DUBAI, UAE — This year looks set to mark a turning point for ESG — Environmental, Social, and Governance. In the nearly two decades since the term was coined, it has steadily gained momentum, and today, 89 percent of global investors are ESG adopters, according to research by the Capital Group. Traction has been slower in the GCC, but with the UAE set to host COP28 from November 30 to December 12, 2023, there are already signs of rapid and significant change. Now more than ever, local enterprises – spurred by both opportunity and regulation – will need to demonstrate their commitment to ESG principles.
Earlier this year, the GCC Exchanges Committee published a set of unified ESG disclosure metrics for listed firms in the region. Comprising 29 standards, these metrics align with the World Federation of Exchanges and the Sustainable Stock Exchanges Initiative. While currently serving as guidelines for companies looking to establish ESG reporting functions, they represent a milestone in the region’s move towards standardised ESG disclosure.
The latest PwC ESG Middle East report reveals that companies are transitioning from an ESG “start-up” mode to a more sustainable “scale-up” mode, driven by climate risk awareness and regulatory compliance. The survey, which polled business leaders from various industries, found that 64 percent of companies adopted a formal ESG strategy in the last year, halving the number of companies with no ESG strategy. Moreover, businesses are becoming more transparent about their environmental impact, with 70 percent reporting on their ESG impact and 59 percent having their reporting formally audited or assured. The survey reflects the region’s growing emphasis on sustainability and accountability.
In last year’s survey, companies in the Middle East were in the early stages of their ESG journeys, with many just starting to think about developing their ESG strategies. This year’s survey shows that companies have taken concrete steps in advancing their ESG actions, while highlighting significant gaps, particularly in sustainability skills and green funding. Businesses expect governments in the region to develop policy frameworks similar to Europe’s Green New Deal ahead of COP28. There is a strong belief that with the right coordinated response from governments, 2023 could be the region’s most environmentally transformative year yet.
Industry specialists have observed the benefits and success of ESG integration into business strategies worldwide and told TRENDS that ESG strategies must be a priority for businesses to remain competitive.
Katarina Uherova Hasbani, Partner and Global Director of Strategy and Advisory at AESG, said that the ESG journey is a step-by-step process. “It starts with developing an understanding of the purpose of reporting, then proceeds with setting an ESG strategy and reporting framework, followed by implementing initiatives and finally, reporting. An ESG report is not an end result in itself; it’s an instrument that helps streamline a transformation towards a more sustainable business,” Katarina said.
Factors Driving the Rise of ESG Reporting in the Middle East
Katarina noted several converging driving factors. The first is the understanding that a wide range of stakeholders with decision-making power value the ESG agenda. These include investors, governments, and international institutions that contribute to the development of the region.
The second driver is customers demanding access to sustainable products and solutions. The economies and societies of the Middle East are mature, and the value they place on the ESG agenda is increasing.
The third driver is the availability of technologies and processes that support the ESG agenda. Access to sustainable materials, as well as water and energy technologies, has become more common in this region. Moreover, there’s an understanding of the standards and processes that support this agenda, allowing organisations to be more effective in their implementation. At AESG, we see this particularly with our clients in asset-heavy sectors – if they understand the benefits of implementing ESG in terms of savings in electricity and water consumption or improving the quality of services offered by their suppliers, they are more open to the transformation required to take place.
The Current State of ESG in the Middle East
Oliver Schutzmann, CEO of Iridium Advisors, said, “To give credit where it is due, there are vanguards for the movement whose initiatives are truly world-class. Saudi Aramco’s inaugural Sustainability Report, in June last year, serves as a prominent example for all business leaders to comprehend the standard of excellence in sustainability practices and critically analyze the key takeaways for their own organization.
“However, Saudi Aramco, and a few other companies, are the outliers. The reality is that while many Gulf-based companies have started to publish sustainability reports in recent years, the majority do not conform to global standards or meet expected best practices. For example, many companies simply provide a statement of their commitment to sustainability and a list of their sustainability initiatives, without providing any metric-based evidence of their performance.”
The Pitfalls Companies Should Avoid
Oliver said, “It is a common misconception among business leaders that ESG is synonymous with Corporate Social Responsibility (CSR); they incorrectly believe it to be entirely interchangeable with the more established practice of CSR. And while the value of giving to society, teams volunteering time to run clean-up drives, or raising funds to support local non-profit organizations is irrefutable, business leaders need to understand that these activities account for less than one percentage point of an ESG rating.”
Benefits to Implementing ESG Initiatives
Oliver explained that GCC organizations need to change their very perception of ESG reporting. “Treating it simply as an obligation and adopting a ‘tick the box’ approach would yield no long-term positive impact. Worse still, any insincere efforts would quickly be unmasked by the industry for what they truly are – “greenwashing.”
“Instead, if organizations change their mindset, they would rapidly realize the tremendous potential that this exercise can help unlock. World-class reporting, developed in line with industry best practices, can deliver unparalleled insight that will serve to inform an organization’s near- and long-term sustainability strategies, enabling it to successfully embark on the journey towards more responsible and reputable operations.
“It is because of how companies such as Cisco and Salesforce treat their employees that they can attract the best talent on the planet; it is because of the growing demand for more sustainable forms of transport that Tesla rapidly took market share from automobile giants; and it is because F&B chains such as Starbucks have committed to ethical sourcing that customers proudly support their establishments. In a world where companies are being called upon to do more than just turn a profit, companies that engrain ESG into the very fabric of their organization, and prove this in a measurable way, will enhance their attractiveness to customers, investors, suppliers, and employees.
“As the global investment community becomes increasingly fixated on ESG, an increasing share of this funding will go to companies that have measurable strategies in place. Success begets success, and local investors will follow the flow of funds, further backing these organizations. Regulations might soon dictate that all GCC enterprises adopt ESG reporting, but those that rightly recognize it as the incredible opportunity it is, will stand to reap the rewards.”