Sustainability has gained significant traction in financial services over the last few years, moving it center stage, as it lies driven by a range of stakeholders including governments and regulators, investors, and clients themselves. Environmental, social and governance (ESG) are central factors in measuring the sustainability and ethical impact of a company. Today, over 90 percent of global emissions are now covered by Net Zero commitments. In the GCC alone, the financial sector is the largest contributor to the list, indicating that insurance companies have potential to achieve high levels of ESG performance. Overall, GCC companies still have room to grow to meet top global performers with more mature ESG activity.
Across the GCC region, adoption of ESG requirements is largely optional, but the development of requirements remains ongoing. High performers on ESG come from a variety of countries and sectors, proving that any company can achieve excellence in ESG, including Telecom Logistics Industrials (20%), Real Estate (10%), and Financials (30%). Out of major insurers in the region, only half are disclosing ESG information, yet regional insurers are developing ESG practices and increasing maturity in ESG reporting, with key best practices emerging.
Other major regional public-private organizations are developing frameworks for involvement in ESG finance. Majid Al Futtaim, a leading retail conglomerate in the MENA region with 40+ shopping malls and other developments, is implementing a Green Finance Framework to support its ESG activity. Saudi Arabia’s Public Investment Fund (PIF), a $430bn sovereign wealth fund that has been actively involved in the transformation of KSA, partnered with BlackRock on ESG finance. Next, HSBC and Saudi National Bank have created a Sustainable Finance Framework making Saudi National Bank (SNB) the largest banking group in the Kingdom, creating the first sustainable finance framework. The Red Sea Development Company was recognized as a global ESG leader in the Real Estate sector as sustainability has been a core guiding principle since the inception of the regenerative tourism project.
The Arab Federation of Exchanges currently references three ESG rating systems which cover companies in the region – Refinitiv ESG Score being mostly recommended as it is widely used and directly measures company ESG performance (vs. risk) offering a 97% share of MENA sustainability leaders score out of 100 points. Refinitiv rates ESG performance, commitment, and effectiveness across 10 main themes while Accounting for industry and company size biases, examples include Aramco (44), Zain (68), and Emirates NBD (35).
Another main ESG rating systems used in the region is S&P, one of the world's biggest rating agencies which recently expanded into the ESG rating segment by combining the ESG profile of a company with the company's readiness to cope with ESG topics; whereas MSCI has developed an ESG index that measures how well a company is prepared for ESG risks.
Co-author Andreas Buelow, Partner in Arthur D. Little’s Bahrain office and a member of the Financial Services Practice, said “Key ESG indicators in the GCC are increasingly being linked to global initiatives such as the United Nations Sustainable Development Goals and Global Reporting Initiative standards. Seeing the financial sector in the region increase economic, social and governance reporting is a testament to how growth may increase reputation, and value.”
Key regulatory requirements for selected GCC countries:
The UAE was the first country in the region to commit to a net-zero emissions target and has undertaken large sustainability projects under its Net Zero 2050 Initiative. It also requires mandatory ESG reporting from publicly listed companies. The UAE market participants see opportunities in electric vehicles, charging, and carbon capture. Overall, 58% of UAE investors see obstacles to ESG investing, and 91% of issuers expect to be reallocating capital towards positive environmental and social outcomes to a substantial or noticeable extent in the next five years. Both issuers and investors want transparent data and guidance around ESG principles.
Kuwait Investment Authority KIA, the 3rd largest SWF in the world, recently announced it will make its entire portfolio compliant with ESG standards. The ESG objectives of Kuwait Vision 2035 are linked to 4 of the 7 pillars of Kuwait’s National Development Plan: Sustainable Living Environment, Sustainable Diversified Economy, Effective Civil Service, Creative Human Capital. Overall, Kuwait has developed state-level support for ESG and encourages listed companies to engage with voluntary ESG reporting.
In Saudi Arabia, the Ministry of Economy and Planning is the lead organization realizing KSA's commitment to meet the UN Sustainable Development Goals, Vision 2030, and National Transformation Program, overseeing major sustainability projects in the Kingdom, with the ultimate goal of reaching net zero by 2060. KSA is active in sustainability initiatives in the region but has yet to develop private-sector ESG requirements. While Saudi Exchange has not developed ESG indicators, it recommends several international initiatives, such as Global Reporting Initiative (GRI).
Currently, ESG objectives are linked to 3 of the 6 pillars of Bahrain’s National Development Strategy: to maintain a safe and pleasant environment; achieve sustainable quality growth; and enhance the quality and accessibility of social services. While government stakeholders oversee specific aspects of ESG compliance, Bahrain encourages but does not require ESG reporting per se. Overall, Bahrain Bourse recommends companies report on 32 indicators: 10 Environmental, 12 Social, and 10 Governance indicators.
Main challenges that must be overcome:
- Uncertainty over the definition of key terms, leading to guesswork when setting and evaluating strategy.
- The unavailability of quality ESG data across the supply chain to underpin decision-making. For example, while the EBRD is exploring the digitization of green finance, a lack of comprehensive, reliable end-to-end ESG data may hold back progress.
- The absence of market standards when it comes to ESG ratings. For example, comparing the evaluations of different ESG rating providers across major banks shows wide variability between these different providers.
- Missing incentives for financial institutions to focus on ESG while delivering expected shareholder returns.
- A lack of knowledge and skills within banks, exacerbated by the need for a cultural shift to put ESG center stage.
“Many of such challenges have been previously faced by other sectors on their ESG journey. However, unlike manufacturers or consumer goods companies, financial services companies do not provide physical products. While they can and must achieve Net Zero in terms of their operational footprint, true sustainability requires ensuring that clients and customers are also Net Zero. That means leveraging customer relationships and driving ESG impact by changing their behavior and becoming an internal sparring partner to drive transformation, rather than simply excluding certain industries or clients,” added Georg von Pföstl, Principal, Financial Services, Arthur D. Little, Vienna.