Environmental, social and governance (ESG) are three words that have risen to the top of the corporate agenda. ESG concerns have become a vital part of business strategy, and more business executives are being held accountable for how they are achieving ESG targets that bring awareness to different climate and social issues.
What is ESG?
From an environmental perspective, businesses are encouraged by government, consumers and stakeholders to adopt policies and take actions to mitigate their impact on the environment. From a social viewpoint, the relationships an organisation fosters with its wider stakeholders are being scrutinised both internally and externally, for example, suppliers are being audited and being held to the highest ethical standards. Another aspect that sits as part of ESG is organisations being attractive to socially responsible investment/investors. This ultimately means a business has to have an ethical and social consciousness to attract investment. The governance aspect of ESG is designed to ensure that the internal system controls and practices are in place to maintain compliance, and promote transparency and leadership accountability.
Implementing ESG
Governments across the world are implementing regulations directly associated with ESG, and in many instances companies have to demonstrate their ESG capabilities to shareholders, consumers and the regulator. However, the regulatory landscape associated with ESG is constantly evolving and the role of lawyers, in particular, now extends to navigating clients through the expanding maze of complex regulations. To this extent, law firms are responding and playing a more proactive and/or progressive role by fostering ESG engagement through:
• Taking clear positions to assist their clients through service offerings
• Partnering/memberships of a growing number of coalitions between major law firms, e.g. Net Zero Lawyers Alliance (NZLA) and the World Business Council for Sustainable Development (WBCSD) — a CEO-led community of over 200 of the world’s leading sustainable businesses working collectively to accelerate the system transformations needed for a net-zero, nature positive and more equitable future
• The Chancery Lane Project – a project in which many legal professionals collaborate to draft and share contractual clauses and model laws that help fight climate change. This is a special collaboration between volunteering lawyers, where lawyers can have an important influencer role to help corporates pursue their transition to sustainability
The significance being placed on ESG by the business community has been substantiated by a 2022 report, commissioned by Al Tamimi & Company, titled Legal Leaders in MENA. The report captured the views of 700 legal decision-makers across nine countries and 13 industry sections in the Middle East and North Africa. Key highlights from the survey included:
• More than nine in 10 (94 percent) legal decision-makers regularly assess ESG risk and compliance within their role
• 80 percent expect ESG considerations to become more prominent in their role in 2022.
How are the region’s governments tackling the ESG issue?
One clear example is businesses being incentivised by governments to be more compliant by – emerging policies and regulations on climate change, establishing ESG indexes showcasing the leading practices across the different sectors in the region, and access to finance through a number of instruments including, sustainability-linked bonds, green bonds and loans.
While many countries have signed the Paris Agreement, which targets limiting global warming to below 2°C, and have, among other things, committed to bringing carbon emissions down to zero by 2050, some are further along this journey than others. In the UAE for instance, 2023 will be the “Year of Sustainability” which showcases the country’s commitment in addressing current challenges and promoting practices at both an individual and community level. There is also the climate change summit (COP28), the world’s largest climate conference in November will be held in UAE. Additionally, governments across the region are taking significant steps to uplift sustainable growth across the region through a number of initiatives, some of which include:
• The commitment by UAE regulators to economic transition and adoption of sustainable finance at a national level. The development of the UAE regulatory commitment response plan by the country’s Sustainable Finance Working Group (SFWG). It sets out action plans to progress the growth of sustainable finance and help the UAE achieve its goal of Net Zero by 2050. The action plans indicate the increasing focus and regulation around how companies manage and disclose their sustainability and climate change risks, particularly for companies who want to access finance or investment by focusing on three core areas:
• Strengthening sustainability disclosure
• Fostering sustainability-focused corporate governance practices
• Development of the UAE-focused taxonomy of sustainable activities
UAE’s establishment of the Abu Dhabi Hydrogen Alliance to reach Net Zero by 2050
ADGM Sustainable Finance Regulatory Framework for green investment funds and climate transition investment funds
The Kingdom of Saudi Arabia (KSA) has set out Vision 2030, which aims to transform and diversify the Kingdom’s economy, removing the emphasis from energy. A key aim within the national vision is “achieving sustainability”, and in line with this vision, the Kingdom aims to reach Net Zero by 2060. This will be underpinned by the KSA National Transformation Programme
KSA has also initiated a National Renewable Energy Programme that aims to meet 50 percent of its domestic energy needs from renewable sources by 2030
What’s on the horizon?
ESG has gained momentum in the region and is set to be at the centre of government and business strategies for climate change over the coming years. For businesses, stakeholder engagement is imperative and so is a collaboration with professionals that can help navigate through the constantly evolving ESG regulations. Another key aspect is understanding the key ESG issues that underpin future success and set an ambition to achieve a common purpose.
Finally, businesses need to prioritise strategic growth in the region, by following three steps:
• Establish new and updated business models and frameworks designed specifically to achieve ESG objectives
• Hiring new talent/work with professionals that will support ESG vision and turn it into reality
• Invest in digital technology and innovation to bridge the existing ESG gaps in the markets
Hamza Al-Haboubi
ESG Consultant, Al Tamimi & Company