Worldwide, investors seek transparent and clear information from companies regarding their Environmental, Social, and Governance (ESG) performance. This is due to the growing awareness of the importance of social issues and the impact of climate change. In the United Arab Emirates (UAE), ESG practices have been driven by the need to broaden energy resources, address risks due to climate emergency, and improve the sustainable finance landscape in the region. Furthermore, the UAE is hosting the 28th session of the United Nations Conference of the Parties (COP) from 30th November to 12th December 2023, which has also initiated the wheel of sustainability in the country and its focus on the ‘E’ in the ESG.
COP 28 is one of the annual international climate summits where the member countries renew their commitment to the Paris Agreement. This came into force at the 21st United Nations Climate Change Conference (COP 21) in 2016, and it ultimately aims to reduce greenhouse gas emissions (GHG) and limit the rise of global temperature to 1.5 degrees Celsius. Each party’s action plan plays a significant role in reducing GHG emissions and combating climate change. The UAE is one of the GCC countries alongside Qatar, Jordan, and Bahrain, to become a part of COP 28, which also represents the efforts of the wider Middle East region towards ESG.
The UAE has displayed a greater emphasis on ESG compared to other countries in the Middle Eastern region, with a commitment to achieve Net Zero by 2050. This is to demonstrate the country's dedication to reducing its carbon footprint. In addition, the growing focus on responsible investing and consideration of social & environmental factors in the UAE's financial decision-making shows the country's significance to sustainable finance. Overall, the year 2023 presents a unique opportunity for the UAE to make positive strides in its ESG journey.
UAE Green Agenda 2030: This agenda aligns closely with ESG principles, encompassing a comprehensive approach to sustainable development. It has five objectives: underpin a competitive knowledge economy, improve quality of life and social development, promote a sustainable environment, focus on clean energy, and promote sustainable use of resources. Under the Green Agenda 2030, the region aims at reducing the country’s emissions to less than 100 kilowatt-hours by 2030. These reflect a commitment of the region to improve the environment as a part of its ESG considerations.
Dubai 2040 Urban Master Plan: The Dubai 2040 Urban Master Plan exemplifies a commitment to ESG principles by focusing on sustainable urban development. Addressing resource utilization, fostering inclusive communities, incorporating sustainable and flexible mobility, and promoting a healthy environment aligns with the social and environmental aspects of ESG and the plan again reflects Dubai's dedication to ESG values. Overall, this plan ensures that the region strives for balanced and responsible urban growth that considers the well-being of residents and visitors while optimizing resource usage.
Sustainability Report Mandate: The UAE's mandate (Corporate Code for Public Joint Stock Companies) for public joint stock companies to publish annual sustainability reports, aligning with Global Reporting Initiative (GRI) standards, reflects a commitment to ESG principles. This initiative enhances transparency, corporate governance, and accountability, promoting responsible business practices and fostering a culture of sustainability in the corporate sector.
Compared to other countries in the GCC region, the UAE's strategic initiatives position it as a leading hub for sustainable finance as well as a leader in institutionalizing ESG initiatives. Since UAE’s Vision 2021 came out, the region’s commitment toward sustainable development, including social aspects (namely, economic diversification and environmental conservation), has led to numerous regulatory actions from entities such as the Securities and Commodities Authority (SCA), Abu Dhabi Global Market (ADGM), and Dubai International Financial Centre (DIFC).
These regulators have been involved in capacity building to strengthen ESG reporting in the region using conferences and webinars. At the same time, corporates in the region face increased scrutiny from investors seeking them to align with global climate goals. Alongside, to combat climate change, the region has launched initiatives like Dubai Clean Energy Strategy and Dubai Carbon Abatement Strategy.
Apart from mandating ESG reporting and advocating for promoting female board appointments, the government's appointment of a Climate Change Special Envoy, issuance of a Sustainable Finance Strategy, and commitment to a Net Zero 2050 initiative with substantial funding further underscore the nation's dedication to environmental responsibility.
In terms of “S” of ESG, the UAE federal government took a significant step toward advancing human rights across diverse industries by establishing a Human Rights Institute in 2021. This institute plays a pivotal role in monitoring and reporting instances of human rights violations within both the private sector and government entities. Moreover, UAE's new labor law, Federal Decree No. 33 of 2021, aligns with ESG principles, prioritizing labor rights, diversity, and employee well-being. Both approaches align with the principles of ESG considerations, emphasizing the social aspect.
In alignment with the governance pillar of ESG, the Securities and Commodities Authority (SCA) mandates a crucial requirement for publicly listed companies: the inclusion of a minimum of one woman member on the board of directors. This directive not only addresses gender diversity but also highlights the initiative to promote inclusive decision-making structures within corporate entities.
In addition, The UAE Federal Personal Data Privacy Law emphasizes the importance of protecting individuals' privacy rights, promoting transparency, and fostering trust between businesses and society through safeguarding personal data. This contributes to the broader ESG framework, emphasizing ethical business practices, accountability, and the social well-being of individuals, reinforcing the UAE's commitment to a sustainable and responsible approach to data management and aligning with ESG principles.
Furthermore, Mubadala Investment Company's USD 230 billion ESG unit project is poised to boost ESG principles significantly in the UAE. The substantial investment reflects a commitment to sustainable economic development, aligning with environmental and social goals. This initiative is likely to impel innovation, job creation, and advancements in clean energy, thereby positively impacting the social and environmental aspects of ESG. Additionally, the project's governance structure is expected to adhere to best practices, further contributing to the overall enhancement of ESG practices in the country.
In summary, UAE's multifaceted approach, including its regulatory measures to improve ESG reporting and its strategic initiatives to improve environmental investment, promote women empowerment, ensure data privacy, and promote job creation, reflects its comprehensive efforts to integrate ESG values into its economic and sustainable developmental agenda.
UAE’s strategic initiatives aimed at increasing sustainability in the region undeniably place them a step ahead in terms of ESG performance in comparison to its GCC counterparts. However, despite making strides in promoting ESG, the region faces multiple challenges with ESG integration and effectively communicating its ESG message. Besides, a lack of ESG training and development, a dearth of standardized ESG regulatory frameworks, and the absence of a mandatory climate reporting framework make matters worse.
Despite having a carbon neutrality target and making a “sustainable environment” one of its pillars, the country lacks mandatory requirements for climate reporting. While TCFD is seen as a best practice globally, considering the impact of climate change within ESG reporting will help firms in the region to ensure ESG integration. According to a survey by SEC Newgate across 12 nations in 2023, only around 60% of respondents from UAE corporations were aware of Net Zero, while more than 90% of them were aware of the importance of prioritizing ESG issues. In addition, research shows that corporations in the UAE struggle to communicate their ESG efforts to their community (mainly consumers). SEC Newgate’s survey revealed that the community in the region felt a lack of trust in communication regarding ESG efforts made by corporations in the UAE.
Another challenge that Small to Medium-Sized firms in the region face is their lack of access to resources for facilitating and imparting ESG skill development. As of 2023, about 557,000 Small and Medium Enterprises (SMEs) in the region exist, contributing around 63.5% of non-oil GDP to the country. Yet, a high cost of investment associated with training and development prevents them from implementing robust ESG reporting practices in their firms compared to other larger corporations. This issue is also associated with a lack of comprehensibility in terms of ESG compliance for many companies and it prevents them from focusing on ESG issues that are critical to their stakeholders. Companies in the region also suffer from a lack of transparency around ESG compliance, which has become a point of concern for investors in the region.
Similar to other countries in the GCC, the lack of standardized ESG reporting frameworks in the region is a major bottleneck affecting the clarity and confidence of reporting for firms. There are multiple frameworks, such as the TCFD, GRI, and CDP, among others, but each of them has a different purpose, making ESG reporting a challenge for companies.
Overall, companies in the region require an effective ESG communication strategy to improve their ESG efforts, for which they need to build an effective ESG strategy. Furthermore, it is important for companies in the region to focus on targeted ESG training for their employees and improve transparency on ESG issues that are vital to their stakeholders.
Astra can provide comprehensive support to organizations in the UAE by offering robust training, identification of relevant indicators, strategy development, and effective ESG reporting. Our team is dedicated to assisting companies in establishing a strong ESG reporting mechanism aligned to country-specific/global best practices, fostering overall ESG value creation. Astra's expertise extends to recognizing significant ESG initiatives and standardized reporting frameworks aligned with UN SDGs, GRI Reporting, MSCI, and other industry standards. We also evaluate guidelines and regulations for compliance, proactively pinpoint disparities within group companies, and formulate comprehensive action plans to address these gaps.
In partnering with Astra, organizations in the UAE can benefit from a holistic approach to ESG enhancement.
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