For your annual seminar, this year you have chosen Environmental, Social and Governance (ESG) as your theme. What inspired this choice?

This is actually the second consecutive year that IFS Malta is dedicating its annual seminar to the topic of ESG. This time last year, ESG – the sustainability values falling under the three pillars of environment, social and governance – was still a relatively new topic for financial services in Malta. Our speakers discussed the role that financial institutions were expected to take to assist society to adopt a sustainable future. They discussed the ESG regulatory requirements, economic perspectives of the subject and how a sustainable economic society can be achieved through the implementation of the ESG requirements.

Kenneth B Micallef

Much has happened since then, both in the economic and social sphere of ESG. At a national level, we have seen such developments as: the setting up of the ESG Alliance – formed by major economic players who are gearing up to be able to implement the requirements that come out of EU legislation; large corporates being asked to provide specific ESG-related information when presenting plans for expansion and submitting financing requests; the launch of green investment and financing products; the introduction of ESG-related reporting requirements; and various studies being undertaken in relation to the impact that ESG is having and or is expected to have on various industries.

Fostering discussion on topical subjects related to financial services is an integral part of what we do at IFS Malta. Notwithstanding all that has already been said and done in the ESG sphere, we believe that there is still some way to go. Hence, facilitating ongoing discussion on this topic is still very relevant.

What is sustainable finance – and what level of awareness do local practitioners have?

Sustainable finance is the practice of taking into consideration the three pillars of ESG as part of the process leading to investment decisions.  Taking this in the policy context of the EU, sustainable finance is considered as the provision of finance to projects which support economic growth but which do not leave any negative impact on the environment, whilst taking into account the social and governance aspects not only during implementation but also beyond.

In the local scenario, ESG requirements have already been adopted – albeit by enterprises of a certain size. Financial practitioners dealing in this area of the business need to factor in ESG considerations when assessing requests for financing from such large corporates.

A level of understanding of the ESG regulatory requirements is already present in financial services institutions. This notwithstanding, further education is definitely required by both the financial services sector and the industry alike especially with the advent of new regulations and benchmarks in this area.

Does sustainable finance fuel short-term gains – or is it more of a long-term investment?

The adoption of the ESG-related criteria in investment decisions can provide better results in the short-term. In fact, some studies show that investors who chose ESG-screened investments receive a better rate of return on their money, fuelling the interest of investors in projects which by their nature are more ESG compliant.

From a credit point of view, ESG issues are being factored in the ratings of borrowers as part of their creditworthiness analysis and their capacity to meet their financial obligations – which are ultimately reflected in the final cost of borrowing.

However, ESG has been created with the longer-term aspect in mind.

Starting with the environment, it is now widely accepted that we are at a critical moment in the fight against climate change. We are already facing the adverse consequences of global warming in the form of extreme weather, rising sea levels, floods and droughts, amongst other environmental concerns.

Businesses that have a negative impact on the environment are not sustainable in the long run and will not remain attractive to the banks or other investors upon which they depend for financing.

Likewise, industries which do not factor in the social factors need to consider the impact of their decisions. Human and animal rights, good employment practices and conditions, as well as consumer protection are all examples of best practices which should be adopted within every organisation. Governance aspects which refer to positive management and employee relations, good compensation practices and transparent reporting, should all be embraced.

There is no doubt that financiers and investors who adopt sustainable finance will look at the long-term aspect of any project presented to them when assessing the investment viability. Short-term gain can only materialise if the long-term considerations are in place.

How does sustainable finance support the transition to a low-carbon, more resource-efficient economy?

In line with the targets set by the 2015 Paris Agreement, most countries have committed to support a strategy which should lead to net-zero carbon emissions by 2050. The goal is to limit temperature increases to two degrees Celsius or less in the next 30 years.

The achievement of this objective relies heavily on the coordinated efforts of both the public and the private sectors. Governments play a critical role in directing resources, establishing regulatory and fiscal conditions and leading change, whilst we are reliant on the private sector to support our societies in making the leap towards becoming carbon neutral.

This changeover requires a huge investment. Some liken the scope and magnitude of this change to the industrial revolution – so imagine the amount of opportunities this will create for those who wish to take this agenda forward.

Financing – and in this case sustainable financing – will be heavily relied upon for the provision of the financial resources needed to enable these initiatives to come to fruition. On the one hand, demand for financing in this area is increasing, while on the other, banks are now adopting a different approach when analysing credit. Taking these factors together, we can expect the financial service industry to become more particular in terms of the initiatives they would choose to support.

No doubt that preference will be shown towards projects and initiatives which pose less risk in terms of ESG compliance.                                                           

What added value will this year’s IFS seminar give to sustainable finance?

A lot of progress is being made in respect of the implementation of the ESG regulatory framework. However, we do believe a lot still needs to be done. That is why the Committee of IFS Malta decided to once again dedicate our Annual Seminar to this very topical subject.

We believe that by pushing the ESG agenda, IFS Malta will continue to assist the financial services sector through the dissemination of knowledge, facilitating discussion and sharing of best practices with the objective of increasing the momentum for a faster and more streamlined adoption of these requirements within our industry.

Furthermore, we are pleased to announce that as part of the build-up of our ESG-focused initiatives, the Institute, in collaboration with a leading partner, is launching an ESG qualification which will be unveiled at the seminar.

Details about the IFS Malta Annual Seminar 2022 – The ESG Journey – A pulse check for the Maltese Economy – can be accessed through ifsmalta.org.

Kenneth B Micallef, president, IFS Malta