Over the past few years, the acronym ESG has become more widely used in investment circles and across the financial services industry. Environmental, Social and Governance (ESG) relates to a framework of principles and actions that are getting embraced by best practice companies, together with companies that get captured by the EU’s Corporate Sustainability Reporting Directive (CSRD). Based on three pillars, ESG does not merely address sustainable development and climate change issues but goes deep into an organisation’s strategy and how this can be achieved through proper governance, an ethical approach, and a cognizance of stakeholders in society and in the company.

The Markets in Crypto-Assets Regulation (‘MiCAR’/’the Regulation’) also recognises the importance this approach holds, paving the way for crypto-asset service providers (‘CASPs’) and crypto-asset issuers to be subject to the diverse requirements brought upon them by ESG. For instance, the Regulation recognises that consensus mechanisms used for the validation of transactions in crypto-assets, and which validation may require high computing processing power that in turn consumes significant electrical power, could have significant adverse impacts on the climate and other environment-related adverse impacts.

As such, it mandates that such consensus mechanism ought to deploy solutions which are more environmentally-friendly, with the added onus of ensuring that principal adverse impacts they might have on the climate, together with any other impact directly relating to the environment, are adequately identified and disclosed by CASPs and crypto-asset issuers.

The determination of adverse impacts as ‘principal’ should be made by referring to the principle of proportionality and the size and volume of the crypto-asset being issued. The European Securities and Markets Authority (‘ESMA’), in cooperation with the European Banking Authority (‘EBA’), was mandated to develop draft regulatory technical standards (‘RTSs’) to further specify the content, methodologies and presentation of information with regard to sustainability indicators specifically in relation to adverse impacts in climate and other adverse impacts pertaining to the environment, while outlining key energy indicators. 

            Moreover, the proposed RTSs serve the purpose of ensuring coherence of disclosures by crypto-asset issuers and CASPs. In the development of said draft RTSs, ESMA took into account the various types of consensus mechanisms used for the validation of transactions in crypto-assets, their characteristics and the differences between them. ESMA also took into account existing disclosure requirements, ensuring complementarity and consistency and avoiding running the risk of increasing the burden on companies. The European Commission will, then, be empowered to fully adopt these draft RTSs.

            ESMA, in cooperation with the EBA, has also developed draft RTSs on the content, methodologies and presentation of information referred to previously in relation to sustainability indicators on adverse impacts on the climate and other environment-related adverse impacts. In developing said draft RTSs, ESMA needed to consider the various types of consensus mechanisms used to validate transactions in crypto-assets, their incentive structures and the use of energy, renewable energy and natural resources, coupled with the production of waste and greenhouse gas emissions. The Regulation mandates that ESMA update said RTSs in the light of regulatory and technological developments.

            The importance given to ESG by the Regulation is also evidenced by the fact that a crypto-asset white-paper for an e-money token shall contain information on the principal adverse impacts on the climate and other environmental-related impacts of the consensus mechanism used to issue the e-money token.Moreover, CASPs shall publish, in a prominent place on their website, information related to the principal adverse impacts on the climate and other environment-related adverse impacts of the consensus mechanism used to issue each crypto-asset in relation to which they provide services, which information may be obtained from the white paper.

          With regard to the Social elements under the Regulation, these may be seen, where, for instance, it mandates that the European Commission in consultation with ESMA and EBA will carry out an assessment on fraudulent marketing communications and scams involving crypto-assets through social media in an interim report leading to a final report to be presented by 30 June 2027.

On the other hand, the importance given to the Governance aspect under MiCAR is, inter alia, seen in Article 34, where it mandates that:

          Issuers of asset-referenced tokens shall have robust governance arrangements, including a clear organisational structure with well-defined, transparent and consistent lines of responsibility, effective processes to identify, manage, monitor and report the risks to which they are or might be exposed, and adequate internal control mechanisms, including sound administrative and accounting procedures.

          Under the CSRD (’the Directive’), when an EU-based undertaking meets, at least, two of the three requirements listed hereunder, it immediately falls under its purview. These requirements are the following:

  • a minimum €25mln worth of total assets;
  • a minimum turnover of €50mln;
  • an average of at least 250 people on its payroll per annum.

It, thus, follows that EU-based CASPs, when satisfying these specific requirements, will automatically also be captured by the Directive.

Moreover, the Directive also specifies the instances when a listed undertaking – i.e. any undertaking in an EU-regulated market exchange, except for listed ‘micro undertakings’ – fall under its purview, these being when said listed undertaking fails to meet at least two of the following three requirements on consecutive balance sheet dates:

  • At least €450,000 worth of total assets;
  • At least €900,000 in net turnover;
  • An average of at least 10 employees throughout the year.

The Directive further specifies instances where a third-country undertaking falls under its remit. The said undertakings are those non-EU parent companies with annual EU revenues of at least €150mln in the most recent two years and who own:

  • A large EU-based undertaking, or
  • An EU-based subsidiary with securities listed on an EU-regulated market exchange, or
  • An EU branch office with a turnover of at least €40mln

Therefore, when a CASP is either an EU-listed undertaking or a third-country undertaking as defined under the CSRD, specific requirements listed therein apply.

In conclusion, it may be seen that, when navigating the dynamic landscape of crypto-assets, one must also be mindful of the different shades of ESG and the importance they hold in ensuring that full transparency and sustainability are continuously aimed for and achieved.

For more information or assistance about ESG and Financial Services please contact Mr Reuben Portanier and Dr Cherise Abela Grech.

You may also wish to read this article. 

Disclaimer This article is not intended to impart legal advice and readers are asked to seek verification of statements made before acting on them.
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