ESG for SMEs – What is in it for you  

ESG refers to a framework as a set of criteria used to assess the sustainability and ethical impact of a company, encompassing three (3) key areas: Environmental, Social, and Corporate Governance. Its relevance namely extends to an organisation’s various stakeholders, including regulators, customers, suppliers, and employees, who are increasingly concerned with the sustainability of an organisation’s overall operations. In essence: 

1. Environmental (E): focuses on a company’s impact on the planet’s ecosystems and climate, including carbon emissions, resource efficiency, waste management, and climate risk mitigation. 
2. Social (S): examines how a company manages relationships with employees, clients, customers, suppliers, and the communities in which it operates, covering aspects such as diversity, labour practices, and human rights.
3. Governance (G): evaluates corporate leadership, transparency, board diversity, ethics, executive pay, and compliance with laws and regulations. 

Pertinent EU Legislation on ESG

As an EU Member State, Malta’s ESG regulatory framework is built upon various legislation introduced and undertaken at EU level. These include, among others, the following: 

Corporate Sustainability Reporting Directive (CSRD) 

The CSRD, as regards to corporate sustainability reporting, aims to bring sustainability reporting on a par with financial reporting, integrating sustainability considerations into business strategies. It focuses on evaluating all business activities’ impacts on people and the environment, seeking to standardise and simplify ESG reporting across various sectors, and ensures that companies adopt sustainable business practices and adequately address climate-related financial risks. 

As a revision and improvement of the existing Non-Financial Reporting Directive (NFRD), the law not only impacts large enterprises employing more than two hundred fifty (250) employees, but also small and medium-sized enterprises (SMEs) from 2026 (where such SMEs represent 99% of all businesses in the EU). One must note that the category of SMEs is made up of enterprises which employ fewer than two hundred and fifty (250) persons, and which have an annual turnover not exceeding fifty million Euro (€50,000,000), and/or an annual balance sheet total not exceeding forty-three million Euro (€43,000,000). 

Firstly, with respect to listed SMEs, being those SMES listed on the EU-regulated markets stock exchange, from 2026, they will be required to follow the CSRD’s sustainability reporting requirements. The first report will need to be published by 2027 latest (for the year 2026), as the new law allows enough time for the company to prepare for the disclosure of their ESG data. 

Secondly, with regards to non-listed SMEs, although they are not directly subject to the CSRD’s requirements, they could still be impacted indirectly, especially if they are part of the supply chain of larger companies subject to the CSRD. Therefore, non-listed SMEs do not fall within the scope of the CSRD but may choose to use the standards on a voluntary basis. 

Sustainable Finance Disclosure Regulation (SFDR) 

The SFDR primarily requires financial market participants (FMPs) and financial advisers in the financial services sector to disclose information about the ESG risks and opportunities of their investment products and how they integrate ESG factors into investment decisions and advisory processes.  

The SFDR has three (3) main goals: 

1. Eliminatinggreenwashing1and false claims; 
2. Holding accountable the sustainability claims made byFMPs;
3. Improving transparency of sustainable investment products in the European Financial Sector.

The SFDR introduces mandatory sustainability disclosures at entity and product levels, covering aspects such as sustainability risks, adverse impacts, and ESG-related investment objectives. Fund managers are tasked with submitting quarterly detailed, quantitative data on behalf of their portfolio companies. In this realm, financial institutions must classify their products into three (3) categories:  

• Article 6 (non-ESG-focused),  

• Article 8 (“light green” products promoting ESG characteristics), or  

• Article 9 (“dark green” products with sustainability as their core objective). 

The Taxonomy Regulation 

The EU Taxonomy Regulation is a classification system applicable to large companies, FMPS and financial advisors, created to provide a streamlined and common language for European sustainable finance regulations. It establishes criteria for determining whether an economic activity is environmentally sustainable for the purposes of understanding the level of environmental sustainability of an investment. 

In order for an economic activity to qualify as sustainable, it must:  

1. substantially contribute to at least one (1) of six (6) environmental objectives listed in the Taxonomy Regulation; and 
2. do no significant harm to any of the other objectives, while respecting basic human rights and labour standards.  

Below are the six (6) core environmental objectives which make up the EU Taxonomy: 

1. Climate change mitigation; 
2. Climate change adaptation; 
3. Sustainable use and protection of water and marine resources;
4. Transition to a circular economy;
5. Pollution prevention and control; and
6. Protection and restoration of biodiversity and ecosystems.

The Low Carbon Benchmark Regulation (LCBR) 

The LCBR has introduced two (2) new categories of climate-focused benchmarks: the EU Climate Transition Benchmarks (EU CTBs) and the EU Paris-aligned Benchmarks (EU PABs). These benchmarks provide investors with greater transparency regarding the carbon footprint of their investments and help guide capital flows toward low-carbon and climate-resilient assets in line with the Paris Agreement.2  

The Regulation applies primarily to benchmark administrators that provide financial benchmarks within the European Union as well as institutional investors, asset managers, and financial market participants who use benchmarks to design investment strategies or financial products, also enhances sustainability-related disclosures for all benchmarks to ensure consistency and comparability in the financial markets. 

Firstly, the EU Climate Transition Benchmark (EU CTB) is mainly designed for investors who seek to reduce their exposure to climate risks while aligning their portfolios with a trajectory of decarbonisation.3 It specifically requires a minimum reduction of thirty per cent (30%) in carbon emissions compared to the market benchmark, along with a commitment to year-on-year decarbonisation of at least seven per cent (7%).  

Additionally, the EU Paris-aligned Benchmark (EU PAB) is stricter, requiring at least a fifty per cent (50%) reduction in carbon emissions and the same annual decarbonisation rate of seven per cent (7%), ensuring alignment with the overall goal to reach climate neutrality by 2050. Both benchmarks exclude companies involved in controversial activities such as coal, oil, and gas production, as well as firms that violate social and environmental norms. 

Beyond introducing these two (2) benchmark categories however, the Regulation mandates enhanced ESG disclosures for all benchmarks, even those that are not explicitly climate-related.  

All the aforementioned legislation is part of the EU’s Green Deal, the Sustainable Development Goals (SDGs) and the broader effort to direct capital flows towards sustainable activities, mitigate financial risks from climate change, and promote corporate responsibility. 

Why ESG for SMEs ? 

Industry best practices in ESG reporting for SMEs emphasise accountability, transparency, accuracy, and stakeholder engagement. A clear governance structure is essential, often led by a senior executive or a cross-functional committee to ensure accountability and effective decision-making. Secondly, data accuracy and transparency play a crucial role, requiring SMEs to provide verifiable information on environmental impact, social metrics, and governance. Furthermore, aligning with globally recognised ESG reporting frameworks further strengthens company credibility and action consistency, such as: 

• the Global Reporting Initiative (GRI);  

• the Science Based Targets Initiative (SBTi) and 

• the Sustainability Accounting Standards Board (SASB).4 

Additionally, regular engagement with stakeholders helps gather valuable input and refine company reporting practices. A long-term commitment to ESG is vital, with companies setting clear, measurable goals on ESG and a roadmap for achieving them. SMEs should also prioritise regular ESG reporting, either annually (as required by law) or biannually (should the need arise), ensuring reports are accessible and aligned with the company’s broader sustainability strategy. Lastly, ongoing employee training, particularly for leadership, fosters awareness and embeds ESG principles into the company culture and operations. 

ESG Best practices for SMEs 

ESG practices essentially provide a structured approach to assessing a company’s sustainability performance.  

Environmental practices focus on reducing a company’s ecological footprint and promoting sustainability. Key efforts include optimising energy consumption, increasing renewable energy usage, and enhancing energy efficiency. Water conservation initiatives track total water withdrawal and consumption efficiency, while waste management strategies focus on minimising waste generation, increasing recycling rates, and ensuring responsible e-waste disposal. Biodiversity protection measures, such as ecosystem preservation efforts, further support environmental responsibility.  

Social practices address a company’s impact on employees, customers, and communities. Every organisation should promote workplace diversity, fair employment practices, and employee well-being through health and safety initiatives, engagement programmes, and continuous learning or training opportunities. Community involvement is reflected in corporate social responsibility efforts, including charitable donations, employee volunteer programs, and investments in social initiatives such as healthcare and education. Non-discrimination policies reinforce inclusivity, while customer satisfaction is monitored through regular feedback and engagement. One may also consider data privacy and security practices which ensure responsible handling of customer information.  

Governance practices emphasise ethical leadership and accountability, with a focus on board diversity, expertise, and transparency. ESG considerations in this regard would be introduced among executive compensation, enforcing a strict code of ethics, implementation of anti-corruption measures, and the maintaining of whistleblower protections.  

Concluding remarks  

Stakeholders, ranging from internal employees to external investors, customers, suppliers, and regulators, play a crucial role in maintaining the highest standard of accountability of SMEs. They not only shape but also promote ESG practices within companies by emphasising the fact that embracing ESG is no longer just about compliance; it is a strategic necessity that enhances long-term business resilience, reputation, and financial performance. Companies with strong ESG practices tend to be more innovative, risk-resilient, and financially stable. Their employees are more likely to be engaged and committed to organisations that uphold ethical governance, diversity, and social responsibility. 

For any business, integrating ESG into operations helps build trust with customers and regulators. Additionally, they are better positioned to attract ethical investors, business partners, and top talent, giving them a competitive edge in the marketplace. Suppliers and business partners also benefit from aligning with sustainable practices, as regulatory pressure and consumer demand increasingly favour responsible and transparent supply chains. 

Ultimately, ESG depicts a plan of long-term success and value creation for all stakeholders. By actively promoting and embedding ESG principles into business strategies, companies can drive positive environmental and social change, foster financial sustainability, and contribute to a more resilient global economy. 

How Can AE Help   

At AE Legal, we help businesses understand and meet their ESG obligations within their operations and governance structures. Whether your organisation falls under the CSRD, SFDR or Taxonomy Regulation, our team provides practical legal guidance to ensure full compliance while supporting your sustainability goals. 

We assist companies, including SMEs, with ESG reporting, policy reviews and regulatory alignment, helping you turn compliance into a strategic advantage.
Contact our team for tailored legal advice on implementing effective ESG practices that strengthen your organisation’s long-term resilience and value.