Gulf states and its investors can show how ESG-led investments can work
Even with investors insisting, there is no broad regulatory framework for such investments
We are one year on from the pandemic-driven meltdown and have witnessed the far-reaching impact the crisis has had on economic activities and social life. As vaccines pave the way for ‘normal life’ to re-emerge, we see evidence of the pandemic’s enduring influence on behavior, preparedness and the attention given to social and economic imbalances.
Nowhere is this more evident than in the Gulf region, where there has been an increased focus on sustainable finance and interest in environmental, social and governance (ESG) issues as governments set their sights on their national economic and sustainability goals.
There is no doubt that the lower oil demand and declining prices during the pandemic will have significant implications for fiscal sustainability in oil and gas-producing countries. News of new virus strains and more lockdowns may also have a negative effect on demand.
No time like the present
This, coupled with the vulnerability of depleting their natural resource base, means that petro-states will need to act now to transition away from the dependence on fossil fuel revenues. The urgency is driven not only by environmental concerns, but also the need to change the social and economic balance to ensure a sustainable future.
This shift in focus is also important to investors in the region, who are looking to express their values and priorities in the investments they hold through incorporating sustainable finance approaches into their portfolios.
Set the transparency benchmark
To be successful, the development of sustainable finance needs to be grounded in access to high quality and meaningful ESG disclosures. While numerous standards are already in place, there remains no single regulatory standard that provides a comprehensive framework for companies to disclose in a way that meets the needs of investors.
Greater convergence in reporting could fill gaps in core metrics that investors rely on to develop their screening tools and assessment methodologies. Convergence in ESG reporting standards would also enable such data to be audited, which is increasingly important to investors that base capital allocation decisions on such information.
The lack of global regulatory ESG framework has given the region a golden opportunity to play a significant role in shaping sustainable finance practices.
Make it part of changes
The stage is set. We are seeing phenomenal change - and adoption - in the region as related to diversity in the workforce and on boards of directors. A number of Gulf countries are already leading the way to create a more sustainable future by developing smart cities such as Neom in Saudi Arabia, launching initiatives such as the Abu Dhabi Sustainable Finance Declaration, and setting goals from an environmental perspective and future cashflow generation through national vision strategies.
Sovereign wealth funds are at the forefront of the ESG conversation, with Abu Dhabi Investment Authority (ADIA), Kuwait Investment Authority (KIA), Qatar Investment Authority (QIA) and Saudi Arabia’s Public Investment Fund (PIF) among the founding members of ‘One Planet Sovereign Wealth Funds’ to integrate risks associated with climate change.
Given the initiatives already underway, and the relatively nascent sustainable financial industry in the region, local regulators are in a prime position to act as an enabler for the development of this market. Market-led initiatives and soft law that emphasize industry best practices and the development of expertise across firms could prove effective.
Regulators have an opportunity to be leaders in making sure we refine these expectations. Measures that carry ESG considerations with a focus on principles that cater to the breadth of models, asset classes and investment approaches, would allow for continued innovation while reducing market fragmentation.
Investors demand
These measures will become increasingly important in a regional atmosphere in which climate-focused factors have incentivized a new approach to ESG. Middle East investors have highlighted concerns around climate-based risks such as changes in oil demand, rising temperatures and water supply, stranded assets and mitigating the impact of extreme weather on their portfolio.
This level of concern underscores the fact that the challenges and opportunities that come with developing ESG frameworks are earning greater recognition. This portends well for the region, where we are seeing significant change and adoption, which ultimately is beneficial for long-term performance across the Gulf.