Last month PKF delegates, along with other FinanceMalta members, attended the Association for Financial Markets in Europe (AFME) conference in Amsterdam.
This brings 300 delegates to discuss and debate key topics and issues that are shaping sustainable finance markets and policy. The agenda included key issues facing market participants including capital market developments, discussing how regulatory frameworks are functioning, and what is needed to support the real economy transition for sustainable finance.
The EU's recent institutional changes on sustainable finance and transitional capital formed a key concept as this reflects a comprehensive and ambitious approach to fostering a sustainable economy. By implementing these regulations and initiatives, the EU aims to mobilise private capital towards sustainable investments, enhance transparency and accountability, and ensure that financial markets contribute to the transition to a low-carbon, resilient and resource-efficient economy. The European Green Deal is the EU's overarching strategy to become climate-neutral by 2050.
A key component of NextGenerationEU was introduced by speakers. This aims to support Green Transition by allocating funds to projects that contribute to the EU's climate and environmental goals. One quickly realizes that there are a number of challenges ahead. Starting with the availability of reliable and consistent data on Environmental, Social and Governance (ESG) factors. These are often lacking. Thus, it is difficult for institutions and auditors to assess the sustainability performance of investments accurately.
Another headache is a lack of standardised metrics and methodologies for measuring and reporting ESG performance. This can lead to inconsistencies and makes it hard to compare different investments. Institutions are expected to ensure the quality and accuracy of ESG data; yet this is a significant challenge. External verification and auditing of sustainability reports adds another layer of complexity.
As in Malta, Europe faces lack of expertise and skills related to sustainable finance within financial and regulatory institutions. Although many seminars and training sessions have been organised lately, the local levels of technology and infrastructure to support sustainable finance practices, such as data analytics and reporting tools, requires significant investment. Can we concur that companies struggle to find the necessary space to borrow and use specialised sustainable financial products in Malta? The elephant in the room is that the economy is not geared for a great push towards suitable investing opportunities in the sustainable growth arena.
One may add this is felt particularly in the short-term. Some may argue that while Malta's own GDP growth is healthy by European standards, yet more needs to be done to shift organisational culture to prioritise sustainability. Our sustainability outlook on renewables is rather subdued and the country suffers from the malady of short-termism particularly in the exports arena.
Perhaps, by incorporating ESG risks into traditional risk management frameworks, this eventually calls for new capital sources. A fresh approach by Malta Enterprise towards attracting more green sustainable investments across different regulatory environments and market conditions may tone down a layer of complexity in Foreign Direct Investment (FDI).
A fly in the ointment is international standards and frameworks. These include those developed by the Task Force on Climate-related Financial Disclosures (TCFD) and the International Sustainability Standards Board (ISSB). It goes without saying that these frameworks can be challenging but essential for global consistency. Overcoming these challenges requires a coordinated effort involving regulatory clarity, data standardisation, technological investment, skill development and a cultural change within all levels of local organisations.
While the transition to sustainable finance is essential for addressing global environmental and social challenges, financial institutions face a bevy of obstacles in implementing such practices. Despite these challenges, the long-term benefits of sustainable finance, including enhanced risk management, improved reputation and alignment with global sustainability goals, make it a critical area of focus for financial institutions in Malta to meet the varying demands of customers and for our drive to scale up GDP. One may ask how keen is Malta exploring the introduction of green financing? Are banks reducing capital requirements for green investments to encourage sustainable projects? Malta can participate in this ambitious EU project by actively supporting sustainable and innovative projects.
Ideally, Malta Development Bank rises to the occasion to help finance Green Projects and pave the way for transition financing. Other notable initiatives were taken by BOV recently in a seminar to discuss their offer of trade finance. Quoting the bank's official site, this talks about a seminar led by Joseph Rodgers who heads the bank's Trade Finance arm. Among the key topics covered, there were the benefits of trade finance, incoterms, methods of payment and pre- and post-shipping financing. Naturally, being a government-controlled bank, one notes how in the words of the CEO Kenneth Farrugia, the institution aims to comply with customers' international business ventures by providing the necessary knowledge and financial tools to help them navigate this often complex but crucial part of their business.
In his brief contribution, he underlined the intricacies of trade finance as a crucial factor for mitigating risks and maximising opportunities. As a good percentage of BOV's customers fall under the SME's bracket, they are traditionally resting on the bank loan assessment team to approve. As Malta, strives to increase its GDP, one augurs applicants for capital finance to succeed in their quest. Unfortunately, due to the global financial crisis and the ongoing war in Ukraine, easy funding avenues are no longer de rigueur.
It is a challenging task for young companies to scale the slippery slopes to become climate neutral. This poses a risk, which could stifle SME growth and hinder Malta's economic progress. To overcome this, SMEs can opt for alternative funding routes such as issuing equity and debt securities in the capital markets. This gives space for growth, and opens up increased options, including for mergers and acquisitions. Obviously, one is cautioned that although M&As are generally a valid option to consider, SMEs must be sure that they plan strategically for this move. While the transition to sustainable finance is essential for addressing global environmental and social challenges, financial institutions in Europe face a range of obstacles in implementing these practices.
George M. Mangion is a senior partner PKF Malta
gmm@pkfmalta.com