Banking & Finance

Malta’s Banks Face Climate Accountability: MFSA’s Call to Action

17 Jan 2025

3 min read

Author: James Bartolo

The Malta Financial Services Authority (MFSA) has issued a letter emphasising the importance of identifying and managing climate-related and environmental (C&E) risks within Malta’s banking sector. The thematic review for 2023/2024 assessed the progress of Less Significant Institutions (LSIs) in aligning with European Central Bank (ECB) expectations for resilient and sustainable banking.

Key Findings from the Thematic Review

The MFSA identified significant gaps in how LSIs assess, integrate, and mitigate C&E risks:

Materiality Assessments

    Banks demonstrated limited capability to map C&E risk drivers, such as physical risks (e.g., extreme weather) and transition risks (e.g., regulatory shifts), to prudential risk categories like credit and operational risks. These expectations are guided by the Capital Requirements Directive VI (CRD VI) and corresponding transpositions in Malta’s Banking Rules (BR/12 and BR/24).

    Strategic Integration

      Many institutions failed to translate climate strategies into actionable Key Performance Indicators (KPIs) or implement forward-looking scenario analyses. This aligns with guidance under CRD VI and the European Banking Authority (EBA)’s Environmental, Social and Governance (ESG)-related guidelines, which have been adopted within the Maltese framework through BR/12, BR/24, and BR/26.

      Governance Structures

        While some progress was noted in establishing dedicated ESG committees, most LSIs lacked defined roles and responsibilities. The governance and risk appetite frameworks, mandated by CRD VI and EBA guidelines, emphasise the need for robust oversight and accountability measures, as reflected in BR/12 and BR/24.

        Risk Management Frameworks

          Few institutions incorporated C&E risks into their overall risk management frameworks or capital planning processes. The requirements outlined in CRD VI, along with EBA guidelines transposed into Malta’s Banking Rules (BR/12, BR/24, BR/26, and BR/28), stress the importance of embedding climate risks into risk management and operational practices.

          Recommendations for LSIs

          The MFSA has outlined steps to enhance LSIs’ readiness for managing C&E risks

          • Conduct Gap Analyses – Evaluate current practices against ECB expectations and MFSA findings.
          • Develop Remediation Plans – Establish board-approved strategies with measurable targets and timelines.
          • Enhance Governance and Reporting – Implement robust data infrastructure and integrate C&E risks into remuneration policies.
          • Align with EU Frameworks – Ensure compliance with CRD VI and EBA guidelines on ESG risk management.

          Regulatory Implications

          Failure to address C&E risks exposes banks to heightened litigation, reputational damage, and financial instability. The MFSA has mandated that all LSIs submit comprehensive gap analyses and remediation plans by June 2025. Adopting these measures will not only meet regulatory standards but also position institutions to navigate the growing challenges of climate change.

          The Road Ahead

          As the financial sector adapts to climate realities, LSIs must prioritise sustainability to ensure long-term resilience. The MFSA’s thematic review serves as a timely reminder of the urgency to act, aligning banking practices with European and global standards for environmental risk management.


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