The Malta Financial Services Authority (MFSA) has released a sustainable finance report based on the participation and application of the Sustainable Finance Disclosure Regulation (SFDR) (Regulation (EU) 2019/2088). The ultimate aim of the report is to increase awareness and improve the state of readiness once sustainable finance becomes a key part of business. In terms of Article 14 of the Regulation, the MFSA has been designated as the competent authority with regards to the implementation of this Regulation, as further set out in the local implementing Act, the “Various Financial Services Laws (Amendment) Act” (Article 4(1)(B)).
The SFDR has been in force since March 2021, with its aim to achieve sustainable investments through transparency and disclosures.
Sustainable investments are defined as “investments in an economic activity that contributes to the realisation of an environmental goal (E) or the achievement of a social goal (S) without significant harm to other environmental or social objectives, provided that the investee companies observe good governance practices (G)”.
The SFDR applies to financial market participants and financial advisors. Financial Market Participants are defined as (1) insurance undertakings providing an insurance based investment product, (2) an investment firm providing portfolio management, (3) institutions for occupational retirement provisions, (4) manufacturer of a pension product, (4) alternative investment fund manager, (5) pan-European personal person product provider, (6) a manager of a qualifying social entrepreneurship fund, (7) a manager of qualifying venture capital fund, (8) a management company of an undertaking for collective investment in transferable securities and (9) a credit institution which provides portfolio management.
The Regulation requires two types of disclosures:
- Entity-level Disclosures: information disclosed on corporate websites applying to financial market participants/financial advisors. This includes a sustainability risk policy and a principle adverse sustainability impact.
- Product-level Disclosures: information regarding the product’s sustainability for both ESG and non-ESG products, and the advice they offer in one of the three categories: (1) products promoting environmental or social characteristics; (2) products with sustainable investment objectives; and (3) mainstream products that do not fall within the previous two categories. This affects pre-contractual disclosures, website disclosures and periodic product reports.
In relation to these disclosures, the MFSA’s report provides a list of explanations and information to be included in both levels, in an effort to provide further clarity to Financial Market Participants.
- Entry-Level Disclosures only on Website:
- Information on the policies regarding the taking into account of sustainability risks in investment decisions/advice
- Explanation of due diligence policies regarding the principle adverse impacts on sustainability of investment decisions/advice
- Explanation on the consistency of the remuneration policy with the integration of sustainability risks
2. Product-Level Disclosures on both the Website and Pre-Contractual disclosures:
- Description of the characteristics and objectives, and of the methodologies for the assessment, measurement and monitoring
- Explanation on the sustainability risks integrated in investment decision/advice and their impact
- Explanation on how the products consider the principle adverse impacts on sustainability
3. Only in Pre-Contractual Disclosures:
- Inclusion of special disclosures for products promoting environmental or sustainable investments as part of their objectives
- Taxonomy disclosures, whereby environmental characteristics which a product promotes are explained, and what extent these investments are considered as environmentally sustainable under the Taxonomy Regulation
In its monitoring role, the MFSA held a review among financial market participants and advisors in Malta to evaluate the level of SFDR compliance. Overall, a majority of licence holders employ less than ten employees, with half stating there is no allocated employee for SFDR matters or any related training. It was noted that the majority of licence holders find it difficult or ineffective to allocate resources to these matters, citing their key concerns as resources and the interpretation of mandatory provisions.
When analysing investment firms specifically, a few have undertaken the work of documenting their assessment process and amending their client information to include the client’s ESG preference. The MFSA has thus taken the opportunity to remind investment firms that as from the 2nd of August 2022 they are to take into consideration the sustainability factors of investment products within their policies and procedures.
Firms are also required to incorporate the collection and analysis of the information regarding client’s ESG/sustainability preference within their client suitability assessment. By way of recommendations, the MFSA has also suggested the enhancement of internal systems and governance, risk management and operational preparedness to ensure firms are complying with the SFDR. Firms are further being instructed to ensure that product-level disclosures are updated with ESG considerations and to continue raising awareness of ESG matters through training.
Specifically with regards to Fund Managers, the MFSA’s report notes that 28% do not comply with Article 3 (transparency on risk policies), however 72% indicate compliance with Article 6 (pre-contractual disclosures requirement). Regardless, investor interest in sustainability related products remains at a low 20%.
As for insurance-based investment products, the majority have published a few policies on the matter but none of the respondents are complying with Articles 8 and 9 (transparency of the promotion of environmental or social characteristics in pre-contractual disclosures, and transparency of sustainable investments in pre-contractual disclosures).
Retirement Scheme Administrators also fall within the scope of SFDR since they are included in the definition of “financial market participant”, however the report notes that most are not compliant with the requirements. As high as two-thirds of administrators have not published policy information on their websites.
These results have been published by the MFSA with the goal of prompting financial market participants and advisors to make the necessary improvements to more sustainability in line with the requirements of the Regulation.
This article was written by Dr Cherise Abela Grech and Legal Trainee Ms Jodie Arpa.
Disclaimer: This article is not intended to impart legal advice and readers are asked to seek verification of statements made before acting on them.