Climate change and achieving a climate-neutral economy by 2050 have been a focus area of politicians, businesses and civil society for decades. The massive challenge we are facing is bringing about a change in how businesses and the economy operate, shifting from simply pushing for growth to sustainable economic development. Mastering the green and digital twin transitions will require a significant commitment from public and private investors alike.
Sustainability and measuring the environmental, social and governance performance are way past the buzzword stage. They should be at the core of every business strategy and reported transparently. Those failing to comply will end out of business.
A change to more sustainable investment will be crucial to channel more private investment into this transition. Environmental (e.g. climate change mitigation and adaption, biodiversity, pollution prevention), social (e.g. inequality, labour relations, human rights) and governance (management structures, executive remuneration, employee relations) criteria must be taken into account, acknowledging businesses’ impact on society and the planet in addition to their mere financial performance.
The EU is promoting sustainable finance and sustainable corporate governance
In April 2021, the European Commission (EC) presented its proposal for a Corporate Sustainability Reporting Directive (CSRD).
The Commission plans to introduce extensive mandatory reporting requirements for large companies and separate, proportionate standards for listed SMEs.
Companies will have to report on how sustainability issues affect their business, society, the environment and vice versa. As a result, nearly 50,000 companies in the EU – Maltese companies included – will have to report on sustainability matters. These together contribute to circa 75 per cent of the EU companies’ turnover.
External audits will be required to verify the reported information. Companies will have to digitally report/tag the information, so it is machine readable. Once an agreement is reached in the negotiations on EU level (estimated Q2 2022) and the directive enters into force, the reporting requirements would be applicable from the 2023 financial year onwards for large companies. Listed SMEs would have to comply as of the 2026 financial year.
Sustainability and measuring the environmental, social and governance performance are way past the buzzword stage- Kurt Farrugia
The European Financial Reporting Advisory Group (EFRAG) is in charge of developing the detailed reporting standards and format. These will most likely only be available by late 2022/mid-2023.
Businesses need to act now to be best positioned to harness the opportunities
Given the substantive widening of the reporting scope and the tight timelines for the implementation of the mandatory reporting obligations, businesses have to act now.
The secret to success is to be an early adopter as a wait-and-see approach will most likely result in higher compliance costs.
Companies not in scope should consider reporting on a voluntary basis, as the expectation is that transparent and reliable sustainability information will be requested by stakeholders such as financial institutions or customers.
When it comes to preparing and assessing whether a business strategy is sustainable and considers all stakeholders, the double materiality principle will be key. Companies will have to converge the ‘inside-out’ perspective of their business impact on the environment and society with the ‘outside-in’, impact of environment and society on their business models.
This will also mean linking the internal risk-assessment and management more closely with sustainability issues such as impact of climate change on the business model and how to mitigate sustainability risks.
Moving to a more sustainable economy and implementing the CSRD will come at a substantial expense for some businesses but, at the same time, it will offer the potential for significant returns based on increased competitive advantage, potential to offer sustainable ‘premium’ products and also by simply lowering operating costs related to consumables (water, energy, raw materials, etc) or tapping into green finance.
Malta Enterprise is supporting the transition to a sustainable low carbon economy
Malta Enterprise (ME) is committed to stimulate and assist companies embarking on the ambitious and yet necessary journey of the green and digital twin transitions. ME has already in place several dedicated support measures such as the Smart and Sustainable Investment Grant or our Energy Efficiency & Skills Development schemes.
In the coming months, we will be exploring additional support that can aid companies to harness sustainability and leverage it to generate further growth.
ME is giving particular attention to the CSRD negotiations and has been feeding its position into the discussions taking place at EU level. ME and the other stakeholders involved are pushing for an adequate roll-out of the standards, while safeguarding proportionality for SMEs, making sure the implementation phase allows for enough time for training and the development of the required IT programmes, and balancing the need for more transparency while safeguarding competitiveness.
Time to act
Sustainability will enhance competitiveness for businesses and will become a mere necessity in the long term, moving towards the 2050 net zero goal. Driven and called for by access to sustainable finance, consumer’s choice, NGOs and the public at large, a robust and transparent reporting of ESG criteria will be key. The time to act is now.
Kurt Farrugia is CEO of Malta Enterprise.
Malta Enterprise together with the Ministry of Energy, Enterprise and Sustainable Development is hosting an event on ESG reporting on December 1. E-mail euaffairs@maltaenterprise.com to register.