TerraLex Cross-Border Guide to Cross-Border Guide to ESG and Sustainable Finance

As an EU member state, Malta’s ESG regulatory framework is built upon the various legislation and initiatives that have been undertaken at an EU level. These include:

• the Low Carbon Benchmark Regulation (Regulation (EU) 2019/2089) (the “LCBR”);

• the Sustainable Finance Disclosure Regulation (Regulation (EU) 2019/2088) (the “SFDR”); and

• the Taxonomy Regulation (Regulation (EU) 2020/852);

• the Corporate Sustainability Reporting Directive (Directive (EU 2022/2464) (the “CSRD”). The disclosure obligations emanating from the above legislation are thus applicable in Malta. These would include:

• For benchmark administrators, to disclose in their benchmark statement whether they pursue ESG objectives and to provide an explanation on how their methodology reflects ESG factors;

• For financial market participants and advisers, the requirement to disclose information about their policies on the integration of sustainability risks in the investment decision‐making process or advice, whether they consider principal adverse impacts of investment decisions on sustainability factors, and clear reasons why they do not in cases where they don’t;

• For certain large undertakings, to disclose information on how and to what extent their activities are associated with economic activities that qualify as environmentally sustainable;

• For listed SMEs and certain large undertakings, additional ESG disclosures to be included in their audit report.

It should be noted that, specifically with regard to the CSRD, Malta has as of January 2024 not yet transposed the provisions into domestic law. Nevertheless, such transposition is anticipated imminently considering that the CSRD itself obliges member states to transpose the relevant provisions by 6 July 2024.

In addition to the above, Maltese law contains certain piecemeal obligations which, while not constituting a comprehensive ESG framework, nevertheless overlap with certain ESG disclosure principles. These would include disclosures on: (i) packaging waste generated by undertakings, in terms of the Waste Management (Packaging and Packaging Waste) Regulations (S.L. 549.43); (ii) single-use plastic products placed on the market, in terms of the Single-Use Plastic Framework Regulations (S.L. 549.149).

The Malta Financial Services Authority (“MFSA”) is the local financial services regulator, regulating several industries including banks, financial institutions, insurance companies and investment services companies. On 5 August 2022, the MFSA issued the first version of its Corporate Governance Code which, among other things, encourages regulated entities to incorporate ESG-specific criteria in their strategies and governance practices. It also encourages entities to adopt sustainable finance principles and to go beyond their legal obligations by investing in human capital and environmentally responsible practices. More specifically, entities are encouraged to: (i) participate in and contribute to ESG initiatives and events; (ii) issue public reports on their ESG commitments and performance; and (iii) communicate the impact of their business, especially on sustainability issues.

With regard to listed companies, the Capital Market Rules issued by the MFSA (which generally govern issuers listed on the Maltese markets) include a Code of Principles of Good Corporate Governance in Appendix 5.1 which broadly addresses several governance issues for listed entities. These main objectives of this code are to provide more transparent governance structures, to ensure proper transparency and disclosure of all dealings or transactions involving the board of directors and higher management, and to protect shareholders from potential abuse. Notably, issuers must also prepare a report explaining how they are complying with the provisions contained in the appendix.

Moreover, in 2021 the Sustainable Development Directorate within the Ministry for the Environment, Energy and Enterprise launched Malta’s first ESG portal (the Malta ESG Platform). The platform encourages companies to disclose their ESG credentials to the general public, thereby allowing businesses, investors, and the general public to evaluate the ESG credentials of such companies.

The most commonly used frameworks for ESG disclosures in Malta are those issued by the so-called ‘ESG Group of Five’ namely CDP, the Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB).

Additionally, the standards currently being adopted at an EU level will also naturally apply in the local context. These would include the regulatory technical standards issued in terms of the SFDR, the minimum standards issued in terms of the LCBR, the technical screening standards issued in terms of EU Taxonomy Regulation and the European Sustainability Reporting Standards (ESRSs) issued in terms of the CSRD.

ESG legislation, as a distinct policy area, has thus far focused on the disclosure aspect and as such does not introduce obligations additional to data collection and disclosure. Nor does it impose some mandatory minimum ESG KPIs or results. That being said, there is ample Maltese legislation that addresses each of the environmental, social and governance pillars individually. Some examples would include the aforementioned Waste Management (Packaging and Packaging Waste) Regulations (S.L. 549.43) and the Single-Use Plastic Framework Regulations, both of which impose certain mandatory targets for waste collection; the Persons With Disability (Employment) Act which imposes a minimum quota on employers to engage persons with disabilities (or the payment of annual contributions in the event of default); and the Equality for Men and Women Act (Chapter 456, Laws of Malta) which inter alia prohibits discrimination when offering employment and sexual harassment in the workplace. This is naturally in addition to the obligations stemming from so-called primary legislation such as the Criminal Code (Chapter 9, Laws of Malta), which covers matters such as environmental crimes, and the Constitution (which inter alia regulates human rights). Finally, the Companies Act (Chapter 386, Laws of Malta) obliges directors to act honestly and in good faith and in the best interests of the company. Company directors also have fiduciary obligations towards the company and must act as a bonus paterfamilias. Considering this, it is certainly arguable that directors nowadays have an obligation to consider ESG obligations in their management of companies, and such considerations would be distinct from, and also wider than, mere disclosure obligations.

No.

While there are no specific regulations in relation to advertising ESG claims, the Consumer Affairs Act (Chapter 378, Laws of Malta) generally prohibits misleading commercial practices. A commercial practice will be deemed misleading if it contains false information in relation to the certain main characteristics of the product or service and it deceives or is likely to deceive the average consumer and causes or is likely to cause the consumer to take a transactional decision that they would not have taken otherwise. It is arguable that such prohibition would capture companies that make false or misleading ESG claims, such as falsely claiming that the carbon emissions of a particular product or service have been offset via separate initiatives undertaken by the company, and such claim induces a customer to purchase such product or service

No. However it is expected, particularly with regard to companies captured within legislation such as the CSRD, that contractual clauses such as those requiring the disclosure of ESG metrics will be included by companies interacting with their suppliers and supply chain generally.

Company directors (who by law are entrusted to manage the company on a day to day basis) have a number of obligations including to act in good faith and in the best interests of the company, and to exercise the degree of care, diligence and skill which would be exercised by a reasonably diligent person having both the knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by or entrusted to that director in relation to the company and the knowledge, skill and experience which the particular director actually has. Furthermore, directors are also deemed to be fiduciaries of the company under general Maltese civil law and as such have a duty to act as bonus paterfamilias and to protect the interests of the company. Considering that companies are nowadays encouraged, if not expected, to consider ESG implications in their strategy and operations, it would be difficult to foresee the directors being held liable for making positive ESG efforts in the interests of the company. However, their actions would need to be assessed in light of the aforementioned general duties at law, namely to act in good faith, in the best interests of the company, and to exercise the necessary degree of care, diligence and skill. To the extent that the directors have acted appropriately in this sense, then they should not be held liable even if losses were sustained.

It is foreseeable that directors may potentially be held liable if non-compliance with mandatory ESG rules has caused losses to the company. However, for such action to succeed it would likely need to be proven that the directors had a legal obligation to comply with such ESG obligations, i.e. that such obligations were mandatory. Moreover, once again one would need to assess whether the directors acted in good faith, in the best interests of the company, and whether they exercised the necessary degree of care, diligence and skill (which admittedly would be hard to prove if the directors’ actions resulted in the company not complying with mandatory legal obligations).

An action might also potentially be brought against the directors for breach of their fiduciary duties. In such case, the court would have to determine whether the directors were obliged to consider or comply with ESG rules and whether that failure was a breach of their fiduciary duties (which generally include to act as bonus paterfamilias and to protect the interests of the company). In the event that a breach is found, then the directors would be held liable. One question to consider is who would be authorized to take action against wrongdoing directors. Firstly, it ought to be mentioned that directors owe their duties to the company itself and not to the individual shareholders. With this in mind, an action against directors should generally be undertaken either by the company itself (via the board of directors) or by the shareholders following a resolution passed at a general meeting of the company. While Maltese law does afford certain rights to minority shareholders, it is unlikely that such rights would extend to individual minority shareholders being allowed to take action against the directors for losses caused to the company due to non-compliance with ESG rules.

This would depend on a number of factors. Generally speaking, a potential claim would need to relate to ESG obligations which are legally mandatory. In other words, it would be difficult for any customer, creditor, or other affected party to make a valid claim against a company and/or its directors for non-compliance with ESG obligations which are voluntary. That being said, one would need to examine the relationship between the customer, creditor, affected party (as applicable) and the company. For example, a customer or creditor might be able to sue for contractual breach in the event that the company falsely represents in contract that it is abiding by certain ESG rules, and such misrepresentation causes losses to the customer or creditor. Potentially a customer might also have a claim against the company for unfair commercial practices, in the event that the company makes misleading ESG claims (such as greenwashing) which result in the customer choosing to make a purchase that they would not have made otherwise. This should also be considered in light of the customer’s own ESG obligations. If the customer is itself captured by ESG obligations such as those emanating from the CSRD, and consequently the customer requests supply chain ESG metrics from the company, then the customer might potentially have a claim against the company if the latter misrepresents the ESG data it provides to the customer. It is arguable that in the cases referred to above, a misrepresentation claim might be possible even if the ESG claims being represented are not mandatory by law.

With regard to affected parties, one would again need to examine the relationship between said parties and the company. Assuming that no contractual relationship exists, and assuming that the company has not abided to ESG obligations which are legally mandatory, an affected party could still potentially have a claim against the company in tort in the event that the company’s actions have caused direct damages (damnun emergens) or loss of earnings (lucrum cessans).

Malta’s ESG regulatory framework is built upon the various legislation and initiatives that have been undertaken at an EU level. Maltese law also contains certain piecemeal obligations which, while not constituting a comprehensive ESG framework, nevertheless overlap with certain ESG disclosure principles. This is in addition to the so-called voluntary initiatives mentioned further above.

We are not aware whether an exercise was conducted to specifically identify prohibitions or restrictions that would prevent a company/entity from pursuing ESG initiatives. However, it ought to be mentioned that domestic legislation, specifically the Malta Financial Services Authority Act (Chapter 330, Laws of Malta) was amended in 2021 to include references to the SFDR and Taxonomy Regulation. By virtue of this amendment, the authority of the MFSA has been widened to also include monitoring the compliance of financial market participants and advisers as defined in Article 2 of the SFDR, and financial market participants as defined in Article 2 of the Taxonomy Regulation. The amendment further empowers the MFSA to impose administrative penalties not exceeding €150,000 (per infringement) without requiring recourse to the courts in the event that any of the aforementioned parties contravenes or fails to comply with any provisions of the SFDR and with any of the provisions of Articles 5, 6 or 7 of the Taxonomy Regulation.

With regard to the CSRD, Malta has as of January 2024 not yet transposed the provisions into domestic law. Nevertheless, such transposition is anticipated imminently considering that the CSRD itself obliges member states to transpose the relevant provisions by 6 July 2024.

As an EU member state, Malta adopts the standards currently being adopted at an EU level. These would include the regulatory technical standards issued in terms of the SFDR, the minimum standards issued in terms of the LCBR, the technical screening standards issued in terms of Taxonomy Regulation and the European Sustainability Reporting Standards (ESRSs) issued in terms of the CSRD.

The Malta ESG Platform is a voluntary initiative developed by the Sustainable Development Directorate within the Ministry for the Environment, Energy and Enterprise. It encourages entities to disclose certain ESG indicators and impact indicators which are more simplified and less exhaustive than those arising under applicable EU and domestic law.

There are no such requirements that are specific to Maltese law. However, in terms of the SFDR, financial market participants and financial advisers are required to publish on their websites: (i) information about their policies on the integration of sustainability risks in the investment decision‐making process or advice; (ii) where they consider principal adverse impacts of investment decisions on sustainability factors, a statement on due diligence policies with respect to those impacts; (iii) where they don’t consider principal adverse impacts, clear reasons why they do not do so, including, where relevant, information as to whether and when they intend to consider such adverse impacts.

Moreover, under the LCBR, benchmark administrators (as defined in said regulation) are required to disclose in their benchmark statement whether they pursue ESG objectives and to provide an explanation of how their methodology reflects ESG factors.

Firstly, it should be noted that, as an EU member state, Malta will be bound by initiatives such as the Carbon Border Adjustment Mechanism (CBAM) and the EU Emissions Trading System (EU ETS). On a more general level, Malta is subject to the European Commission’s Sustainable Finance Agenda and thus the EC’s Sustainable Action Finance Plan and the European Green Deal. It is thus arguable that such initiatives will influence financial institutions and pension institutions in their investment decisions. Similarly, Malta will also be bound by any revisions that are made to the EU Energy Taxation Directive.

On a domestic level, in 2021 the Malta Stock Exchange (MSE) launched the Green Bond List (GBL), a new framework encouraging green finance in Malta. The GBL falls under the MSE’s main market and is subject to the same listing rules as the main market, but with additional requirements for bonds to be categorized as ‘green’ and thus admitted to the GBL. Notably, issuers who list qualifying securities benefit from a 50% reduction in listing fees as well as enhanced visibility to investors wishing to invest in green investments. The first green bond was listed in August 2023 and was subscribed within a few hours.

There are also several extended producer responsibility (EPR) initiatives targeting environmental sustainability and which require adherence to targets and/or reporting. These cover areas such as end-of-life vehicles, packaging and packaging waste, batteries, and waste electrical and electronic equipment.

Additionally, Malta Enterprise, a government entity focused on supporting enterprises in Malta, periodically issues grants and tax incentives covering various initiatives, with a particular focus recently on grants and incentives focusing on environmental sustainability, green initiatives, and digitization of businesses.

There are also other initiatives that target social sustainability, such as the Voluntary Occupational Retirement Pension Scheme (VORPS), which provides attractive tax credits for both the employer and the employee, and the Skills Development Scheme which supports businesses in developing a knowledge-based workforce, and which provides a maximum grant of €2,000,000 per skills development project, which is awarded in the form of a tax credit, cash grant or a combination of both.

It is arguable that all of the above would influence financial and pension institutions in their investment decision processes.

There are no specific measures adopted locally against greenwashing. However, the MFSA has publicly communicated its intention “to mitigate the notion of greenwashing and to ensure that consumers and firms can trust that products have the sustainability characteristics they claim to have”. In this regard, in 2023 the MFSA was one of 13 regulators that participated in the Global Financial Innovation Network (GFIN)’s first ever Greenwashing TechSprint, which was chaired by the UK Financial Conduct Authority. It is thus to be expected that the MFSA will issue guidance and potentially regulations in relation to greenwashing in due course.

Since greenwashing is not yet regulated in Malta, there have not been any cases or enforcement actions in this regard. It also appears that there have not been cases dealing with greenwashing in an ancillary manner, such as under Maltese consumer legislation prohibiting misleading advertising or claims.

The provisions of the CSRD have not, as of January 2024, been transposed. It is thus anticipated that the directive will be transposed into Maltese law by 6 July 2024. Separately, it is anticipated that the Maltese legislator will likely follow the European trend and introduce further ESG obligations into Maltese law, such as those relating to supply chain due diligence. It is also anticipated that further legislation will be introduced in an effort to help Malta meet its anticipated ESG targets for GHG emissions, total energy consumption from renewable sources and energy efficiency.

It is hard to estimate how ESG within the context of M&A will be regulated. Once the CSRD is successfully transposed into Maltese law, it is anticipated that certain assurances will be sought by prospective acquirers from the sellers and targets they will be acquiring. Similarly, potential sellers and/or targets might seek to build in the appropriate warranties and exclusions in the transaction documents. Whether ESG considerations will be duly codified into law regulating M&A remains to be seen.