How will ESG impact local SMEs? Embracing sustainability for a more sustainable economy

Small and medium-sized enterprises (SMEs) play a crucial role in the local economy of Malta, constituting the majority of registered businesses in the country. With 99.9% of local businesses employing fewer than 250 employees, and the vast majority (97.3%) being micro firms with less than 10 individuals, it is imperative for SMEs to embrace the next wave of Environmental, Social, and Governance (ESG) initiatives to foster a more sustainable economy.

Starting in 2024, approximately 50,000 companies within the European Union will be required to report on sustainability under the EU’s Corporate Sustainability Reporting Directive (CSRD). The initial 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 supplemented 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.

At present, SMEs in Malta are not subject to any ESG reporting under the default accounting rules, which are the General Accounting Principles for SMEs. However, this does not mean that SMEs should disregard sustainability, as adopting sustainable practices can bring significant benefits.

Recognizing the importance of sustainability, Malta Enterprise has committed to supporting companies in their transition toward green and digital practices. This support includes measures such as the Smart and Sustainable Investment Grant. Additionally, the Ministry for Energy, Enterprise, and Sustainable Development launched Malta’s first ESG portal in December 2021. This portal allows the public and investors to assess the ESG credentials of major quoted companies in Malta and Gozo, enabling smaller businesses to make informed decisions for sustainable investments by evaluating the progress made by larger enterprises.

In the pursuit of sustainability, SMEs can take various measures to enhance their ESG performance. Embracing an environmental approach involves reducing CO2 emissions, decreasing energy consumption, adopting renewable energy sources, increasing the utilization of recycled materials, and managing water consumption. For instance, installing photovoltaic panels to harness Malta’s abundant annual sunshine can be an effective measure. 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 recognize 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 not only allows SMEs to expand their businesses but also enhances their competitiveness. Implementing a sustainable business model is financially advantageous as it reduces costs and provides access to new customers and markets. With ESG information becoming increasingly important in assessing creditworthiness, SMEs with enhanced ESG credentials gain access to better financial conditions, critical funding, business opportunities, and overall resources.

In summary, there are numerous measures that SMEs can adopt to improve their sustainability performance and achieve high ESG ratings, benefiting both their own enterprises and the environment. To stay updated on the latest developments, businesses are invited to join on the 27th of June at PKF Malta’s “The ‘S’ in ESG” conference, taking place at Hilton Malta. One can register for the event here: https://www.ticketline.com.mt/bookings/Shows.aspx?ProductionId=1002