Last Updated on Thursday, 1 December, 2022 at 12:24 pm by Andre Camilleri
During the past months professionals, especially those within the financial industry, took great interest in organising and attending conferences on ESG. Last week, I participated in a panel discussion organised by the Malta Chamber as part of the SME week. The discussion covered funding through the European Investment Fund under the wings of the EIB, as well as guarantees through EU funds. Other themes encompassing the private industry were also discussed.
Absolutely, I was glad to be part of the panel discussion, especially with representatives from the EIB. In 2017, during the Maltese presidency of the Council of the EU, I presided the Budget Committee in Council and certainly I had a big bang on my table. Ahead of the Maltese presidency, I convened several meetings with the Cabinet of former Commissioner for Budget and Vice President of the European Commission Kristalina Georgieva, who is currently heading the International Monetary Fund. I am writing about this event because Georgieva was the Commissioner who submitted a proposal to revise the financial regulation of the EU, that included an accompanying 15 pieces of legislation known as the Omnibus regulation.
The revision of the financial regulation of the EU saw a new chapter to regulate financial instruments and guarantees under the EU Budget. As president of the EU Budget Committee in Council, I negotiated the financial regulation revision and the ensuing guarantees to regulate the financial instruments. Indeed, in the final text, we agreed that most of the guarantees would go under the management of the EIB. Clearly, I never thought that after five years I would be on the other side of the spectrum dealing with the promotion of guarantees from a private sector’s perspective. Undoubtedly, the market is being flooded with guarantees and subsidies by the EU to encourage private enterprises to change and transit to a greener energy system. There are different loans and schemes facilitated by financial intermediaries, with subsidised rates spanning from business to personal loans. Surely, I encourage you to look into these advantageous loan schemes and seize the opportunity to renovate and transit to a cleaner energy system.
Hitherto, the funding and assistances to transit is available. However, that is not guaranteed in the future, so I urge you to start doing the necessary planning. The transition ties to the EU’s ambition to decarbonise the European continent and this is clearly inevitable. It forms part of the Green Deal and the accompanying multiple regulations that ensued, thereafter. During last week’s conference I was asked about the hurdles that the private industry might be facing to transit. As already mentioned, most of the green regulations, especially the sustainable finance package ensued the Green Deal, including the greening of the financial system. These are quite complex. The acronym ESG in short for Environmental, Social, Governance, has been widely explained in the past months. The conferences that were organised were all high-level discussions and certainly they are highly commendable. Indeed, authorities and the industry are creating awareness on green initiatives, as well as the required disclosures. Nonetheless, there isn’t enough technical knowledge on the topic within the market and I hasten to add that ESG is a complex topic that covers an array of industries. There are multiple directives and regulations on the table from the SFDR, Taxonomy, CSRD and CSDDD. These are acronyms which you will be hearing from time to time when you attend such conferences.
Undeniably, the biggest hurdle is the technical knowledge within the market. Clearly, the required expertise varies from one industry to another, especially within the financial industry. What needs to be reported differs from one regulation and directive to another, and certainly the industry lacks technical knowledge. Such technical knowledge and information must be tailormade for Malta and the lack of data is making it more difficult to estimate numbers. Let’s take a few examples. Right now, the Environment is a priority, especially after the outcome of COPS 27. For instance, Climate and Environmental risks, known by their acronym C&E risks, are partially captured under the E of ESG.
In a nutshell, C&E risks are split between physical risks and transition risks. Let’s take the physical risks, which are also further split into acute and chronic risks. Unquestionably, it would not make sense to use other countries’ landscape or geography if the industries are situated on the Maltese islands. When it comes to physical risks, the academic work needs to cover the statistical areas designated under Nuts3. However, a more granular understanding of the geographical areas requires the use of the LAUs statistics to designate which zones in Malta would be affected by physical risks. Indeed, those researching and designing their assessments ought to delve into the IPCC reports to understand the risks for Malta. And the use of NACE codes would solve the problem to map the assets on their balance sheet.
Let’s now take the transition risks. This comes out of the multifaceted regulations that continuously refer to the Climate Paris Agreement targets, as well as the UNSDGs to primarily assess the sectors’ progress to transit to a cleaner business model. The crux of the argument relates to a situation where if the industry is vulnerable to high C&E transition risks, if it does not change its business model, in a few years’ time it will become irrelevant with obsolete commodities within the European market. This reminds me of the photography industry, whereby those big brands that did not innovate to transit to a digital model, in time were completely pushed out of the market. I recall big brand names within the photography industry that became obsolete due to their lack of foresight in changing their business models in line with the rapid technological change.
Certainly, we need to acknowledge that the current regulations and directives are complex. Also, at times the language is ambiguous because the operationalisation of the directives and the regulations are still a novelty. What is surely certain is the rapid push to transit to a greener business model. However, there are two parallel tracks in the sphere of C&E risks. One track relates to the European Commission’s regulatory proposals for disclosures and transparency, and the second track relates to the banking sector, especially the supervised banks to primarily integrate C&E risks in their business models to disclose information. Clearly, those reading this opinion piece might be asking themselves where it starts and where it ends. This is the reason why last week I reiterated that the next level is to transit from a high-level discussion to a technical level and assist the industry with concrete examples. Obviously, I am sanctioned on the word limits in my opinion pieces and consequently I am limiting the disclosure of complex information. However, my advice to readers is to start thinking about business models that would take into consideration C&E risks and ESG disclosures.
Unquestionably, the regulations are somewhat complex but not impossible to assimilate. There are countless reports by reputable agencies in the market on how to apply and carry out a materiality assessment, as well as designing a climate risk taxonomy. Hence, if the financial industry follows these reports, it will prepare better to at least align to the required disclosures. Otherwise, it is going to be quite difficult to reach the European Unions’ ambitious targets, not least the democratisation of the financial system which also covers the S for the Social and the G for Governance.
So, brace yourselves to more regulations in the nearby future. And for today I will not delve into the PCAF methodology in relation to financed emissions and I will leave the topic for another time.