ESG impact local SMEs?

Small and medium-sized enterprises (SMEs) are the backbone of the local economy and represent the lion’s share of registered businesses in Malta. According to the NSO, in 2022, 99.9% of local businesses employed fewer than 250 employees, with the vast majority (97.3%) being micro firms employing less than 10 individuals. Therefore, it is essential for SMEs to embrace the next wave of Environmental, Social, and Governance (ESG) initiatives for Malta to become a more sustainable economy.

Currently, nearly 50,000 companies in the EU will be required to report on sustainability as of 2024 under the EU’s Corporate Sustainability Reporting Directive (CSRD). The first CSRD reports are due in 2025 for companies with a year-ending on 31 December 2024. The CSRD obligations apply to companies listed on EU regulated markets (excluding micro-undertakings) as well as all EU-based companies that meet at least two of the following criteria: (i) employing more than 250 employees, (ii) having a net turnover exceeding €40 million, or (iii) possessing total assets exceeding €20 million.

For companies reporting under the International Financial Reporting Standards (IFRS), the CSRD will be complemented by two new IFRS standards addressing sustainability finance reporting: the IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures, both effective from January 2024.

The default accounting rules for local SMEs are the General Accounting Principles for SMEs, except for licensed entities which are required to report under IFRSs. As it stands, SMEs are not yet subject to any ESG reporting. Nonetheless, this does not imply that SMEs should disregard sustainability, as they can greatly benefit from adopting sustainable practices.

To begin with, Malta Enterprise has committed to supporting companies in their transition towards green and digital practices by offering dedicated measures such as the Smart and Sustainable Investment Grant. Furthermore, since December 2021, the Ministry for Energy, Enterprise, and Sustainable Development has launched Malta’s first ESG portal, allowing the public and investors to assess the ESG credentials of major quoted companies in Malta and Gozo. This enables smaller businesses to evaluate the progress made by larger enterprises and make informed decisions for sustainable investments.

An environmental approach to promoting sustainability in European SMEs involves reducing CO2 emissions, decreasing energy consumption, adopting renewable energy sources, increasing the utilisation of recycled materials, and managing water consumption. For example, installing photovoltaic panels on rooftops to harness Malta’s abundant annual sunshine can be an effective measure. Additionally, improving the energy efficiency of buildings through renovations such as window and door insulation can significantly enhance thermal performance. Furthermore, opting for greener equipment and energy-efficient assets can contribute to a company’s daily sustainability. Considering investments in electric fleets, charging stations, and upgrading to energy-efficient air conditioning systems can be both profitable and environmentally beneficial. It is crucial to recognise that every SME has the potential to operate in a greener manner and, in some cases, even develop sustainable or recycled products.

The adoption of sustainable practices enables SMEs to expand their businesses and enhance their competitiveness simultaneously. It is widely acknowledged that implementing a sustainable business model is financially advantageous as it reduces costs and provides access to new customers and markets. Given the increasing importance of ESG information in assessing creditworthiness, SMEs with enhanced ESG credentials gain access to better financial conditions, critical funding, business opportunities, and overall resources.

George M Mangion is a Senior Partner at PKF Mlata

- Advertisement -