Momentum is building around the Middle East’s ESG agenda, driven by numerous government initiatives, efforts to diversify away from oil and gas, and increasing requirements for disclosure on sustainable activities and reporting. Recent sustainable financing firsts in the region signal the success of – and opportunities available to – companies committed to integrating ESG goals into their corporate and investment strategies.
In alignment with global sustainability trends, companies in the Middle East are ramping up their efforts to implement ESG frameworks and policies, as stakeholders – including investors and consumers – increasingly demand businesses measure and address their ESG impacts.
In an early 2021 survey of Middle Eastern CEOs by consultancy firm PwC, 46% of regional respondents said that they aim to increase investments in ESG and sustainability initiatives over the next three years as part of their post-pandemic transformation planning.1
Although the region as a whole still lags its global counterparts in terms of ESG progress – likely as a result of its historical reliance on hydrocarbons – countries like the United Arab Emirates (UAE) and Saudi Arabia are now striving to establish themselves as sustainability leaders.
“We’ve recently started to see a real conscious effort and shift in focus towards ESG and sustainability in the region, and much of that is being led by the UAE,” says Sereen Ahmed, head of trade and working capital Middle East at Barclays. “We’re having a lot of conversations with clients about what they need to think about in terms of their ESG impact and credentials. Whereas in the past this was often considered a ‘nice to have’, companies are now really starting to face up to their responsibilities around incorporating ESG concerns into their business strategy.”
Efforts to diversify economies away from oil and gas, coupled with government directives, are driving much of the impetus.
The UAE – a signatory to both the Paris Agreement and the UN Sustainable Development Goals – has adopted a number of charters related to sustainability. UAE Vision 2021, launched in 2010, prioritises “sustainable environment and infrastructure” and sets national targets related to clean energy, water availability and productivity, reduction of carbon emissions, and energy intensity, as well as a list of key performance indicators to measure its progress. Other initiatives in the Gulf state include Energy Strategy 2050, which among other things aims to increase the contribution of clean energy in the total energy mix from 25% to 50% by 2050; the UAE Green Agenda 2015-2030, an overarching framework of green economy actions; and the National Innovation Strategy, a plan to stimulate innovation in a number of key sectors, including renewable energy.
There has also been a push for UAE-based companies to disclose their ESG performance. The KPMG UAE Survey of Sustainability Reporting 2020, released in December, finds that corporate sustainability reporting among the top 100 UAE companies increased from 44% in 2017 to 51% in 2020, with multiple industries, including construction and materials, financial services and oil and gas, seeing an uptick in reporting rates.
“With the recent introduction of ESG disclosure guidelines from the Abu Dhabi Securities Exchange (ADX) and Dubai Financial Market (DFM), we expect this rate to continue to increase in the coming years,” says the report, which also predicts a rise in the number of companies attaining third-party assurance for their sustainability data in the coming years.
Pioneering companies lead the way
“The Gulf region has always responded quite quickly to global trends, and I think we’re likely to see a sudden acceleration as the region moves to become more green,” says James Binns, global head of trade and working capital at Barclays. “As we’ve seen in other markets, there will be a number of larger businesses that lead the way and ensure that priorities at government level make their way to company boardrooms.”
One such business is Dubai-headquartered multinational logistics firm DP World, which two years ago became the first company in the region to sign a loan transaction with an embedded environmental target. The conventional and murabaha facility was structured in a way that the margin was linked to DP World’s carbon output, thereby incentivising the company to reduce its greenhouse gas emissions. A total of 19 financial institutions supported DP World in this innovative financing structure.
“As a global supply chain solutions provider, our ambition is to lead the industry for all our stakeholders, and we continue to integrate sustainable best practice into every aspect of our business, which includes finance,” says a DP World spokesperson. “By linking our core banking facility to our environmental performance, we will continue to improve our efficiency on greenhouse emissions and show our commitment to sustainability and the environment.”
In 2019, the company took its commitment a step further by electing to establish a Sustainable Development Financing Framework, which enables it to issue green, social, or sustainability bonds – or sukuks – and use the proceeds to finance social and environmental sustainability projects ranging from renewable energy, energy efficiency and marine conservation to infrastructure, education and female empowerment initiatives.
“As sustainability considerations now form part of institutional investors’ credit evaluation criteria for investment decisions, we have established the framework to complement our ongoing and planned sustainability initiatives to ensure our value proposition to the broader investor base is compelling, in turn creating access to additional pools of liquidity,” says the spokesperson.
Among DP World’s many initiatives is its involvement – and considerable investment – in Virgin Hyperloop, the technology company working to commercialise the new high-speed mode of passenger and freight transportation with zero direct emissions.
“As fighting against climate change becomes an existential issue for cities across the globe, hyperloop will create a new, shared, electric mobility model for helping to permanently reform an industry with some of the world’s highest carbon emissions,” says the spokesperson.
Saudi Arabia is expected to become the first GCC country with a hyperloop rail system.
Supporting ESG agendas
Banks can play a vital role in helping companies achieve their sustainability objectives, and there has been substantial growth in the provision of solutions over recent years.
In terms of future product innovation, the team at Barclays agrees that – while green products will remain a priority – there will likely also be an increasing prevalence of social and sustainable solutions across the financial markets, including trade. Where traditionally companies would start out with a focus on the environmental aspect of their business, borrowers are now increasingly setting performance targets across all three principles: the ‘E’, ‘S’ and ‘G’.
Across the trade ecosystem, independent ratings and analysis firms are helping lenders establish frameworks that set out the parameters for what qualifies as sustainable, and serve as the basis for tracking and disclosing performance against commitments.
“Being able to meet green funding requirements with sustainability-linked finance products is important as it allows companies to demonstrate their ESG commitment to their investors and other stakeholders,” says Binns. “Equally important is that they can prove, via external certification, that the investment is absolutely and objectively sustainable in nature.”
According to Ahmed, the demand that banks are currently seeing in the Middle East is likely to herald the rollout of more sustainability-linked trade facilities for clients across the region.
“As we start helping clients learn more about ESG activities and reporting and how that may assist them in terms of access to funding, there is definitely the potential to implement these facilities for more companies,” she says. “But it’s really important that we remain patient, because this is a journey and a learning experience for everyone.”
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