ESG disclosures may be considered greenwashing. Greenwashing is when the management team makes false, unsubstantiated, or outright misleading statements or claims about the sustainability of a product or a service, or even about entire business operations.

One may encounter greenwashing which is unintentional, perhaps due to a lack of knowledge or understanding on the part of management, but sometimes greenwashing is also carried out intentionally.

Ideally, Castille should appoint an ad hoc regulator and offers grants, tax credits and scientific assistance to all sectors in gearing up to the challenge.  Locally, one notices how the galloping building and real estate sector forms a substantial part of annual GDP.   Focusing on the real estate industry, one wonders how much attention is being given in their approach to request disclosure when signing property owners.

Again, the social element is just as important. Bricks and mortar may make a building, but the overall happiness and productivity of those who live or work within it are equally important.  Are owners fully conscious of the need for a reduction of energy consumption, of cutting waste, adequate sound proofing, use of environmentally friendly and sustainable building materials, and regular energy audits?

As buildings are constantly exposed to the elements, future proofing them and fitting of PV panels is of the utmost importance to achieve certification as ESG compliant (perhaps this may reduce deaths so far caused from uncertified, collapsing structures).

Emissions targets may be the biggest driver behind the importance of ESG certification concerning utilities running clean electricity (eg from hydrogen) as opposed to burning LNG.

Locally, reporters continually point to climate-related abuses. These temporarily grab the headlines, such as over- population, licensing labour permits for more TCN’s, congestion in beaches due to three million (Sun&Sea) tourists coupled with unbridled importation of ICE cars.

The latter remain affordable when compared to prices of zero-carbon EV motors - again some complain charging points are few and overstretched.

In conclusion, PKF has organized a sequel to its first ESG conference which is now hosting a business breakfast booked on 27 June at the Hilton Portomaso Suite.  This is a must-attend ESG event which is addressed by a formidable team of 12 local and US speakers.

For more information, contact Clarissa Galea on 2148 4373.