The dominance of financial services in the GCC to accelerate ESG practices

Sustainability has grown in popularity in financial services in recent years, brought to the center of attention by stakeholders at all levels, including governments and regulators, investors and customers themselves.

Environment, social and governance (ESG) are central factors for measuring the sustainability and ethical impact of a company. Today, more than 90% of global emissions are now covered by net zero commitments.

In the Gulf Cooperation Council (GCC) alone, the financial sector is the largest contributor to the list, indicating that insurance companies have the potential to achieve high levels of ESG performance. Overall, GCC companies still have room for growth to meet the best global players with more mature ESG activity.

The latest report from the American consulting firm Arthur D. Smallentitled Actively shaping the futurehighlights how the dominance of the financial sector in the GCC is likely to accelerate ESG practices.

Across the GCC region, adoption of ESG requirements is largely voluntary, but development of requirements remains ongoing.

The best ESG performances come from different backgrounds, with the financial sector being the mainstay at 30%, followed by telecommunications at 20% and real estate at 10%.

Of the major insurers in the GCC region, only half disclose ESG information, but regional insurers are developing ESG practices and maturing in ESG reporting, with key best practices emerging.

Other large regional public-private organizations are developing frameworks for engagement in ESG finance. Majid Al Futtaima distribution conglomerate in the Middle East and Africa (MENA) region, is setting up a green finance framework to support its ESG activity. Saudi Arabia’s Public Investment Fund (PIF), a $430 billion sovereign wealth fund that has been actively involved in Saudi Arabia’s transformation, has partnered with black rock on ESG finance.

Next, HSBC and Saudi National Bank (BNS) have created a sustainable financing framework making SNB the largest banking group in Saudi Arabia, creating the first sustainable finance framework.

The Red Sea Development Corporation has been recognized as a global ESG leader in the real estate sector, because sustainability has been a fundamental guiding principle since the beginning of the regenerative tourism project.

The Arab Federation of Stock Exchanges currently benchmarks three ESG rating systems that cover companies in the region – Refinitiv The ESG score being the most recommended as it is widely used and directly measures the company’s ESG performance (against risk) offering a 97% share of the MENA region’s sustainability leaders score out of 100 points.

Refinitiv assesses ESG performance, engagement and effectiveness across 10 core themes while taking into account industry and company size biases, e.g. Aramco (44), Zain (68) and United Arab Emirates (35).

Another main ESG rating system used in the region is S&Pone of the largest rating agencies in the world that recently expanded in the ESG rating segment by combining a company’s ESG profile with the company’s ability to address ESG topics; while MSCI has developed a ESG index which measures a company’s degree of preparedness for ESG risks.

Andreas Bülow

“The GCC’s key ESG indicators are increasingly linked to global initiatives such as The United Nationssustainable development goals and the Global Reporting Initiative standards,” comments the report’s co-author, Andreas Buelowwho is associated with the firm’s Bahrain office

“Watching the region’s financial sector increase economic, social and governance relationships is a testament to how growth can increase reputation and value.”

Main regulatory requirements for some GCC countries

The UAE was the first country in the region to commit to net zero emissions and has undertaken major sustainability projects as part of its Net Zero 2050 initiative, while also requiring mandatory ESG reporting. from listed companies.

Players in the UAE market see opportunities in electric vehicles, charging and carbon capture. Overall, 58% of UAE investors see barriers to ESG investing, and 91% of issuers expect to reallocate capital towards positive environmental and social outcomes to a substantial or noticeable extent over the next five years. years. Issuers and investors want transparent data and advice on ESG principles.

Kuwait Investment Authority (KIA), the third largest sovereign wealth fund in the world, recently announced that it will make its entire portfolio ESG compliant. The ESG objectives of Kuwait Vision 2035 are linked to four of the seven pillars of the country’s national development plan. Overall, Kuwait has developed state-level support for ESG and encourages listed companies to engage in voluntary ESG reporting.

In Saudi Arabia, the Ministry of Economy and Planning is the lead organization carrying out Saudi Arabia’s commitment to achieving the United Nations Sustainable Development Goals, Vision 2030 and the National Transformation Agenda, overseeing major sustainability projects in the Kingdom, with the ultimate goal of reaching net zero by 2060.

Saudi Arabia is active in sustainability initiatives in the region, but has not yet developed ESG requirements for the private sector. Whereas Saudi exchange has not developed ESG indicators, it recommends several international initiatives, such as the Global Reporting Initiative (GRI).

Currently, ESG objectives are linked to three of the six pillars of Bahrain’s national development strategy: maintaining a safe and pleasant environment; achieve sustainable quality growth and improve the quality and accessibility of social services. While government stakeholders oversee specific aspects of ESG compliance, Bahrain encourages but does not require ESG reporting per se. Globally, Bahrain Stock Exchange recommends that companies report on 32 indicators: 10 environmental indicators, 12 social indicators and 10 governance indicators.

Main challenges to overcome:

  • Uncertainty over the definition of key terms leads to assumptions when defining and evaluating strategy.
  • The unavailability of quality ESG data throughout the supply chain underpins decision-making. For example, while the European Bank for Reconstruction and Development (EBRD) explores the digitization of green financethe lack of comprehensive and reliable end-to-end ESG data can impede progress.
  • The absence of market standards in terms of ESG rating. For example, comparing the ratings of different ESG rating providers at major banks shows great variability between these different providers.
  • Lack of incentives for financial institutions to focus on ESG while delivering expected returns to shareholders.
  • The lack of knowledge and skills within banks is exacerbated by the need for a cultural change to put ESG at the center of attention.
Georg von Pföstl, Director, Financial Services, Arthur D. Little Vienna
Georg von Pfoestl

“Many of these challenges have already been encountered by other sectors in their ESG journey. However, unlike manufacturers or consumer goods companies, financial services companies do not provide physical products,” added Georg von PfoestlDirector, Financial Services, Arthur D. Little Vienna.

“While they can – and should – achieve net zero in terms of their operational footprint, true sustainability requires ensuring customers and customers are also net zero. This means leveraging customer relationships and generate ESG impact by changing their behavior and becoming an internal partner to drive the transformation, rather than simply excluding certain sectors or customers.

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