The merit in MENA’s measured ESG progress
The merit in MENA’s measured ESG progress
By Alice Assaf Tabbah, Manager at CRMI
The evolution of the ESG (Environmental, Social, and Governance) space in the MENA (Middle East and North Africa) region can be timestamped into two periods, as Convene ESG rightfully observes. There was the pre-2020 state of affairs, marked by oil reliance, ‘work-in-progress’ ESG regulation, and an investor focus on profitability that had somewhat sidelined environmental considerations. And then, there was the post-2020 need to align regional ESG agendas with global priorities, as MENA at large – and the GCC in particular – looked to accelerate its non-oil transition, attract FDI (Foreign Direct Investment), and cement its position in international capital markets.
The urgency in our region is not only informed by global must-haves and nice-to-haves, but by equally pressing local challenges. MENA’s climate is warming fast, at twice the global average, and regional governments and policy makers are moving faster in charting sustainable growth avenues – both economic and environmental.[1] Many MENA economies have already formalized their commitments to the United Nations’ 2030 SDGs (Sustainable Development Goals). At the same time, politico-economic instability is scrutinizing governance and its role in long-term stabilization. It is also calling for more responsibility among organizations to play their part in social and communal development beyond CSR checklists and tokenism – particularly considering the region’s current geopolitical climate and increasingly diverse demographic makeup. This is a massive opportunity for MENA policy makers and organizations to pivot towards ESG-first strategies.
Solid ground for ESG-bound markets
Naturally, this is also a trickle-down effort that starts with regulators, scales with businesses, and ultimately cascades to end consumers. Between 2021 and 2022, MENA and GCC governments made steadfast progress on their net zero carbon emissions commitments; regulation and legislation in areas such as data, sustainable finance, and the ethical use of technology; and ESG reporting.[2] The renewable energy transition and sustainable finance have been focal areas for MENA policymakers’ ESG transition. Regional government-led and PPPs (public-private partnerships) in this direction have included the UAE’s Sustainable Finance Strategy and Net Zero 2050 Strategic Initiative; Saudi Arabia’s National Renewable Energy Program to meet 50% of its domestic energy needs from renewable sources by 2030; Egypt’s green bond issuance; the Iraqi Central Bank’s accession to the Paris Agreement on Climate Change; Jordan’s National Green Growth Plan (2017-2025); and Abu Dhabi’s creation of a dedicated ESG Unit.[3]
GCC authorities have equally laid solid ground for ESG reporting in the past four years. In 2020, the Arab Federation of Exchanges jointly launched a Low Carbon Select Index with Refinitiv, mapping out investment opportunities in MENA companies that are seriously committing to low-carbon operations.[4] Saudi Arabia’s Tadawul released its sustainability disclosure guidelines in 2021.[5] Boursa Kuwait issued its voluntary ESG reporting guidelines in 2021, while the Capital Markets Authority of Kuwait also set sustainability regulations for the financial sector in 2022. [6] The UAE’s Securities and Commodities Authority (SCA) mandated ESG reporting for listed companies during the same year – and the Abu Dhabi Global Market (ADGM) doubled down with its own Sustainable Finance Regulatory Framework in 2023. [7] The Qatar Stock Exchange (QSE) issued its ESG reporting guidelines in 2022. Oman followed suit in 2023, and plans to enforce mandatory sustainability reporting in 2025.[8] In June 2024, the Qatar Central Bank also launched its ESG and sustainability strategy for the financial sector. In the wider MENA region, Egypt’s Financial Regulatory Authority (FRA) has also published regulations and guidelines requiting non-banking-sector companies to submit ESG reports.[9] These efforts are already bearing fruit, particularly in the Islamic finance space. In the first six months of 2024, volumes for ESG-related Sukuk in MENA grew by 48% year-on-year, reaching USD 6.2 billion from eight issuances.[10] In May 2024, Qatar raised USD 2.5 billion in its first-ever green bond issuance.[11]
Taking stock beyond the stock exchange
Aligning with the regulatory environment, MENA organizations are taking initiative and action to bump up their ESG ratings, now working with the likes of Morgan Stanley Capital International (MSCI); Standard & Poor’s (S&P) Global/SAM; Morningstar Sustainalytics; Moody’s; Refinitiv; and the Carbon Disclosure Project (CDP).[12]
However, outside of national commitments and reporting regulations, a lot more needs to be done for a true ESG transition. A study by consulting firm Instinctif Partners and ESG metrics platform ValueCo showed that MENA’s average ESG ratings stand below the 50% mark, with the UAE leading the way. Another report by Bain & Company showed that while 70% of MENA organizations have set clear sustainability targets, only 3% are on track to achieving them. That is not to say that the region stands alone in lagging ESG performance. In fact, the same report shows that only 15% of global SDGs are on track. And more recent media headlines are signaling the magnitude of the challenge, with Wall Street giants toning down their ESG focus to reprioritize “financial resilience”.[13]
Source: Consultancy-me.com, Instinctif Partners, ValueCo
The money in MENA is following the opposite trajectory, with ESG-focused products emerging as a focal area for wealth managers and their clients.[14] In November 2023, a report by Ernst & Young showed[15] that nearly 45% of MENA banks had set up sustainable finance frameworks, many of which adhere to global standards such as the International Capital Market Association’s Green Bond Principles, Social Bond Principles, and Sustainability-Linked Bond Principles. Nearly 75% of MENA Banks had introduced ESG strategies into their operations and 55% had established a formal ESG committee. [16] In contrast, only 20% had introduced ESG KPIs and less than 20% had developed climate risk policies.[17]
Regional insurers are also making moves on ESG integration. Efforts have so far been shy, but nonetheless notable, considering that the United Nations Environment Program Finance Initiative (UNEP FI) only launched its Principles for Sustainable Insurance (PSI) initiative in June 2020. By 2022, only half of major insurers in the region had disclosed ESG information, but most had been developing practices and reporting frameworks.[18] Players like RSA Middle East and Qatar Insurance Company (QIC) have been active on this front – with QIC becoming the first regional insurer to the UNEP FI PSI initiative in 2023.[19] Chedid Capital, a leading investment group in the insurance sector, has also been a UN Global Compact 2018, and established its group-wide ESG committee in 2023.
There is merit to the slow and steady progress of the ESG ecosystem in MENA. In the short term, challenges arise in the difficulty to harmonize the ESG transition between MENA’s thriving and struggling markets, the lack of implementation plans for carbon net zero emissions, and funding gaps for greening economies, among others.[20] But the long-term opportunity is far bigger. At a time when global markets and organizations are grappling to deliver – and even backtracking – on their sustainability promises, our region can yield their lessons learned to chart a future-proof and structured ESG transition.
[1] World Economic Forum (2023). MENA needs to pivot towards sustainability during 2023. Here’s why.
[2] Al Tamimi (2022). ESG Developments in the MENA and GCC Region: Look Back 2021 / Look Ahead 2022
[3] Al Tamimi (2022). ESG Developments in the MENA and GCC Region: Look Back 2021 / Look Ahead 2022
[4] Bahrain Bourse (2021). Navigating ESG in MENA
[5] Convene ESG. The State of ESG Reporting in the Middle East
[6] Convene ESG. The State of ESG Reporting in the Middle East
[7] Convene ESG. The State of ESG Reporting in the Middle East
[8] Convene ESG. The State of ESG Reporting in the Middle East
[9] Convene ESG. The State of ESG Reporting in the Middle East
[10] Zawya (2024). ESG, sovereign issuances drive MENA fixed income market in H1
[11] ESG News (2024). Qatar’s $2.5 Billion Green Bond Issuance Marks Historic Debut
[12] RSM Global (2023). ESG in MENA: Realities, challenges, and opportunities
[13] Sustainability Magazine (2024). BlackRock eases on ESG messaging amid increased scrutiny
[14] RSM Global (2023). ESG in MENA: Realities, challenges, and opportunities
[15] Ernst & Young (2023). The latest EY ESG MENA Bank Tracker 2023 tracks the collective progress of the top 20 banks across the MENA region.
[16] Ernst & Young (2023). The latest EY ESG MENA Bank Tracker 2023 tracks the collective progress of the top 20 banks across the MENA region.
[17] Ernst & Young (2023). The latest EY ESG MENA Bank Tracker 2023 tracks the collective progress of the top 20 banks across the MENA region.
[18] PwC (2022). Next in Insurance: Key trends shaping the future of the Middle East Insurance Industry
[19] Qatar Tribune (2023). QIC scores a MENA first by signing a global deal with UN programme
[20] Al Tamimi (2022). ESG Developments in the MENA and GCC Region: Look Back 2021 / Look Ahead 2022