Coined in 2005, in a report financial professionals drafted for international organizations, the concept of ESG evolved relatively quietly, slowly and steadily for 15 years. It was adopted and refined by a select group of financial sector policymakers and practitioners – predominately in Europe and some first movers elsewhere, including some emerging markets like South Africa. Recently, climate change, COVID19 and to a lesser degree socio-political divisions in the US have catapulted ESG into the spotlight. ESG now strides the headlines pages of the business and financial press, and is debated in boardrooms, governments, political parties. regulators and stock exchanges.
This article examines what ESG is and why it is an imperative for MENA today.
ESG is a holistic approach to business or investment, that posits the following:
environmental, social and governance (ESG) issues present material risks to a business or an investment; and
every business or investment has financial as well as ESG impacts.
Although this holistic approach to business or finance is not new, critics of ESG claim it overextends out of the “normal” confines of business or finance. This is and always been untrue. For centuries, businesses have engaged in extractive industries that have inherent environmental risks and impacts. Organized labor, social movements and trade unions grew out of this “environment.” In the Islamic world, Islamic finance was devised so that investors could align their investment strategies with their faith. Later, in Western countries, investors financed the ships that carried slaves from Africa to the Americas. In response, the world’s first non-governmental organization (NGO) was founded – to advocate for the abolition of slavery in the British empire. In the modern era, some investors began to exclude certain industries (alcohol, nuclear energy or pornography, for example) from their portfolio/investment strategy or targeted other business sectors (microfinance or renewable energy).
In short, ESG issues have always intersected with business and finance.
In contrast to corporate social responsibility (CSR) and socially responsible investment (SRI), both focused on the S, ESG not only considers all three axes; it also recognizes the interplay among them. Thus, governance is crucial for a business to recognize, analyze and address environmental and social risks/impacts.
ESG can and should be implemented as a risk management tool, a business optimizing strategy and a method to choose the least risky and most impactful investments, financially and according to material ESG indicators. ESG is imperative in MENA today. First, consider the gravity of the following issues across MENA:
E
Circular Economy (recycling)
Climate Change
Water Efficiency
Energy Efficiency
S
Diversity/Gender in the Workforce, as well as in Executive Management and Corporate Boards
Inclusion (Access to Finance, Financial Inclusion, Access to Energy, Access to Water)
G
Disclosure
ESG Financial Products (Blue Bonds, Green Bonds, ESG Indices, etc.)
Supply Chain Management
In order to progress on these and other issues, business, financial and government leaders across MENA must create a viable ESG framework. The components of any successful framework – national and/or regional – include behavior change, innovation, investment, policy, and research. These components interlock like the ten fingers of two hands. There needs to be contact among the components, engagement of the stakeholders and cooperation across entire value chains.
Many MENA governments are committed to the United Nations Sustainable Development Goals (SDGs) and/or similar national/regional targets. ESG can serve as a bridge, especially by attracting finance to support achievement of the SDGs and other ESG targets.
Second, globally and in MENA, investors have demonstrated interest in ESG products. Some MENA regulators and stock exchanges have shown leadership by strengthening ESG reporting requirements, launching sustainable finance working groups and conducting capacity building for corporates/financial institutions. This work should broaden and deepen, to increase the portfolio of ESG products and improve the quality of ESG disclosure.
Third, the European Union (EU) is firmly committed to ESG. The EU has strengthened disclosure requirements for both corporates and financial institutions. Additionally, several EU member states have national legislation regarding: climate finance, diversity/gender on corporate boards, human rights, modern slavery, net zero and other ESG issues. Any MENA corporate or financial institution doing business in or with EU counterparts must be aware of these requirements.
Fourth, much more can be done in the applied research arena to develop ESG products – circular economy, energy efficiency and water efficiency. Yesterday’s focus on convenience needs to reboot to recycle, reduce, renew and reuse. This reorientation will reap E, S and G rewards.
For all these reasons, ESG is an imperative for MENA today. Even for those business or financial leaders who do not embrace ESG, ignoring ESG impacts and risks is perilous – internally for the individual business/financial institution and externally, in terms of navigating the broader business, financial, political and social environment in which it operates.
By: Geoffrey Mazullo, Principal, Emerging Markets ESG