How much does ESG certification cost?

The PN manifesto makes it very clear that nearly all fiscal incentives to both firms and to families will depend on ESG certification. Many know that the tax cut proposed by the PN is conditional on the firm having ESG certificate. Much fewer people know that even the tax credit for extracurricular activities that currently is offered unconditionally will become conditional on ESG certification if the PN is elected. There are at least 32 proposals (one in fifteen of all PN proposals) that explicitly require this adherence.

Given the emphasis on this matter, it is strange that the terms and conditions of ESG certification are not laid out clearly. However, when one delves deeper into the matter and talks to experts, this lack of clarity becomes very understandable.

In the EU, the type of non-financial reporting associated with ESG certification is governed by the Non-Financial Reporting Directive (NFRD). This is a directive that affects a few thousand firms across the EU. These firms are mostly big players in the financial sector and firms employing more than 500 workers. The Commission is now trying to extend the applicability of the directive to cover smaller firms, but only if they are listed companies. There is no indication that the Commission would ever consider putting this burden on the micro, small and medium firms that dominate the Maltese economy, in the way that the PN is proposing.

In November 2020 an independent study was prepared for the European Commission. The main conclusions of this study were that:

“The recurring administrative costs for providing non-financial statements under the NFRD are on average €82,000 per year, of which about 40% can be fully attributed to the legal requirements. These costs depend, among others, on company size and sector, as well as assurance level, comprehensiveness and type of reporting. In addition, about two-thirds of the surveyed companies incur assurance costs, which amount to €76,000 per year on average.”

The report is clear that these costs fall more strongly on smaller firms, stating:

“For smaller companies, incremental costs are on average just above 50% of the administrative costs in the first year of compliance, and fall slight afterwards. For bigger companies, the ratio between administrative and incremental costs goes down to about 34% in the first year and stays roughly the same afterwards.”

The NFRD also requires a statutory auditor to check whether the non-financial information is provided. This could add between €1,000 to €10,000.

The process of ESG certification can quickly become one of the costliest administrative processes for a firm.

This report shows very clearly that the process of ESG certification can quickly become one of the costliest administrative processes for a firm, exceeding substantially the cost of preparing audited financial accounts. Moreover, the reporting itself is only the start. Then comes the difficult process of having to change one’s business to get the ESG certification.

If firms do not get that positive mark, their competitors would gain a competitive advantage as they would pay less tax and receive more generous assistance through a multitude of schemes. There is no real choice here. You either get ESG certification – with no help from Government – or else you do not face a level playing field.

The independent study carried out for the European Commission shows that if ESG certification follows the NFRD framework, firms in Malta are in for administrative costs of tens of thousands of euros.

On the other hand, with Labour’s proposal, firms will get a tax cut that will boost the funds available for the adoption of ESG standards. Moreover, Labour has proposed direct assistance to help firms to make the transition.

Let us take one example from the manifesto. Micro and small firms will be refunded the full costs of an energy audit, which are at least €2,000. Furthermore, there will be assistance through tax credits so that the recommendations of these audits are implemented.

This shows the clear difference between the Labour and Nationalist approach to business. The PN would force companies to do an energy audit, go out of pocket and then have to spend money to implement its recommendations. After that they would give companies a tax cut. With Labour you get the tax cut upfront, a free energy audit and tax credits to implement changes. The cost of changes not covered by the tax credits could be financed from the tax cut.

With Labour, companies are given all the means to conform to ESG requirements. With the PN these changes are forced upon companies, and if they do not comply they end up penalised on tax and other incentive schemes.

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