PKF attending AFME Amsterdam event on sustainable Finance

PKF delegates attended Amsterdam this month on a conference which brings 300 delegates together to discuss and debate key topics and issues that are shaping sustainable finance markets and policy.

The agenda addressed key issues facing market participants including capital market developments, how regulatory frameworks are functioning, and what is needed to support the real economy transition for sustainable finance. Top of the agenda were changes to SFDR, how CSRD will shape the data landscape and integration of transition plans into finance and investment decision-making. For PKF delegates, this was a unique opportunity to learn more on EU taxonomy alignment, classifying products under SFDR and utilising comparable disclosures. 

Speakers included heads of the units from the European Commission, FCA, AMF, HM Treasury, German Federal Ministry of Finance, EFRAG, AFM, IMF, World Bank, IOSCO, EBA, BAFIN and the Bank of England.  The regulatory landscape for sustainable finance is complex and often fragmented across different jurisdictions.  Financial institutions must navigate varying requirements and standards, which can be resource-intensive. 

These are continually evolving. Will Malta‘s institutions achieve stringent disclosure requirements, such as those mandated by the EU Taxonomy and the Sustainable Finance Disclosure Regulation (SFDR) in the near future. Only by harvesting reliable and consistent data on environmental, social and governance (ESG) factors can Malta meet its international obligations and attract more capital investment. Ideally, financial and banking regulators educate licensed entities on the use of standardized metrics and methodologies for measuring and reporting ESG performance.  

If this is lacking or inconsistent, it can lead to confusion and makes it hard for international investors to compare different investments. Last year, PKF organized jointly with the Times of Malta three ESG themed conferences and invited ministers directly involved to explain their roadmap on the subject.  Malta cannot rest on its laurels. It must start integrating ESG considerations into existing risk management, investment decision-making, and reporting systems. One appreciates that locally, there is often a lack of expertise and skills related to sustainable finance within financial institutions.  

PKF Academy has designed a number of specialized courses how to implement the necessary technology and infrastructure to support sustainable finance practices, such as data analytics and reporting tools. One sympathises that this requires significant investment.  The risk of greenwashing, where investments are falsely marketed as sustainable, can undermine trust and credibility in sustainable finance products.  It is enviable that Malta has a domestic capital market that for many years was highly regulated.  

MFSA as the prescient regulator, ensured that sustainable finance practices are aligned with the overall business strategy and objectives of the capital markets. Now, the penny has dropped and in strict compliance, we have to incorporate ESG risks into traditional risk management frameworks.  As can be expected this requires a nuanced understanding of how these risks impact financial performance. 

Aligning with international standards and frameworks, such as those developed by the Task Force on Climate-related Financial Disclosures (TCFD) and the International Sustainability Standards Board (ISSB), such can be challenging but essential for global consistency.  Environmental, Social and Governance (ESG) factors are key criteria used by financial institutions to evaluate the sustainability and ethical impact of their investments.  These factors help investors assess the long-term risks and opportunities associated with their investment decisions.  For Malta this includes:

•  Energy Efficiency: Use of energy-efficient technologies and practices (reducing dependence on heavy LNG plants producing electricity).
•  Water Usage: Sustainable water management practices and balanced use of scarce water table resources.
• Waste Management: Reduction, recycling, and proper disposal of waste, waste to energy.
• Air and Water Pollution: Measures to reduce pollutants and excessive ICE - motor vehicle congestion.
• Biodiversity and Land Use: Protection of ecosystems and responsible land use.
• Compliance with labour laws and standards, including fair wages and working conditions (including thousands of low-paid TCN’s).
• Diversity and Inclusion: Promoting a diverse and inclusive workplace.
• Respect for Human Rights: Ensuring that business operations do not infringe on human rights.
• Supply Chain Management: Ensuring that suppliers adhere to human rights standards.

A related topic at the AFME event covered “Anti-Corruption and Anti-Bribery”.  Such policies and practices are needed to be religiously followed to prevent corruption and bribery.  Closely linked are protection of shareholder Interests. Moving onto the two-day conference, it covered transitional financing and new regulation such as IFRS S1 and S2.  EU Transitional Finance

Transitional finance refers to financial activities and investments that support the transition towards a more sustainable economy.  This concept is closely linked to the EU Taxonomy Regulation, which is a classification system establishing a list of environmentally sustainable economic activities.  The EU Taxonomy aims to provide clarity to investors, companies, and policymakers on which activities can be considered sustainable, thereby facilitating the transition to a low-carbon, resilient, and resource-efficient economy.

It covers topics such as: “Sustainable Investments” **Green Bonds**: Introducing IFRS S1, this broadly covers the International Financial Reporting Standards Sustainability Disclosure Standards.  Speakers enlightened the audience about key workings of IFRS SI. This requires companies to disclose information about their sustainability-related risks and opportunities that could affect their financial performance and position.  

Regulated companies in Malta are now encouraged to provide a complete integration of sustainability-related information with traditional financial reporting, thus providing a more comprehensive view of a company's overall performance and prospects. Auditors will be assessing companies on their ESG compliance to EU Taxonomies next year.  Such rules help create a more robust and transparent financial system that supports the transition to a sustainable economy.  IFRS S2, in turn focuses specifically on climate-related information.  Combined, IFRS SI and S2 offer a comprehensive approach to sustainability.  

In turn, IFRS S2 is aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), which provides a widely recognized framework for climate-related financial disclosures.  PKF augurs that Malta consolidates its drive to strengthen compliance as eventually this helps attract international investors when they make informed decisions where to invest. 

Auditors, in turn are duty bound to report on clients that do not disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities. This includes greenhouse gas (GHG) emissions, energy consumption, and other relevant indicators.  In conclusion, the AFME event was an eye opener that Malta needs to strengthen its prowess to catch up with recent capital markets regulations.