Lina Klesper is Legal Assistant at PKF Malta
ESG (Environment, Social and Governance) is a topical subject indeed. Until now everyone should have heard that implementing an ESG strategy is inevitable for businesses that want to withstand the test of time.
ESG embodies a topic that never seems to get old making it worth dedicating yet another article to. There are plenty of local conferences and actions taken in Malta to tackle corporate governance and ESG issues. To recap, in September 2021 the MIA Biennial Conference put the need for stronger corporate sustainability reporting as a key theme. Last December Malta launched the Malta ESG Platform to illustrate the ESG credentials of companies listed on the Malta Stock Exchange helping the investment community to incorporate these credentials in their decision-making process. With regard ESG platform, The Malta Chamber recently organised an ESG conference with workshops for local businesses. Moreover, The STEP Malta Conference held at the Hilton Malta from 6-7 October 2022 has ESG awareness on its agenda connecting its importance for sustainable investing.
It can be said that 2021 was the year of ESG awareness, arising to be the flavour of the season at nearly every conference in the business community. Triggered by the EU Commission´s proposal for a Corporate Sustainability Reporting Directive (CSRD) published in April 2021, ESG criteria will soon be a reality within the corporate reporting ecosystem. The proposal builds on the Non-Financial Reporting Directive imposing more detailed reporting requirements while envisaging the adoption of mandatory EU sustainability reporting standards. Subject of the CSRD are all large companies without the previous 500-employee threshold as well as companies listed on an EU-regulated market making a wider array of companies publicly accountable for their social and environmental impact. Companies falling within the scope will need to be prepared to integrate the new reporting responsibilities for the financial year of 2023. Hence, for these companies, it is best to get ahead of managing ESG challenges.
Unfortunately, awareness of ESG issues and responsibilities is still rather thin on the ground. One may predict that this will change as soon as the CRSD is implemented, and companies simply must deal with ESG challenges. Still, carve-offs for SMEs may put a damper on putting corporate values that serve the common good into practice. In general, ESG issues affect all companies regardless of their size. However, SMEs were left on the sidelines until recently. In that regard, it cannot be highlighted enough that SMEs account for 99% of businesses in the EU playing a major role in our economy and being the most important contributors to job creation and global economic development.
While only 15% of SMEs in the EU would agree to mandatory reporting and 30% see no need for a reporting standard, more than 50% are in favour of a voluntary reporting standard. A trend can be seen that SMEs do care about ESG but are somewhat hesitant toward mandatory regulations. This could be because SMEs face particular challenges with ESG reporting. First of all, limited resources and operational flexibility may put SMEs at a disadvantage compared to larger entities when it comes to adapting reporting procedures and tools. It should not be overlooked that ESG reporting is complex and somewhat expensive as often a designated position has to be opened. Secondly, another disadvantage is that investors could eliminate SMEs that do not disclose ESG information from their asset allocation plans, depriving them of the crucial finances necessary for their survival. On the one hand, it can be deemed crucial to be able to assess the ESG quality of an SME for investors and banks, but on the other hand, one must not neglect the importance of not overburdening SMEs with reporting. Hence, simpler reporting standards as proposed by the EU Commission for SMEs may be a welcome solution since ESG reporting for SMEs seems no longer a question of “if” but “when”.