Economic Undertakings

MFSA Report on SFDR Operational Readiness and Compliance

The Malta Financial Services Authority (MFSA) has published a report on sustainable finance based on participation and application of the Sustainable Financial Disclosure Regulation (SFDR) (Regulation (EU) 2019/2088). The ultimate goal of the report is to raise awareness and improve readiness once sustainable finance becomes a key part of business. Under section 14 of the regulations, the MFSA has been designated as the competent authority in relation to the implementation of these regulations, as set out in more detail in the local implementing law, the “Law on various Financial Services (Amendment) Acts” (Article 4(1)(B)).

The SFDR has been in effect since March 2021, with the aim of achieving sustainable investments through transparency and disclosure.

Sustainable investments are defined as “investments in an economic activity which contributes to the achievement of an environmental objective (E) or to the achievement of a social objective (S) without significant prejudice to other environmental or social objectives, provided that the beneficiary companies observe good governance practices (G)”.

The SFDR applies to financial market participants and financial advisers. Financial market participants are defined as (1) insurance companies providing an insurance-based investment product, (2) an investment company providing portfolio management, (3) institutions for occupational retirement provision , (4) a manufacturer of a pension product, (4) investment fund managers, (5) pan-European provider of products for individuals, (6) manager of a qualifying social entrepreneurship fund, ( 7) manager of a qualifying venture capital fund, (8) management company of an undertaking for collective investment in transferable securities and (9) a credit institution providing portfolio management.

The Regulations require two types of disclosures:

  1. Entity-Level Disclosures: information disclosed on company websites applying to financial market participants/financial advisers. This includes a sustainability risk policy and an adverse sustainability impact principle.
  2. Product level disclosures: product sustainability information for ESG and non-ESG products, and the advice they offer in one of three categories: (1) products emphasizing environmental or social characteristics; (2) products with sustainable investment objectives; and (3) consumer products that do not fall into the previous two categories. This relates to pre-contractual disclosures, website disclosures and periodic product reports.

With regard to this information, the MFSA report provides a list of explanations and information to be included at both levels, with the aim of providing further clarity to financial market participants.

  1. Entry-level website-only disclosures:
  • Information on policies regarding consideration of sustainability risks in investment decisions/advice
  • Explanation of due diligence policies regarding key negative impacts on the sustainability of investment decisions/advice
  • Explanation of the consistency of the remuneration policy with the integration of sustainability risks

2. Product-Level Disclosures on the Website and Pre-Contractual Disclosures:

  • Description of characteristics and objectives, and methodologies for evaluation, measurement and monitoring
  • Explanation of sustainability risks incorporated into investment decisions/advice and their impact
  • Explanation of how products address key negative sustainability impacts

3. Only in pre-contractual disclosures:

  • Inclusion of special information for products promoting environmental or sustainable investments as part of their objectives
  • Taxonomy disclosures, in which the environmental characteristics that a product promotes are explained, and to what extent these investments are considered environmentally sustainable under the Taxonomy Regulation

In its oversight role, the MFSA conducted a review among financial market participants and advisers in Malta to assess the level of compliance with SFDR. Overall, the majority of licensees employ less than ten employees, with half reporting that there is no employee dedicated to SFDR issues or any related training. It was noted that the majority of licensees find it difficult or inefficient to allocate resources to these issues, citing their main concerns regarding resources and interpretation of mandatory provisions.

When analyzing specific investment firms, a few undertook to document their assessment process and modify their client information to include the client’s ESG preference. The AMSF thus took the opportunity to remind investment firms that from 2n/a August 2022, they must consider the sustainability factors of investment products in their policies and procedures.

Firms are also required to integrate the collection and analysis of information regarding the client’s ESG/sustainability preference into their client suitability assessment. As recommendations, the MFSA also suggested improving internal systems and governance, risk management and operational readiness to ensure companies comply with SFDR. Companies are further advised to ensure that product-level information is updated with ESG considerations and to continue to raise awareness of ESG issues through training.

With regard specifically to fund managers, the MFSA report notes that 28% do not comply with Article 3 (transparency on risk policies), but 72% indicate compliance with Article 6 (obligation pre-contractual disclosure). Regardless, investor interest in sustainability-related products remains at a low 20%.

As for insurance investment products, the majority have published some policies on the subject but none of the respondents respects Articles 8 and 9 (transparency of the promotion of environmental or social characteristics in pre-contractual information, and transparency of investments in pre-contractual).

Administrators of pension schemes also fall within the scope of the SFDR since they are included in the definition of “capital market participant”, but the report notes that most do not comply with the requirements. Up to two-thirds of administrators did not post policy information on their websites.

These results have been published by the MFSA with the aim of encouraging financial market participants and advisers to make the necessary improvements for more sustainability in accordance with the requirements of the regulation.