Malta’s transition to a greener economy

In the first episode of the Ganado Meets Green Finance Podcast, Luke Hili, Associate at Ganado Advocates, speaks with Perit David Xuereb, Chairman of the Malta ESG Alliance, to discuss the green economy and the country’s efforts on this front.

Leading the Local Surge Towards a Transition to a Greener Economy

Being an architectural engineer by trade, Xuereb notes that (for better or for worse) he has historically been associated with the construction industry. Xuereb comments that the shortcomings in this industry have in turn fuelled his desire to make a positive change, and remarks that the two years spent leading the Chamber of Commerce gave him the opportunity to do just that. Xuereb notes that during his tenure, he was exposed to the entire spectrum of the economy, and confirms that these experiences, together with the fact that he was surrounded by the right people who shared the same motivation and positive attitude, generated the appropriate atmosphere for the Chamber of Commerce, and eventually even politicians, to look at the economy not only from a GDP perspective, but also from an environmental, social, and good governance perspective. Because of this, the environment started being viewed as a necessary element towards economic growth for this first time.

‘Green Finance’ and the ‘Green Economy’

Through the Paris Agreement 2015, a number of countries agreed to decarbonise their economies. The world, therefore, needs to transition from being carbon hungry to becoming carbon neutral by the year 2050. This aspiration also means that the economic change that the world will need to go through within the next 27 years will be larger than that produced by the industrial revolution in the 1960s. ‘Green finance’ and the ‘green economy’ are two instruments that will help us move in this direction.

Hili and Xuereb discuss that in order for this transition to carbon neutrality to happen there needs to be a flow of finance. Thus, ‘green finance’ and the ‘green economy’ effectively refer to those investments and transitions, in terms of financing, talent, and resources, that enterprises need to embrace in order to aid in the transition of our economy into a green one.

Sustainable Finance and Economic Return – Compatible or Mutually Exclusive?

Xuereb explains that the compatibility of sustainable finance and economic return depends on the mindset of the board of directors and the CEO of a particular corporate entity. When short-term returns are prioritised, the bottom-line profitability and dividends that the company can make will be considered satisfactory by its directors. However, this does not work in today’s day and age for several reasons. Any business that wants to be sustainable from a self-preservation point of view will need to ensure that it has Key Performance Indicators (KPIs) that allow it to grow in the medium to long-term and that it can work within an ecosystem.

In this regard, Xuereb and Hili discuss that customers’ expectations, which are continuously changing, must be taken into consideration by businesses. This is especially because customers choose which products to purchase and what services to pay for based on their personal values. Xuereb explains that because of this, any business would be very short-sighted to prioritise the quality of the dividends it is able to produce in the short-term without looking to develop appropriately and ensuring transparency about how the business will fare in the medium to long-term. For example, if carbon hungry businesses, such as those involved in the industries of construction, cement, and steel, do not start looking at alternative means and materials to develop buildings in a carbon neutral manner, such businesses will die. Therefore, businesses need to future proof themselves so that they are able to make this leap into a green future.

The Regulatory Framework Surrounding Green Finance

Hili notes that nowadays we are seeing a push from the EU Commission in terms of the regulation relative to green finance. Such regulation is making it incumbent upon companies to inter alia understand what the sustainability preferences of their underlying customers are, to guarantee that the products and services they offer are in line with the customers’ wants and that customers can make well-informed choices. Xuereb agrees that the regulatory framework in which this transition to a green economy is happening is of crucial importance. However, he also highlights that for the transition to be a successful one, companies should not view this as a tick the box exercise and be motivated to act just because they are legally required to do so. Rather, they should be moving in this direction intuitively and swiftly since this will lead them to become preferred businesses to invest in, be employed by, purchase from and be serviced by.

Through the Malta ESG Alliance, business leaders in different industries are collaborating to transition to a more ESG-friendly direction. The Malta ESG Alliance promotes collaboration and support in this area, while also increasing effective lobbying with regulators, politicians, and the business community itself. All this contributes towards there being more accountability to future generations, Xuereb and Hili discuss.

The Doughnut Economic Model

The Doughnut is an economic model invented by Professor Kate Raworth. Professor Raworth contemplates an economy that is not driven or measured by GDP, but rather by those things that society and economies require to survive. The name of this model derives itself from the shape of the diagram representing it, with the inner boundary referring to basic life necessities such as food, water, income and work, political voice, education and social equity and the outer boundary referring to the environmental resources that we use, and which we might overconsume of if we are not careful enough. Overconsumption is dangerous since it leads us to tipping points including climate change, ocean acidification, air pollution, biodiversity loss, and land conversion, all of which will inhibit us from benefiting from the free resources that our planet provides us with.

Xuereb shares his ambition to one day be able to measure the Maltese economic model using the Doughnut economic model. He emphasises that this framework must be kept in mind on a local level whenever we take business decisions and even in our national budgets since it takes into consideration all environmental, social, and governance aspects that help our society thrive in the short, medium, and long-term.

Malta’s Transition to a Green Economy

While there is a lot going on behind the scenes in Malta’s effort to transition to a green economy, there is very little dissemination of information regarding the challenges we face, Xuereb and Hili discuss. It is only when we understand what is truly at stake that we can increase discussions on the topic and achieve an economic model in Malta that is attractive, reputable, environmentally sensitive, and thriving in terms of its economic return. In the coming years, investors will expect a transition, one which businesses will have to make, both because it makes sense from a business perspective and because they will want to be a force for good.

This article was first published in the ‘Times of Malta’ on the 19th of June 2023.