Sustainability-related disclosure in the financial services sector

The Sustainable Finance Disclosure Regulation (SFDR) requires financial market participants and financial advisers to disclose specific information regarding their integration of sustainability risks and the consideration of adverse sustainability impacts in their investment decisions or insurance advice.

This includes the details of how sustainability risks are integrated into their investment decisions and the expected impact on returns. This directive, which is evolving into the Corporate Sustainability Reporting Directive – CSRD, mandates that large companies and groups provide disclosures on their management of social and environmental challenges.

This helps investors, consumers, policymakers and other stakeholders evaluate non-financial performance. Financial regulators in each country oversee compliance and may impose penalties for non-compliance. The integration of these sustainable finance regulations aims to shift the financial sector towards more sustainable and long-term investments, ensuring that finance plays a crucial role in achieving a climate-neutral Europe.

These measures not only help in managing risks associated with climate change, environmental degradation and social issues but also promote transparency and long-term financial and economic action.

In Malta, the MFSA has introduced concepts about various methodologies employed to assess and integrate Environmental, Social and Governance (ESG) data into investment and corporate decision-making processes.

These methodologies provide frameworks and tools for measuring the sustainability and societal impact of an investment or a company’s operations. Here’s an overview of some key ESG data methodologies commonly used in Europe. Let us start first by delving into the ominous EU Taxonomy.

This is a complex classification system that defines what is considered an environmentally sustainable economic activity. This system helps investors, companies and issuers make informed decisions based on whether economic activities meet specific criteria related to climate change mitigation, adaptation and other environmental objectives. Will Maltese firms be able and willing to adhere to the taxonomy for examination and evaluation of their true compliance next year? Only time will tell.

Widely used globally and across Europe, GRI (Global Reporting Initiatives) metrics for reporting on ESG impacts. These standards are designed to enable auditors and other specialists to report on issues that are critical to particular businesses by providing a consistent and credible way for detailed disclosure. The CSRD is set to replace the Non-Financial Reporting Directive (NFRD) and will expand the EU’s requirements for corporate sustainability reporting. It will enhance the scope of companies expected to disclose information and will mandate the use of more detailed reporting frameworks, ensuring that the data provided is more consistent and comparable.

Next, let us visit CDP (formerly Carbon Disclosure Project). This methodology helps companies, cities, states and government agencies disclose their environmental impacts, providing one of the most detailed and comprehensive datasets for GHG emissions, water use and climate change strategies. Malta cannot be a laggard in this context considering how many European companies use CDP to not only disclose their environmental impact but also to compare their performance with peers. In Europe, we meet various methodologies currently employed to assess and integrate ESG data into investment and corporate decision-making processes.

These methodologies provide frameworks and tools for measuring the sustainability and societal impact of an investment or a company’s operations. Here’s an overview of some key ESG data methodologies used in Europe:

EU Taxonomy: The EU Taxonomy is a classification system that defines what is considered an environmentally sustainable economic activity. This system helps investors, companies and issuers make informed decisions based on whether economic activities meet specific criteria related to climate change mitigation, adaptation and other environmental objectives.

Global Reporting Initiative (GRI) Standards: Widely used globally and across Europe, GRI Standards offer a comprehensive set of metrics for reporting on ESG impacts. These standards are designed to enable companies to report on issues that are critical to their business and stakeholders, providing a consistent and credible way for detailed disclosure.

Sustainable Finance Disclosure Regulation (SFDR): SFDR requires financial market participants in the EU to disclose specific ESG information, helping to standardise ESG disclosures across Europe. The regulation aims to improve transparency in how financial market participants integrate ESG factors into their investment decisions.

Corporate Sustainability Reporting Directive (CSRD): Set to replace the Non-Financial Reporting Directive (NFRD), the CSRD will expand the EU’s requirements for corporate sustainability reporting. It will enhance the scope of companies expected to disclose information and will mandate the use of more detailed reporting frameworks, ensuring that the data provided is more consistent and comparable.

ESG ratings: Consultants provide ESG ratings for global public and admissible private companies in Europe to screen potential investments for sustainability criteria. In conclusion, the NFRD and the now applicable CSRD targeted companies are subject to various regulations that they must comply with.