ESG: Nascent Yet Growing in MENA

By Charlene Rahall

Green-led economic activities, alongside accelerated technology adoption and greater private sector participation could promise a more sustainable recovery in MENA states. Adoption of ESG standards is a crucial step towards long-term sustainable development.

This year started with a bang for ESG and sustainable finance, not just in the Middle East. At several major conferences in January, including the World Economic Forum (WEF), global business leaders, regulators and other stakeholders stressed the importance of adopting new global ESG standards.

An important step toward ESG standardization was taken on February 3, when the International Financial Reporting Standards (IFRS) Foundation kickstarted plans to develop a single, global ESG framework.

Expectations are that the non-profit organisation will announce the launch of a Sustainability Standards Board (SSB) at the meeting of the United Nations Climate Change Conference COP26 in November this year. The SSB’s role would include issuing global standards for sustainability or ESG accounting and disclosures.

These global trends are mirrored in the MENA region, where the emphasis on ESG adoption is growing. Out of the 61 companies that committed to the WEF’s initiative for “Stakeholder Capitalism” metrics, two were from MENA. The “Stakeholder Capitalism” metrics are a set of ESG metrics and disclosures that measure long-term value creation for businesses.

Sustainable investing and ESG considerations were also highlighted during the Saudi Future Investment Initiative (FII). At the event, the Saudi Stock Exchange (Tadawul) and the Future Investment Initiative Institute signed a Memorandum of Understanding to advance ESG awareness in the kingdom. The agreement promotes ESG thought-leadership and events that bring together relevant stakeholders to advance ESG impact in Saudi Arabia.

The Tadawul also plans to launch an ESG index in cooperation with global index provider MSCI this year. The index will include over 70 Saudi-listed companies and will be based on MSCI standards. A set of ESG guidelines will be released for all listed Saudi securities. In a similar development last year, the UAE’s Abu Dhabi Securities Exchange (ADX) did in fact launch new ESG guidelines for all ADX listed companies.

Recently, in two separate instances, Saudi Arabia saw the benefits to be reaped from ESG-conscious investors, while also experiencing the costs of ignoring ESG requirements. Saudi Electricity’s $1.3 billion green sukuk issuance in September 2020 was five times oversubscribed, a result that was helped by the growing demand for ESG investments.

On the other hand, a month later, Saudi Arabia was excluded from the investment portfolio of a top global fund, Candrian, along with other emerging heavyweights, Russia and China. Candrian argued that the three countries scored too low in their ratings for ESG risks.

Other regional trends cement the region’s unfolding paradigm shift in sustainable finance and ESG investing. As many MENA states push ahead their diversification efforts, the adoption of ESG is expected to increase.

However, to unlock the full potential of sustainable finance in the region, more efforts are needed from investors and regulators, including more disclosures. Limitations so far have included a lack of awareness and demand for ESG among investors as well as regulatory constraints.

Since the onset of the pandemic, an increasing number of global businesses have set policies on responsible investing and incorporated impact goals. In the MENA region, the UAE is leading this transformation, followed by Saudi Arabia and other countries.

In a major step, the Abu Dhabi Investment Office (ADIO) launched an ESG policy on February 3. With this new policy, ADIO aims to apply ESG principles in partner companies and public-private partnership transactions.

A study conducted by UBS last year showed that the highest rate of adoption in sustainable investing took place in the UAE. The survey polled more than 5,300 millionaires across 10 markets including Brazil, China, Germany, Hong Kong, Italy, Singapore, Switzerland, the UAE, UK, and the US.

Another study by the CFA Institute concluded that some 94% of retail investors in the UAE were interested in or using ESG in 2020, up from 90% in 2018. According to the report, 74% of UAE investors were willing to give up some return in exchange for meeting their investment goals.

These insights reflect much improvement, with incubators, financial authorities, and local investors becoming more aware of sustainable financing.

We expect to see more activity in green financial instruments, especially as MENA countries continue to develop large scale investments in “green infrastructure”. Since the launch of MENA’s first green bond by the Moroccan Agency for Sustainable Energy in 2016, interest in green issuances, including in sustainability-linked bonds has risen.

In 2020, the UAE, Egypt, Saudi Arabia and Qatar issued new green and sustainability-linked bonds, taking advantage of the strong international appetite for sustainable investments.

In his blog post on February 4, the IMF Director of the Middle East and Central Asia Department, Jihad Azour, noted the importance of “high-quality investment in green infrastructure” to accelerate the recovery process in the MENA region.

Even though ESG integration in MENA remains at a nascent stage, there is a growing willingness to promote the sustainability agenda. This development coalesces with other “green turns” in the region’s economy, including its energy transition.

Over the next years, we expect MENA states to witness more buy-in from companies and public sector stakeholders, firmly rooting sustainability concerns, including ESG-systems, in the region’s financial and economic practices.

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