Are corporate governance practices applicable to the Maltese banking sector leading to the achievement of overall ESG goals?

Abstract

In 2015, the Paris Agreement was signed to combat climate change, aiming to keep global temperature rise well below 2°C and pursue efforts to limit it to 1.5°C above pre-industrial levels. Following this, the EU spearheaded substantial legislation that Malta, as an EU member, must comply with. This dissertation explores the key legislation affecting the Maltese banking sector, focusing on Governance (the G in ESG) requirements from both EU and local laws. It also provides a historical overview of the climate change treaties leading up to the Paris Agreement. Chapter 1 then provides an overview of the Maltese banking sector, introduce the concepts of Corporate Social Responsibility (CSR) and Environment, Sustainability and Governance (ESG) that are applied by Banks and how the ESG concept evolved whilst retaining CSR activities. Chapter 2 will examine and focus on the main International, the EU’s main directives and local legislative governance requirements effecting the banking sector. Chapter 3 provides an assessment on whether the governance requirements including legislation especially that effecting Banks are progressing towards the attainment of the Paris Agreement goals in Malta and also an insight into how the EU is progressing, based on expert reports. In this respect, reference will also be made to the risk of climate related litigation that Maltese banks may eventually face, especially considering the results of a survey wherein it was established that Maltese society is quite environmental conscious. Such litigation has to date not been instituted against Maltese Banks but there is the possibility of future cases nevertheless; based on tort and possibly human rights related cases for financing sectors deemed to be high GHG emitters by the Kyoto Protocol. Chapter 4 provides feedback to improve applicable local, EU and International legislation in connection with governance practices whilst always cognizant that this sector is very competitive, in an environment of a US pullout from the Paris Agreement and the changing stance of the EU through the Omnibus proposed Directive probably as a result of this pullout and the Draghi report. To date the EU and its institutions such as in the case of Banks, the ECB, have enacted very tough legislation to an already very heavily regulated banking sector, albeit with good intentions, but have reduced the EU’s competitiveness and caused ripple effects such as lack of investment as cited in the Draghi report itself, anti-climate sentiment and lack of finance to various sectors of the economy. Evenmoreso in Malta, the economy is very dependent on Bank finance both due to the size and nature of operators thus making alternative sources of finance such as the stock market, not within easy reach. Chapter will also make reference to the recent Omnibus Directive issued by the EU on 26th February 2025 whereby it is being proposed to review and postpone some CSRD and CSDDD reporting requirements without compromising the overall climate goals. The concluding remarks in Chapter 5 are that whilst acknowledging that the banking sector is already very highly regulated, the right thing must be done to protect the environment and therefore legislation is necessary but on the other hand there are areas of improvement that can be either taken nationally or suggested at an EU level to ensure and improve business competitiveness simultaneously with improved and at times enhanced legislation.