ESG investing gathers pace in the Middle East
While the economies that make up the Middle East, North Africa and Turkey (MENAT) region remain varied, one common area of focus is the pursuit of diversification and low-carbon economies. Today, the region is shifting towards investing in renewable energies, launching green bonds and other green financing initiatives, with a view to enabling higher levels of green solutions across a wide range of sectors.
Our survey of 2,000 capital markets issuers and investors shows that in the Middle East region there is a move amongst investors to pursue firm-wide policies on responsible investing or ESG factors. 41 per cent cited this intention – the highest amongst all the regions surveyed.
A large majority of issuers – 93 per cent – cite environmental and social issues as important to them, a sign of the growing awareness of the benefits of incorporating ESG factors. Yet this figure is markedly lower for investors, with just 65 per cent agreeing.
Engagement with some issues, such as the UN Sustainable Development Goals (SDGs) — is high in the region. Issuers and investors also adhere strongly to core values, while the COVID-19 pandemic has clearly strengthened interest in sustainable finance.
Pandemic plays a role
In the Middle East, a 2019 study showed that ESG uptake was already on the rise1. And as in other regions, the global COVID-19 pandemic has further accelerated engagement with ESG issues. The survey found that an above average proportion of issuers – 44 per cent versus the 41 per cent global average – and investors – 30 per cent versus 29 per cent – now believe more strongly than before in the importance of becoming sustainable or considering ESG issues in investing.
For investors in the Kingdom of Saudi Arabia (KSA), this focus on ESG was higher still. The Kingdom has been at the forefront of renewable energy in the region with the development of the USD500 billion NEOM smart city, a ‘new model for urbanization and sustainability’, which will include a 100 per cent renewable energy system as part of its design.2
The increased focus on ESG may be driven, in part, by the perception that a more sustainable business – whether through E, S or G factors, will play a role in mitigating the challenges of future shocks and will act as a ‘defensive characteristic’.3
A principled stance
The region’s social welfare has been brought into focus because of the pandemic, with 43 per cent of issuers and 36 per cent of investors regarding this as more important than before. Moreover, two thirds of issuers put greater emphasis on employees’ social wellbeing than before and over half of investors see greater value in organisations that take care of employees’ health and avoid excessive management pay. Each of these proportions is the survey’s highest level globally for that issue.
Moral values, the survey found, remain important in the Middle East. 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, the strongest level globally. This was especially true of UAE respondents, with 70 per cent of issuers agreeing.
Potential for sustainable infrastructure
Investors and issuers, who responded to the survey, clearly see the potential for sustainable infrastructure investment. Harnessing the climate and geography – and overcoming their challenges are drivers of this. Through our survey scoring system water and wastewater show as the areas of key focus for investors, while energy occupies the attention of issuers.
These are issues at the heart of many of the region’s diversification efforts.
Solar power, for example, is deemed the ‘new oil’ for the region, because of year-round sunshine and lower financing costs4. Masdar’s Shams Solar Power Plant in the UAE is one example of harnessing the climate, along with Dubai’s Mohammed bin Rashid Al Maktoum Solar Park and the Noor Abu Dhabi solar power project.5
As one of the world’s driest regions, the challenges of water management are stark due to the burdens of population growth, urbanisation and climate change. Reports suggest managing water shortages in the region can be achieved through recycling wastewater to help meet demand6, prompting significant opportunities in the technology and solutions that support these7.
Growth of disclosure
Issuers in MENAT expect their disclosure to increase – the highest figure amongst the regions surveyed, with 57 per cent of those surveyed compared with the 45 per cent global average. In comparison with peers in other regions, the figure may be high because rates of disclosure are currently low.
Disclosing strategies for climate change is another area where issuers in MENAT stand out. 98 per cent affirm that they do this. The region also ranks above average for reporting alignment with the Paris Agreement, with 84 per cent saying they do so. Additionally, many also disclose how they are aligned with the UN Sustainable Development Goals. However, the flip side of this is that issuers in the region are less transparent when it comes to revealing fact-based information, such as publishing their carbon footprints, which only 18 per cent do, compared with the global average of 54 per cent.
Investors in MENAT show compliance with guidance from the Task Force on Climate-Related Financial Disclosures (TCFD) and similar reporting frameworks that is significantly below the global average.
According to the OECD, Bahrain, Egypt, Jordan, Kuwait, Oman, Qatar, Saudi Arabia and the UAE have all revised their corporate governance codes since 20158. And with the region’s efforts towards diversification, among them a greater encouragement of private sector participation, it is likely the move towards greater disclosure will gain momentum as corporate governance evolves.
The future of sustainability
The thinking around sustainable financing and investing is clearly evolving around the MENAT region – and positions on some topics are changing more quickly than on others. What emerges from the survey is that COVID-19 has spurred the region toward greater engagement with environmental and social issues. The region will need to tackle perceptions around returns related to ESG investments to increase adoption. Better data and access to local expertise can help to do this. There is clear appetite for infrastructure investment in MENAT, particularly around water and alternative energy sources. Such diversification, which is becoming increasingly necessary in the region, will continue to play an important role in driving the growth of incorporating ESG factors. With room to grow and innovate, there appear to be clear opportunities for MENAT in sustainable financing and investing for savvy market participants.
Download the full report
The Middle East Report (4MB, PDF)
Related articles:
1 ESG on the rise in the Middle East
2 A place on Earth like nothing on Earth
3 ESG stocks prove their value during Covid-19 crisis
4, 5 How the Middle East is shifting to a sustainable future
6 Challenges to wastewater reuse in the Middle East and North Africa
7 How the Middle East can tackle the problem of water scarcity
8 Improving transparency and disclosure in MENA
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