By Ryan Borg, Deputy Counsel EU and International Affairs, Legal & International Affairs
The European Agenda to promote sustainable finance is advancing. The European Commission has been implementing a range of initiatives to meet its international environmental obligations on sustainable finance. These efforts include substantial regulatory changes to help the EU reach its goal of net-zero carbon emissions by 2050 and maintain a stable and sustainable financial system.
The financial system as an intermediary between saving and investments has a key role to play in reorienting private capital to more sustainable investments. We must foster this transition without causing economic distortions or unnecessary inefficiencies.
EU Regulations will help to generate a common understanding of what is deemed sustainable and scale-up these investments. EU Regulations will allow the financial industry to invest in environment, social and governance (ESG) and to rapidly build the necessary capacity. ESG-related disclosures are increasing, and the financial sector will have to respond to the requirements that will shortly be imposed on it. For this reason, the MFSA is encouraging financial market participants to familiarise and acquaint themselves with the requirements emanating from the recent adopted EU Regulations.
ESG standards are an increasingly popular way for investors to evaluate companies in which they might want to invest. ESG standards can also help investors avoid companies that might pose a greater financial risk due to their environmental or other practices.
Holding long-term investments requires understanding, identifying and managing long-term financial risks and opportunities. Now we understand, better than ever before, how ESG considerations can impact long term risks and opportunities in financial markets. In this regard, the MFSA stresses the importance of ESG considerations in business strategies and encourages firms to be proactive to integrate ESG considerations into their investment processes.
One cannot ignore the rapid changes in consumption patterns and the growing interest for green and sustainable products. Also, at the European level, there is a rapid evolution in financial product offerings, with financial intermediaries swiftly adapting their product range to include green, social or sustainable considerations.
The financial markets are at a point of change as it can be observed that investor preferences are shifting towards an interest in financial products that incorporate ESG factors, which have increased rapidly over the last year. It is expected that the industry plans for the updates of its internal policies accordingly in order to conform with EU Regulations. It’s time that regulated entities review their business strategies and apply forward-looking tools that enable them to factor future shifts in policy and consumer choice into their investment decisions.
Sustainable finance is a question of interlocking opportunities, challenges and priorities. Setting the right incentives for the financial industry is key and the MFSA will do its utmost to ensure that the appropriate incentives are in place within a framework that encourages competition.
The direction of travel is clear, that is, financial institutions and investors will increasingly be required to assess, monitor and disclose the sustainability of their investments. Although EU regulatory measures present the need for adjustments to businesses, they also present an opportunity for the development of new products and services. In the face of climate risk, the financial market has an opportunity to innovate.