While green finance is on the rise in the region, action must accelerate to reach climate goals. Here, innovation, education, and standardisation have a key part to play in transforming the investment landscape.
Antoine Shehadeh, CFA Institute, Senior Director, MENA, recently spoke to ESG Mena about ramping up green investment in the region, the path to closing the ESG knowledge gap, and how technology and innovation are shaping the industry.
It’s been estimated that the MENA region faces a $230 billion gap annually to achieve UN Sustainable Development Goals. How do we ramp up green investment in the region, and what needs to be prioritised?
In the MENA region, we have our unique set of challenges and opportunities. While our unique geopolitical and socio-economic contexts have shaped our developmental trajectory, they also offer rich insights and learning opportunities.
The importance of mobilising both public and private capital can’t be overemphasised. But capital infusion without direction can be counterproductive. Hence, it becomes crucial to have a robust and standardised framework in place. Improved data, reporting standards, and taxonomies all play an important role in investment decision-making and facilitating the efficient allocation of capital.
Prioritising areas for green investment, the energy sector undoubtedly stands out in the MENA region. With vast natural resources and growing energy demands, steering this sector towards sustainability presents both a significant challenge and a lucrative opportunity. Emphasising renewable energy and aligning it with strategies from global directives, like the discussions at COP28, can act as a catalyst in the region’s transition to sustainable energy.
To truly ramp up green investments, it’s not just about the funds but also fostering a culture of sustainable thinking, innovating financial instruments tailored for the region, and building capacities through education and knowledge-sharing. This comprehensive approach ensures that investments today lay the foundation for a sustainable and prosperous tomorrow. At CFA Institute, we are contributing to knowledge and skill-building through education, such as our courses and certificates on ESG investing and climate finance, as well as the development of an active research agenda designed to shape the industry’s thinking on solving sustainability challenges, including net zero.
What is the role of blended finance here, and how can it be scaled to reach its potential?
I firmly believe that blended finance holds the key to the green transition here in MENA. By combining public, private, and philanthropic funds, we can create an environment conducive to sustainable investments. Enhancing collaborations among stakeholders is essential to tap into its full potential. But there are a number of obstacles.
To improve the attractiveness of funding transitional activities, investors need standardised and credible corporate transition plans that detail the economic feasibility of decarbonisation initiatives, as well as better mechanisms and measurements for linking transition financing to real-world impact. Governments also have an important role to play with incentives that improve the risk and return profile of blended and transition finance instruments.
Research shows that there is a big ESG knowledge gap in the industry. Where is the industry in closing this knowledge gap?
The ESG knowledge gap underscores the need for an integrated approach to sustainability within the industry. Addressing this gap isn’t solely about introducing tools or certifications; it’s about cultivating a culture of continuous learning and collaboration.
Education is undeniably a cornerstone in this endeavour, which CFA Institute is advancing with its market-leading certificates and courses.
The CFA Institute Climate Risk, Valuation, and Investing Certificate further amplifies our commitment. While it’s a significant step forward, we also champion peer-to-peer knowledge sharing, robust stakeholder engagement, and a willingness to innovate.
In essence, bridging the ESG knowledge gap is a journey we are deeply committed to, and one that requires collective action and innovation. One such example of collective action is the establishment of harmonised responsible investment terms, created by CFA Institute in partnership with GSIA and PRI. This initiative aims to create a unified foundation for communicating about ESG concepts, setting the stage for clear, consistent dialogues and strategies across the sector.
In your report, you shared data that only 33% believe the investment industry will halve financed emissions by 2030, and only 35% believe it will achieve net zero in financed emissions by 2050. What needs to happen to make the industry’s net-zero ambitions a reality?
Ambition sparks change, but continuous effort turns it into reality. For our industry to better support net zero, we need a renewed focus. Strengthened collaborations within and across organisations can drive engagement and collective action. Purposeful culture and continued innovation in sustainability thinking, products and solutions are also needed to reach net zero goals.
Can you share with us some of the findings from CFA’s recent study on greenwashing risks in investment fund disclosures? What did you find out about the impact of, for example, the Sustainable Finance Disclosure Regulation (SFDR)?
In our recent study on greenwashing risks, we found several instances where ESG disclosures in investment funds might confuse investors. These discrepancies ranged from inconsistent information across documents to potentially exaggerated sustainability claims. This ambiguity can damage the trust that investors place in these products, leading to misallocated resources and possibly undermining genuine sustainable efforts.
With respect to the Sustainable Finance Disclosure Regulation (SFDR) in Europe, its introduction is a significant step toward transparency.
While our study did not specifically analyse the SFDR’s direct impact, it’s evident that regulations like the SFDR can help standardise disclosures and reduce the greenwashing risks we’ve identified. It’s a testament to the importance of clear regulatory frameworks in ensuring that sustainability promises are genuine and verifiable.
In the Future State of The Investment Industry report, it’s recommended that investment organisations build a culture around a multistakeholder business model that’s centred on purpose and aligned with a fiduciary mindset. What does this look like in action?
The multistakeholder business model emphasised in our “Future State of The Investment Industry” report reflects the dynamic shifts happening in the investment industry. Specifically, the report identifies megatrends like deglobalisation, which 97% of respondents believe will have an impact on economic growth, and the rise of sustainable finance, with 77% of participants expecting its positive societal impact to increase in the next 5-10 years.
In tangible terms, embracing a multistakeholder approach means organisations are proactive in addressing the challenges these megatrends present, ensuring decisions are not only profitable but also sustainable and ethical. Organisations are increasingly accounting for broader societal and environmental considerations in their strategic choices. And with rapid digital transformation being a key theme, a multistakeholder mindset also requires organisations to be agile and innovative, ensuring they stay relevant and effective in a changing landscape.
How is the landscape evolving with regard to investors using AI tools for ESG investing, and how do investors mitigate the risks associated with this?
The infusion of AI in ESG investing is evolutionary. AI tools and big data (including alternative and unstructured data) provide greater depth and information-processing efficiency in analysing complex ESG data. But as we evolve, balancing AI capabilities with human judgment is essential. The complexities and subjectivity of ESG issues often demand a nuanced understanding, something that human intelligence can best provide. Firms should aim to marry the technological advancements of AI with the ethical foundations of professional judgment when it comes to ESG investing.
What are your thoughts on how the anti-ESG movement is evolving, its impact across the investment industry and beyond, and projections here?
Anti-ESG sentiment is driven, in part, by the conflation of two different ideas: ESG integration and responsible investing. ESG integration is the ongoing consideration of ESG factors within an investment analysis and decision-making process with the aim of improving risk-adjusted returns. Responsible investing is the overlay of a normative framework to guide investment decisions. Conceptions of responsibility vary, and thus, responsible investment may include aspects of sustainability, fiduciary duties, morality, or some combination thereof.
Our recent initiative, in collaboration with GSIA and PRI, to harmonise definitions like Screening, ESG integration, and Impact investing, aims to address this very concern. By demystifying and standardising these terms, we seek to create an environment where investors, irrespective of their size or experience, can communicate more clearly.
CFA Institute Standards of Professional Conduct require CFA® charterholders to conduct appropriate research and investigation of all material information relevant to their investment analyses and portfolio management decisions, recommendations, or actions—including material ESG information. The decision to overlay a normative framework of responsibility is a choice that belongs to clients and those designing products to meet the preferences of certain market segments.
Some “anti-ESG efforts” are clarifications that certain pools of money must be managed purely for risk-adjusted return and must not apply normative frameworks. These efforts reflect a valid choice, and, in some cases, a decision that is embedded in existing law. Other efforts, however, are problematic because they risk infringing on investors’ ability to consider material ESG information. Ultimately, the anti-ESG movement may be helpful in clarifying the differences between ESG integration and responsible investing by bringing these two ideas into sharper focus.