Is 2023 the "Year of ESG" in the Middle East?

2023 should be the year of sustainability in the Middle East, specifically in the United Arab Emirates (UAE). The stage is set for Dubai to host the annual 2023 United Nations Climate Change Conference from November 30 to December 12 this year. The 28th Conference of the Parties (COP28) is expected to unlock a greener future for the region by providing practical support for companies to implement ESG measures, improve infrastructure, create green financing options, and provide incentives for green growth.

Apart from creating ESG policies and strategies, the region has witnessed a surge in companies reporting their ESG information publicly. In 2023, companies across the Middle East have ramped up the implementation of Environmental, Social, and Governance (ESG) practices within their businesses. As of 2023, around 64% of them disclose ESG data, which is an 8% increase compared to 2022. Among these, 73% are committed to achieving carbon neutrality in their operations, and around 50% of companies are self-reliant when it comes to funding their ESG activities.

On the other hand, all the countries in the Gulf Cooperation Council (GCC) have national visions focused on improving the national well-being and the living standard of people in their respective countries. The UAE’s Green Agenda 2030, Saudi Vision 2030, Bahrain’s Economic Vision 2030, and Oman’s Vision 2040 embed sustainability as a core principle and are aligned with the United Nations’ Sustainable Development Goals (UNSDGs). Reaching all these sustainability visions is directly tied to specific ESG targets set by the GCC countries. For instance, Qatar Energy, a state-owned petroleum company, has an environmental target of achieving “zero routine flaring” in the region by 2030 under Qatar National Vision 2030, while Saudi Arabia’s Vision 2030 includes targets to improve key social indicators, such as improving women's representation in the workforce. This makes 2023 a very important year for ESG in the Middle East.

In the upcoming articles, Astra will focus on individual assessments of how ESG adoption can help GCC countries achieve their sustainability visions. Meanwhile, this article provides an insight into the significance of the adoption of ESG in the Middle East. 

Why is ESG the Need of the Hour in the Middle East?

In recent times, the Middle East has been evolving in adopting ESG in contrast to the exposure of ESG in Europe. In Europe, global leaders have invested in more than half of the overall assets based on the principles of ESG. According to a public research report, 46% of CEOs in the Middle East are considering increasing their investments in ESG by 2024. These CEOs also aim to implement sustainability initiatives within their organizations. Apart from the investment landscape, several other factors have fueled the incorporation of ESG in the Middle East. This includes the ever-increasing emissions, ingrained cultural bias, and growing regulatory compliance in the region.

E- Environmental factors - The ever-increasing emissions:

Over the years, the Middle East has been highly reliant on oil & gas to power its operations and export & produce oil. The region has been a laggard in its transition from thermal power to renewable energy despite making pledges to achieve net zero emissions by 2050. In 2022, 90% of the region’s power capacity came from thermal power, mainly fossil fuels (gas, coal, & oil). Furthermore, the region has been criticized for gas flaring, a major source of environmental waste and Greenhouse Gas (GHG) emissions, which has been rampant across gas & oil fields in the UAE. In 2020, the Middle Eastern and North African regions were responsible for 40% of the gas flares occurring globally.

Amid various opportunities for GCC countries to extract energy from solar and renewable sources, their excessive dependence on oil will likely affect their aim of becoming a net zero economy. Hence, due to increased dependency on oil & gas, the ability to achieve ESG targets in the region is heavily linked to the environmental component of ESG. 

S-Social factors -Equality and diversity in the workplace:

The Middle East, characterized by diverse cultural, social, and economic contexts, is witnessing efforts to promote workplace equality & diversity. Saudi Arabia, as part of its Vision 2030, has enacted reforms to boost the participation of women in the workforce. Despite such strides, challenges persist, notably reflected in the Gulf Cooperation Council's (GCC) low representation of women on corporate boards, which is 7% compared to the global average of 20%. The World Economic Forum's 2021 Global Gender Gap Index ranks GCC countries low in gender equality, with Saudi Arabia at 147 and the UAE at 72. Similarly, the 2021 Economic Participation and Opportunity index indicates challenges, with Bahrain at 134, Qatar at 136, Kuwait at 137, and Oman at 143.

In 2023, a public survey was conducted across 25 of the biggest companies in the gulf and included 1,150 professional men and women.  Of the women who participated in the survey, 70% of the respondents cite gender bias and stereotypes as major hindrances to women’s advancement in the workplace. Insufficient mentorship, training, and support for work-life balance compound these challenges, restricting the progression of women in corporate leadership roles in the Middle East region. ESG training, leadership, and reporting will help organizations in the region improve their sustainability performance and create an inclusive & diverse future in the region.

Governance factors - Regulatory compliance:

A recent 2023 public survey revealed that more than 60% of firms in the Middle East were reporting on ESG within their annual reports or through a separate ESG report. Almost the same proportion indicated mounting regulatory pressure in the region to have a significant impact on their approach. Nevertheless, major regional stock markets, such as the Dubai Financial Market and the Abu Dhabi Securities Exchange,have developed guidance on reporting nonfinancial information, and regulatory authorities, like the Abu Dhabi Financial Services Regulatory Authority (FSRA), have planned to create ESG criteria for organizations. However, in most GCC countries, although reporting guidelines are in place, they have not been integrated as mandatory listing requirements. In addition, there is an inconsistency in reporting requirements across individual stock exchanges. In 2023, the GCC Exchanges Committee introduced an additional set of voluntary ESG disclosure standards for publicly listed firms in the Gulf region. There is a wide range of opportunities for public firms to disclose sustainability information, considering the regulatory landscape in the region.

What Drives Organizations in the Middle East to Adopt ESG Practices and Embrace ESG Reporting?

A 2022 study by Clarity AI found that only 30% of nearly 40,000 publicly listed companies in the Middle East and North African (MENA) region disclosed at least one ‘quantitative’ sustainability ESG metric, while 80% do not report on quantitative ESG metrics.  Also, according to the WSJ Pro Sustainable Business Survey conducted globally in 2023, it was found that around 45% of the companies that were part of the survey do not report ESG information, and many of them do not have any plans to report them.

It is not just that public companies face scrutiny. Eco-conscious consumers, lenders, insurers, & suppliers seek in-depth disclosures on ESG policies from private companies as well.  Among the many frameworks available for reporting, most of the public/private companies use the UNSDGs as reporting guidelines, followed by the Global Reporting Initiative (GRI) and the Task Force on Climate-Related Financial Disclosures (TCFD).

Organizations are starting to embrace ESG reporting due to two major reasons. The first is that there is increasing pressure from stakeholder groups asking companies to disclose nonfinancial information. The second is that effective tracking and disclosure of ESG metrics directly contribute to business value creation.  Both aspects are discussed below.

Investor pressure for nonfinancial information:

Apart from achieving decarbonization, improving regulatory compliance, and ensuring equality & diversity, ESG/sustainability reporting is a fundamental aspect of sustainable finance. As a leader in sustainable finance, the UAE depends on ESG reporting to promote accountability, compliance, and transparency in accordance with international sustainability standards to increase the traction of Green Fintech in the country. The Securities and Commodities Authority (SCA) and the GRI are notable legal authorities driving the adoption of ESG reporting in the region. In addition, public companies in the Middle East face investor pressure, calls for stringent reporting, and compulsory climate reporting requirements, which are oncoming.

Using ESG reporting to create value for stakeholders:

For businesses to create value for stakeholders, the first step in ESG strategy development and ESG reporting is to collect ESG data. This helps them understand social responsibilities, scrutinize their environmental impact, and standardize governance processes to ultimately measure the “value” they create for the environment and society. With the availability of standardized and trustworthy information, companies also meet the expectations of their stakeholders (regulators, customers, investors, & employees), increase transparency of operations, and improve their sustainability performance. While this may appear quite simple, the curation, standardization, & monitoring of ESG data and the process of identifying material topics for assessment are quite complex.

Overall, adopting ESG strategy and reporting can help businesses achieve the environmental objectives set by the government, creating opportunities for women and youngsters in the Middle East (social objectives) and attracting foreign investment. Astra employs a proprietary ESG taxonomy to track and report ESG Key Performance Indicators (KPIs) to create strategic value for businesses.

How Astra Can Help:

Astra provides end-to-end ESG and corporate ESG reporting using digital technology and human intelligence to provide deeper, faster, transparent, & actionable customer insights. Astra integrates a robust ESG taxonomy encompassing more than 300 ESG indicators and providing connected solutions to enhance ESG reporting & performance for companies.

1. Data collection and analysis: Raw ESG data is essential for measuring ESG performance and making informed decisions. The research team at Astra plays a significant role in collecting, managing, and analyzing substantial amounts of raw ESG data. This may include financial, environmental (e.g., carbon emissions & water usage), social (e.g., employee turnover & diversity metrics), and governance (e.g., board composition) data.

2. ESG reporting: Developing an ESG report is a common practice for organizations seeking to communicate their ESG efforts and performance to stakeholders. ESG integration teams at Astra assist in compiling, analyzing, and presenting ESG data in a structured & transparent manner. We help align the report with recognized reporting frameworks, such as the Global Reporting Initiative (GRI), Task Force on Climate-related Financial Disclosures (TCFD), and the Sustainability Accounting Standards Board (SASB).

3. ESG integration: ESG integration refers to systematically incorporating ESG factors into an organization's core business operations and decision-making processes. Astra's ESG integration services include the following:

1. Deploying teams or engaging with ESG consulting & advisory services to integrate ESG considerations into a company's strategy & operations

2. Performing materiality analysis to assess ESG issues that are significant to a firm's operation and its stakeholders

3. Creating industry/company benchmarking reports based on its ESG performance against peers

4. Analyzing and identifying ESG factors based on key ESG data to make impact reports

5. Creating ESG impact scores to understand an organization's performance and reputation