Shifting sands – how the UAE is upping its ESG game
As an international business hub, the United Arab Emirates (UAE) is home to hundreds of companies across various industries, many of which are listed on the Abu Dhabi Securities Exchange (ADX), Dubai Financial Market (DFM) or Nasdaq Dubai. New reporting responsibilities are set to arrive as the world of Environmental, Social and Governance (ESG) reporting arrives in the UAE. But what do these new regulatory reporting requirements look like and how do they compare to well-developed international standards?
Investors are increasingly considering ESG factors to support their investment decisions. Global environmental challenges such as climate change and rising sea levels, as well as diversity and data security, are among the new ways in which investors are assessing businesses.[1] The COVID-19 pandemic’s far-reaching effects have also catalysed this development by highlighting the importance of ESG initiatives in relation to social inequality and climate change. Investors, policymakers and regulators see the importance of considering a different approach to how businesses operate and what this means for investing.[2] The latest trends indicate that ESG analysis may provide valuable insights about factors impacting a company’s financial performance. The disclosure of sustainability-related information for large companies is increasingly reflected in national regulatory frameworks.
While the global sustainability reporting landscape continues to evolve, we are now seeing the emergence of similar steps being taken in the GCC. In April 2021, the UAE Securities and Commodities Authority (SCA) released a circular indicating that all listed companies must submit a standalone sustainability report by June 30th. For next year onwards, the same will need to be submitted 90 days after the end of the financial calendar, or before the company’s annual general meeting, whichever is first. In addition, listed companies must comply with the Global Reporting Initiative (GRI), the dominant international standard for sustainability reporting, and any other requirements issued by the relevant stock exchange.[3]
The ADX and DFM have made formal commitments to encourage sustainability in financial markets by joining the Sustainable Stock Exchange (SSE) Initiative, led by the United Nations. ADX has also shared a voluntary ESG disclosure guide to assist its listed issuers by outlining 31 ESG indicators considered essential to align with SSE recommendations and those of the World Federation of Exchanges (WFE).[4] Similarly, the DFM ESG Reporting Guidelines support listed companies in integrating ESG information into their disclosures and promoting company transparency.[5] Listed companies are strongly encouraged to refer to these guidelines as a first step in their sustainability reporting journeys. Furthermore, Nasdaq Dubai has become a regional leader in listing bonds and Sukuk that meet global ESG standards, including in reporting.
These initiatives reflect the UAE’s overall mission to be an established global sustainability leader. The government has also been keen to align the UAE’s objectives with the UN Sustainable Development Goals (SDGs), and this has been reflected in the increased mention of the SDGs by local companies. Furthermore, a survey by the CFA Institute found that 94% of retail investors in the UAE are interested in or are considering ESG factors.[6] With the increased focus on sustainability reporting, 51% of the top 100 UAE companies have reported on these factors.[7]
Despite these developments, the UAE and MENA region are lagging in terms of sustainability reporting. A 2020 survey by KPMG of 5,200 companies across 52 countries and jurisdictions showed that North America has the highest regional sustainability reporting rate at 90% of the top companies, as opposed to only 59% in MENA. While this represents a noticeable increase from previous years, it is below the average of the Americas, Europe and Asia Pacific.[8]
In the highest reporting countries, the trend is driven by regulatory requirements from the relevant government or stock exchange. In several European Union (EU) states, for example, the rules of the EU Non-Financial Reporting Directive are applied on the national level. This requires large companies to publish regular reports on the social and environmental impacts of their activities.
In the current age of sustainability and ESG reporting, the practice is shifting towards greater disclosure. This has been further driven by the transnational impacts of the pandemic. The significant steps taken by the UAE towards improved transparency and disclosure of ESG initiatives may influence other states in the region to move in a similar direction. Regulatory requirements have been a key driver of growth in this space, and while there is progress in the UAE, further obligations should be outlined if the country is to keep pace with international progress and sustainability leaders.