On the 11th August 2020, the Malta Financial Services Authority (the “MFSA”) issued a circular on the initiatives undertaken by the EU on sustainable finance while also providing an outline of the legislative instruments that will come into force within the next twelve months in the area of sustainable finance.
Sustainable finance at an EU level, refers to any form of financial service that supports the European Green Deal, by taking account of environmental, social and governance (“ESG”) considerations when making long-term investment decisions.
- Taxonomy Regulation
This political agreement which was entered into effect on the 12th July 2020 in the form of a regulation is designed to establish a unified classification system (or taxonomy) designating environmentally sustainable economic activities, encompassing all three factors of sustainability. The regulation will therefore provide a classification system to stakeholders which will specifically provide which objectives or concepts are to be considered as sustainable, encouraging relevant entities to invest in environmentally sustainable assets.
- Disclosure Regulation
The Disclosure Regulation will be applicable from the 10th March 2020 and will seek to harmonise existing provisions on disclosures in relation to sustainability. The regulation will place an obligation upon institutional investors and asset managers to disclose how they will integrate the ESG factors in their risk process. Thus, once again the main objective is that of promoting sustainable investment in relation to financial products.
- Benchmark Regulation
This is the final text amending the EU Benchmark Regulation, requiring benchmark administrators providing new climate benchmarks to comply with it by the 30th April 2020. The purpose of this regulation is to eliminate any potential or actual, conflicts of interest in the benchmark-setting process while increasing reliability. The Benchmark Regulation is built upon the International Organisation of Securities Commissions principles for financial benchmarks and will enable a remarkable degree of comparability of climate benchmark methodologies, whilst also allowing flexibility for benchmark administrators when planning their methodologies. The regulation will contribute towards enhancing transparency and avoiding situations of greenwashing, where relevant entities would portray their products as being more environmentally sound than they actually are.
Besides the above sustainable finance regulations, the European Commission is also undertaking to publish an updated sustainable finance strategy to further incorporate ESG factors into corporate governance, including the development of labels for retail investment products. In addition to this, the Commission also aims to increase transparency when it comes to sustainable reporting by relevant entities.
The MFSA has begun implementing the said regulations while also analysing the impact of the proposed regulatory changes in a two-fold manner:
Increasing awareness and assessing the impact of the regulations’ legal requirements through questionnaires, consultations, circulars and assessments that quantify the domestic institutions’ exposure to climate policy relevant sectors; and
Implementing and facilitating compliance by license holders by stimulating market participants to familiarise themselves with the upcoming requirements and to reflect upon any new obligations within their respective policy framework. Furthermore, the MFSA will also consult with relevant stakeholders prior to implementing the necessary EU legislation in accordance with the local market needs.