In today’s dynamic and ever-evolving global landscape, a transformative opportunity awaits; one that transcends traditional financial norms. As businesses endeavour to diversify and cultivate fresh avenues for growth, the integration of sustainability principles becomes paramount as a response to investors being driven by the growing awareness on responsible investment, recognizing the material impact of ESG considerations on long-term financial performance. In light of this, the MENA region stands at a critical juncture, where the global transition towards sustainability is driving a major regulatory and financial shift. While these issues were once viewed as discretionary, sustainability is now taking centre-stage, encompassing not only environmental stewardship but also social responsibility and robust governance, positioning internal collaboration as an essential foundation to ensure impactful communication and disclosures.
ESG at the Forefront of Investment Decision Making
The integration of ESG in investment decisions is becoming an increasingly common practice amongst institutional investors, aiming to utilize it as a supplementary tool to generate excess returns. With ESG assets surpassing USD35 trillion in 2020, according to the Global Sustainable Investment Association, they are expected to exceed USD50 trillion by 2025, representing more than a third of the projected USD140.5 trillion in total assets under management globally.
Bloomberg Intelligence’s ESG Market Navigator Survey has unveiled key findings, describing ESG as a “backbone” of financial markets and corporate strategy, with 84% of executives highlighting its critical role in reinforcing corporate strategies and 85% of investors emphasizing the numerous benefits of ESG such as improving fundamental analysis, enhancing returns, and strengthening investment portfolios.
Beyond traditional financial analysis, ESG encourages investors to identify additional risks and opportunities, primarily through adopting new investment values, enhancing risk management, and catalysing investment inflows, which ultimately lead to long-term value creation, both at the fund and the national level.
The MENA Context: A Shift Towards Sustainability
As the MENA region bids to enhance economic diversification, tackle environmental challenges, empower its youth, and bridge gender disparities, it aims to create a more inclusive, sustainable, and resilient future. This ambition has resulted in a noticeable increase in sustainable finance trends with key financial institutions, mainly banks, establishing sustainable finance frameworks typically linked to environmental and social considerations. Many of these are backed by international standards such as the International Capital Market Association’s (ICMA) Green Bond Principles (GBP), Social Bond Principles (SBP) and Sustainability-Linked Bond Principles (SLBP).
The adjustment within the ecosystem, attraction of ESG-linked foreign direct investments, and commitment of leading players to serve the environmental and social concerns in MENA, resulted in a significant increase in ESG investments, where around USD14 billion in green and ESG bonds and sukuk were issued in the first seven months of 2023, up from USD4.4 billion in all of 2020. This has mainly impacted regional listed companies, driving them to adopt more robust ESG practices, through implementing a holistic sustainability approach across the entire value chain.
This interest has been paired by stock exchanges pushing towards integration of sustainability related KPIs and metrics into annual reports. Key GCC exchanges such as Tadawul, Dubai Financial Market, Qatar Stock Exchange, and Boursa Kuwait published ESG reporting guidelines, along with Abu Dhabi Securities Exchange, Bahrain Bourse, and Muscat Stock Exchange mandating the integration of ESG metrics into annual reports.
Leveraging the Power of Communication
While companies embark on their ESG journeys and build capabilities to advance their ESG programs, the need for stronger alignment, both internally and externally, becomes a strategic imperative, to foster stakeholder loyalty through the adoption of a transparent, coherent, and truly impactful ESG narrative. Effective communication on ESG is crucial, especially for listed companies, to build trust and credibility among stakeholders and enhance their appeal to investors who prioritize ESG issues to the same level of scrutiny as operational and financial considerations.
With this arises the undeniable role of investor relations officers (IROs), in articulating and narrating the ESG story to the public, supported by their bird’s eye view of the company’s strategic direction, risk framework, business model and governance structure. The importance of regular and proactive engagement between internal ESG and Investor Relations (IR) teams cannot be emphasized enough, to ensure a compelling and more cohesive investment narrative, which will ultimately drive the success of the ESG agenda.
In other words, the two functions are interdependent, as ESG performance influences IR, while IR teams help shape ESG strategies. Leveraging this correlation can significantly amplify the impact of the organization’s ESG initiatives, by tailoring the narrative to meet, or even exceed investors’ expectations, thus translating to a long-term and sustainable shareholder base.
In summary, ESG communication is not merely a corporate responsibility, but rather a strategic imperative that shapes perceptions, drives investment decisions, and contributes to a sustainable future.
By Alaa Badawi, Associate Partner, Sustainability at Instinctif Partners MENA and Samah Ragab, Associate Partner, Capital Markets and Investor Relations at Instinctif Partners MENA