Climate Change Report: ESG in the Middle East
Insights
By Diana Estupinan, COO MENA
With global Environmental, Social, and Governance (ESG) assets on track to exceed $50 trillion by 2025, sustainability is a top priority around the world, from asset management firms to corporate boardrooms and governments.
In the Middle East this is no exception, with governments committed to net zero carbon targets and many companies rapidly improving their sustainability disclosure practices and standards. The region has both the potential and a strong desire to contribute much more to sustainability.
However, sustainability approaches in the Middle East can differ somewhat. Would ESG in the region and globally benefit if reporting was more standardised?
How does ESG in the Middle East currently differ from other regions?
The Middle East is culturally and economically distinct from much of the rest of the world, with those differences inevitably feeding in to ESG approaches.
While in other countries ESG is mainly driven by the demands of asset managers, financial institutions and corporate decision makers, in the Middle East it’s more driven by regulators. However, the balance in the region is changing as investors and companies themselves embrace sustainability more fully. In 2022 this trend is increasing faster than ever.
The uptake of ESG in the Middle East is being driven by many factors. These include:
1. Linking sustainability and growth
Firstly , governments are well aware that sustainability and green initiatives are essential, not just for the environment and people’s wellbeing, but for economic growth.
2. ESG metrics effects in the real world
Secondly, investors are increasingly using ESG metrics in their investment decisions, to not only assess risks, but to identify real-world impacts of corporate operations and future investment opportunities.
3. Consumer demand for sustainability
Thirdly, consumers in the region are demanding sustainable practices in the products and services that they buy. Recent reports show that sustainability factors affect Middle East consumers’ decisions more than their global peers (31% in the Middle East, compared with 18% globally)[1].
From a listed or issuer company’s perspective, the three main pillars of sustainability are:
- Target setting
- Performance management
- Reporting
Could standardised ESG reporting overcome barriers to sustainability disclosures in the Middle East?
Focusing on the third of these pillars, regional stock exchanges have taken significant steps to improve reporting. The Dubai Financial Market, the Bahrain Bourse, the Saudi Exchange and the UAE have all published ESG reporting guides or mandatory reporting requirements in recent years.
How could mandatory ESG reporting help?
Mandatory reporting can be very helpful to both companies and investors. It provides a clear framework for them to follow so that different entities can be compared with each other using the same metrics. One of the problems faced by companies globally and in the region is fragmentation of standards.
Fortunately, there are clear moves globally towards standardisation of reporting. In the future, it seems likely that the International Sustainability Standards Board (ISSB) will become the global gatekeeper of ESG disclosures. The ISSB was established at the COP26 climate conference in 2021 and includes climate-specific disclosures as well as general sustainability.
Increasing standardisation and thus transparency will help allay a host of misgivings that investors often have about companies, from supply-chain monitoring to accurate emissions reporting. Investors’ decision making will improve and companies that deserve investment will be more likely to have it allocated to them.
There’s still work to do in ESG, in the Middle East and globally
Standardising ESG reporting and making it mandatory can help companies and investment, but it isn’t a panacea. Not all ESG metrics can be quantified, and they may not directly translate into enhanced corporate earnings or performance. Also, current sustainability disclosures are often biased towards process and procedures, not towards actual performance.
Applying the same factors to companies in different regions and industries with varying business practices can be problematic. Regions have different challenges that need to be considered when it comes to data quality, especially in emerging markets such as the Gulf.
Increasing standardisation globally is a helpful step, but ESG approaches should be unique to every company. Many in the Middle East are now embedding sustainability in their corporate strategy and behaviour. They are increasingly considering a “triple bottom line” approach as they expand their ESG commitment. This includes social and environmental impacts in addition to financial performance, or to put in simply: “profit, people, and the planet”.
Let’s hope this approach continues across the region following COP27 in Egypt.
Download our Climate Change Report 2022
[1] PwC’s Global Consumer Insights Survey – Pulse 4
