People, planet and profit are equally important. This new operational ethos among many companies in the Middle East means environmental, social and governance (ESG) is moving front and centre. Appetite for a market that has been described by PwC as the ‘growth opportunity of the century’ is certainly rising fast. Global investment in ESG-directed institutional and retail assets will reach USD53 trillion this year, up from USD30 trillion in 2018, estimated Celent.1
In the Middle East for example, bourse operator Saudi Stock Exchange (Tadawul) is preparing to launch an ESG index shortly. This index will be a collaboration with MSCI and will be based on the US-based index provider's standards, including 70 Saudi listed firms.2 The creation of such an index by a state-owned company in what is the Middle East’s largest economy and world’s largest oil exporter speaks volumes about the region’s quickening financial maturity and its commitment to diversify its oil-centric economy. The same can be said for the Kingdom’s NEOM project, a USD500 billion high-tech city and tourism hub that could near the size of Belgium, for which sustainability is central.3 And in the UAE, the Dubai Sustainable Finance Working Group – established in mid-2019 – recently published two guides for issuers and investors as part of Dubai’s bid to lead the UAE’s growth as a hub for ESG and sustainable finance.
Such upper tier moves echo the broader sentiment. For example, HSBC’s survey of 2,000 capital markets issuers and investors on ESG last October showed that nearly half (41 per cent) intend to pursue firm-wide policies on responsible investing or ESG factors – the highest amongst all the regions surveyed.4 And a large majority of issuers – 93 per cent – cite environmental and social issues as important to them, which strong indicates a growing awareness of the benefits of incorporating ESG factors. Morally, the Middle East has the strongest pull worldwide. When asked why they care about environmental and social issues, 62 per cent of issuers and 47 per cent of investors say ‘we believe it’s right’ — in each case, this was the strongest level globally. This was especially true of respondents in the UAE; 70 per cent of issuers agreed.
Of course, this shifting sentiment has taken time. What speakers termed ESG 1.0 focused on engagement and education, before it evolved into today’s ESG 2.0. This latest step sees ESG becoming an increasingly important part of the financial architecture, being integrated into a company’s competitiveness and being used as a tool to attract, engage and retain clients. Next, ESG 3.0 will see it become a non-negotiable and seamless part of the entire financial ecosystem, spurred by intensifying the environmental targets under the Paris Agreement and increasing social conscientiousness.
Clarity counts – a lot
Better data transparency and reliability are pivotal to boosting the Middle East’s credibility and credibility among international investors – many of whom are already engaged or very keen on the region – when it comes to ESG. Some nations, such as Saudi Arabia, have made impressive progress in the ESG space. But their achievements are not generally disclosed, meaning said country risks losing reputational credit and potentially even financial deals. It is especially important to master a respected ‘ESG speakerphone’ in the Middle East, as the region works hard to diversify its oil-centric economy. This also feeds back into the ‘build back ethos’ amid and after the COVID-19 pandemic, which is seeing many market-leading companies invest more deeply on home soil. For example, in a proactive response to market dynamics, HSBC formed a dedicated ESG Solutions unit last year to help clients around the world rebuild and transition their businesses and economies in a more sustainable way post-Covid-19.
Becoming ESG savvy is also key to capturing and then sustaining talent, as the younger generation – both students and younger employees – are increasingly focused on employers’ sustainability credentials. For example, the Economist Intelligence Unit (EIU) reports that 76 per cent of the younger investors cite that healthy ESG data is a determining factor when managing assets, in contrast to 37 per cent of those from older generations.5
Clearly, many agree that a greater focus on ESG is non-negotiable. But the asset and capital allocation that follows that – i.e., firms walking the walk – must now accelerate. But whatever the pace of progress, have no doubt that the future fundamentals of finance will encompass far more than balance sheets.
Better data transparency and reliability are pivotal to boosting the Middle East’s credibility among international investors.
This article is taken from the HSBC MENAT Markets & Securities Forum 2021’s ESG Outlook panel which featured speakers from: HSBC Global Asset Management, NEOM, Tadawul, MSCI and was moderated by Osman Raie, Managing Director, Head of ESG & SWF Cross Asset Institutional Sales, MENAT HSBC