By Ryan Borg - Deputy Counsel EU and International Affairs, MFSA

Sustainable finance has become a leading issue in public debate and on the policy agenda. The policy program adopted by the European Union places environmental sustainability at the centre of its policies. The European Commission launched a programme of legislative instruments, a far-reaching regulatory strategy to boost transparency and make environmental, social and governance (ESG) issues a primary focus of financial institutions and investors.

At the heart of the EU’s sustainable finance push is its response after COVID-19 and the need to address inequalities as part of the economic recovery, which also adds urgency to the EU’s efforts to make progress on social and governance issues.

Without any doubt, the EU legislative framework presents the need for adjustments and potential opportunities, both from a supervisory regime as well as for the whole investment chain. The MFSA intends to accelerate its work to align with the increased focus on this policy area by the EU and at an international level. Sustainable finance is also one of the cross-sectoral themes in focus as included in the MFSA’s supervisory priorities for 2022. In particular, the work in this area will focus on integrating the requirements emanating from the applicable legislative instruments relating to sustainable finance with other supervisory requirements.

One of the biggest challenges faced by the industry is the complexity of rules and the alignment of the scope of the new European regulatory framework. The fast-evolving regulatory framework leads to diversity in the interpretation and application of sustainable finance legislation across the EU. At the same time, there are the challenges posed by the complex issue of greenwashing and the definition of its fundamental features. Then there is the issue of data: the availability of reliable and comparable information is an essential element. Climate and environmental data are crucial for investors to set their portfolios strategies and manage the related risks.

Although this is a game changer for the industry, there are nevertheless concerns, for example  about the interplay of various legislations, and the lack of resources and specialised knowledge. The MFSA is determined to continue building momentum to bring sustainable finance into the mainstream of financial services, complemented by increasing customer demand, industry supply and public interest.

One cannot stress enough the importance for financial market participants and financial advisors to familiarise themselves with the requirements emanating from the Sustainable Finance Disclosure Regulation (SFDR) and the associated technical standards. Whether direct or indirect, pressures are increasing to make more detailed ESG-related disclosures. The MFSA reiterates the importance of ESG considerations in business strategies and encourages firms to be proactive in integrating ESG factors into their investment processes. This is because ultimately ESG factors form a critical part of the health and prospects of any financial institution.

The MFSA will continue to raise awareness and guide market participants to assist them in better addressing the challenges, ensuring a stable regulatory environment and, most importantly, raising standards. The Authority is looking into ‘sustainability’ from a cross-sectoral viewpoint, underlining the need for consistency, coherence and setting the right founding elements for such an important shift in finance – which is bound to be long term. It is extremely important to build the necessary knowledge, not only to ensure compliance with the requirements being imposed, but to drive the ambitious policies and beyond.

In its first supervisory exercise, the Authority assessed the state of readiness and compliance of financial market participants and financial advisors that fall within the scope of application of the SFDR, which became applicable on 10 March 2021. The review of the information collected indicates that in spite of the willingness shown by licence-holders, both knowledge and resources are yet to be specifically allocated and developed in all sectors and therefore the state of compliance was still fragmented at the time. A high level of commitment was noted among investment firms to integrate ESG considerations in their decision-making in the future.

The Authority will continue working with stakeholders, including other national competent authorities and the European supervisory authorities, in order to increase awareness and share best practices in this new area of supervision. Looking ahead, the MFSA believes that it is to deliver this transition  towards sustainable finance with a forward-looking ambition to seek out any potential opportunities for our financial sector and Malta in general.