The concept of ESG has started to gain momentum in the MENA region as more companies have started to embrace sustainability reporting. It’s noteworthy that Hawkamah and S&P launched the first, and the only, MENA region ESG index in 2011.
However, things started to move faster in the last few years. There started to be some discussions in the business community and by regional regulators about ESG. The concept of ESG is about creating long-term stakeholder value through designing and implementing business strategies that consider every dimension of how a business is run. In other words, ESG should be an integral part of corporate strategy, where all the strategic business decisions take various ESG elements into consideration. In 2020, the UAE launched its own S&P Hawkamah ESG index for its listed companies.
Investors increasingly rely on companies’ disclosures to make investment decisions, when disclosure is lacking, investors are likely to assume that things are not that well in the company and are likely to invest elsewhere. Moreover, disclosure puts companies in control of their own ESG narratives. It is highly recommended for the company to provide accurate data for its ESG practices and to communicate the right messages. Most regulators of the region, in their efforts to attract foreign direct investments, started to mandate some sort of sustainability reporting from banks and listed companies. This can be in a separate report or as part of their annual reports.
What is the role of boards in ESG?
Boards need to discuss and agree on what ESG means for their own companies. Boards also need to prioritise and focus on the key ESG areas relevant to them and to their own stakeholders. This is important as MENA companies are mostly starting their ESG journeys. They cannot focus on all its metrics but need to start where it is most relevant to them. Boards then need to make sure that the factors they have considered to be strategic are included in the overall company strategy. Subsequently, a follow-up with the management is essential to make sure that ESG strategy is being adhered to, probably using a set of agreed KPIs.
Boards should finally ensure that their companies provide meaningful statements about their ESG-related activities, not as a PR or a compliance activity, but to demonstrate awareness of risks and how they are managing them. By reporting on ESG performance, companies send a message to investors that they can manage risks and generate sustainable long-term financial returns.
While a company produces financial reports to show its performance and numbers, it should also produce ESG or sustainability reports to provide “the story behind the numbers”: A summary of quantitative and qualitative disclosures supported by analysis of performance across these ESG factors and specific metrics.
As some of Hawkamah’s previous market reports have shown, whereas governance reporting in the MENA region has improved significantly over the years (partly as a response to the issuance of corporate governance codes and mandated disclosures in the region), environmental and social reporting remain weak.
It is worth mentioning though that the percentage of MENA companies producing meaningful sustainability reports, whether as stand-alone reports or as part of their annual reports, has increased significantly over the past five years. Ten years back, it would have been impossible to find a listed company in the region producing a sustainability report. Last year, as part of our work on the S&P Hawkamah ESG index, covering the largest 150 MENA listed companies, we realised that the percentage came up from zero to almost 20%. Approximately half of the 150 companies are disclosing their environmental policies. This is an area where the MENA region has significant room to improve. However, we realised through our work with large MENA companies that when companies are not reporting on some ESG metrics, that does not mean that they do not have anything to report. We came across companies with relatively good environmental and social programmes, but they simply did not think that it was important to disclose them.
Countries in the MENA region, including the GCC, are ramping up efforts to launch major IPOs and attract global investors and to diversify their economies. These efforts have resulted in a growing prominence of GCC countries among international investors, which has been reflected in the inclusion of the United Arab Emirates, Saudi Arabia, Kuwait and Qatar in leading emerging market indices. This inclusion also means that there will be extra scrutiny on regional companies and increasing demands on their transparency and disclosure practices by international institutional investors driving meaningful ESG reporting.
By Dr. Ashraf Gamal, CEO of Hawkamah