Responding to ESG demands

Businesses around the Middle East recognise the relevance of ESG reporting, but the lack of uniform standards and frameworks complicates the approach

Key takeaways:

• Supply chains stakeholders are becoming more vocal when it comes to the environmental, social and governance performance of a business
• ESG reporting is commonly seen as a complicated process, weighed down by a lack of uniform, globally accepted standards and limited guidance from public entities
• The rising importance of personnel such as chief sustainability officers is aiding in measuring and reporting non-financial information
• The Middle East’s financial markets have widely issued voluntary and mandatory ESG disclosure guidelines

As governments implement the UN Sustainable Development Goals (SDGs) and their own national targets, organisations and their supply chains must rapidly adopt new ways of measuring and incentivising the right environmental, social and governance (ESG) behaviours to not just comply with reporting standards, but drive the right outcomes forstakeholders, investors and customers.

Against a backdrop of climate and societal change, stakeholders across the supply chain have become more aware, ready to question working conditions, supplier arrangements and environmental impact, boycott goods and services, hold boards to account and disinvest.

However, understanding and implementing the appropriate framework to guide ESG behaviours is not an easy task. ESG reporting, which forms a key part of the overall governance framework, is often regarded as an overwhelming process.

Moreover, the question that arises is that – why must companies take the onus of driving the ESG agenda forward?

“As significant users of natural resources, employers of scale and the source of much technological innovation, companies do have a significant impact,” explained Damian Reagan, assurance leader for sustainability at Deloitte Middle East. Reagan was the host of an exclusive workshop held at the inaugural MEED-Mashreq Business Leaders Forum titled the ESG Impact on Modern Supply Chains.

“Their license and ability to trade may be provided by governments and regulators, but influence over companies’ strategies and operations also lies with its stakeholders: shareholders/owners, clients, consumers and employees. If companies do not recognise the importance of their role, then stakeholders will take action.”

As stakeholders increasingly make their demands known and the weight of their decisions have more influence, companies are being urged to improve their communications and increase transparency.

In January 2023, the GCC Exchanges Committee, chaired by the Saudi Exchange, issued a unified set of voluntary ESG disclosure metrics that includes 29 standards aligned with the World Federation of Exchanges (WFE) and Sustainable Stock Exchanges Initiative (SSEI), and comprise categories across GHG emissions, energy usage, water usage, gender pay, employee turnover, gender diversity, data privacy, ethics and more. The indicators are mapped against the GRI standards.

The committee includes Abu Dhabi Securities Exchange, Bahrain Bourse, Boursa Kuwait, Qatar Stock Exchange, Muscat Stock Exchange, Saudi Exchange and Dubai Financial Market. The metrics do not replace existing ESG disclosure guidelines for GCC stock exchanges.

But key to communication is information, and in this case, it is often non-financial information, such as carbon reporting, water usage, waste produced, diversity metrics, governance policies and practices that is needed. In many ways, the reporting of non-financial information is becoming as relevant to stakeholders as traditional financial information.

“Companies are not as mature in terms of collation processes and controls, calculation methodology and disclosures for non-financial information, as they are with financial information,” said Reagan. “However, the industry is responding by creating ESG accounting and reporting standards and disclosures, developing careers for professional ESG managers, and expanding the role and importance of the chief sustainability officer.”

The changes are all happening in the face of what Reagan describes as a “tidal wave of legislation, regulatory requirements and expectation driving the production and disclosure of such information”, which will inevitably impact and roll out across all financial markets, including those in the Middle East.

For instance in January 2021, the UAE Securities & Commodities Authority issued a circular that required all companies subject to the Joint Stock Companies Governance to complete a sustainability report as part of their set of integrated reports, in line with the internationally-recognised Global Reporting Initiative (GRI). Reports need to be completed on an annual basis, within three months of fiscal year-end. The UAE is the first in the region to mandate formal reporting requirements for issuers.

A GRI sustainability report typically provides material non-financial performance information about a company, highlighting ESG concerns. It explains the strategy put in place to set goals, measure performance, manage sustainability-related impacts and risks. Importantly, it must also be balanced and disclose a company’s potential negative impact, as well as its positive impact on the environment, society, and economy.

“We are seeing these initiatives in parallel to significant local changes across the Middle East with regards to diversity and inclusion, supply chain “in-country value” localisation initiatives and worker welfare concerns. These are all of great interest to stakeholders, and raise their own challenges in reporting,” said Reagan.

The Middle East will not be immune to the challenges of ESG or the weight of non-financial reporting that stakeholders increasingly demand.

“It is time for Middle East companies to be part of the global response to these ESG issues and take action in the development of their response to and reporting of ESG, recognising their role in driving a more equitable and sustainable economy and society, both now and in the future,” said Reagan.

ESG in the Middle East financial markets

• Abu Dhabi Stock Exchange (ADX) – SSEI* partner; issued ‘ESG Disclosure Guidance’ in 2019
• Bahrain (BHB) – SSEI partner; issued ‘ESG Reporting Guide’ in 2020. Central Bank of Bahrain aims to issue disclosure guidelines in 2023
• Dubai Financial Market (DFM) – SSEI partner; issued ‘ESG Reporting Guide’ in 2019; issued the S&P/Hawkamah UAE ESG Index in 2020
• Egypt (EGX) – SSEI partner; issued ‘Model Guidance for Reporting on ESG Performance & SDGs’ in 2016
• Saudi Arabia (Tadawul) – SSEI partner; issued ESG guidelines in 2021
• Kuwait (BK) – SSEI partner; issued ESG guide in 2021
• Oman (MSM) –SSEI partner; established department focused on ESG and diversity and inclusion in 2021
• Qatar (QSE) – SSEI partner; issued ‘Guidance on ESG’ in 2016

*SSEI = Sustainable Stock Exchanges Initiative