How the Middle East is driving ESG adoption
As the region’s reliance on hydrocarbon begins to fade, the subject of ESG is moving sharply into focus.
It’s no secret that the Middle East has historically lagged behind other regions when addressing ESG issues, but this is changing.
Momentum is building across the region to – not only is it gaining ground on its global peers, but also setting an example for others to follow.
So, why is this happening? On a recent edition of the Great Fund Insights podcast, Apex Group’s Global Head of ESG, Andrew Pitts-Tucker, joined Funds and Asset Management Counsel, Kamar Jaffer, to discuss ESG developments in the Middle East.
For many years, the Middle East relied heavily on the hydrocarbon sector, but the gradual divestment away from a hydrocarbon economy is shifting the focus to ESG.
There are other factors behind this, too. Much of the global ESG focus is on the environmental aspect, with social and governance elements often overlooked. But in the Middle East, there’s a growing awareness of the need to address all three. As Pitts-Tucker noted during discussions: “We’re seeing a huge pick up in [diversity, equity, and inclusion] so the social aspect of it is incredibly important.”
A further driver is the shift in monetary flows, with the Middle East now accommodating more international investment, meaning the fiduciary demands of international finance have started to impose themselves on the region.
The region’s commitment to addressing ESG issues is highlighted by several key developments and initiatives. In 2016, the United Arab Emirates became a signatory of the Paris climate agreement, pledging to reduce carbon emissions by 25% by the year 2030.
The Vision 2021 plan is another example. One of its four pillars is to create a nurturing and sustainable environment for quality living. Another initiative, Energy Strategy 2050, “aims to increase the contribution of clean energy in the total energy mix from 25% to 50% by 2050 and reduce carbon footprint of power generation by 70%.”
According to Pitts-Tucker, these developments are increasing the demands placed on managers when integrating ESG and sustainability considerations into their investment strategies. Chief among these demands is data collection. The sustainable finance disclosure regulation (SFDR) requires investment managers and advisers to disclose ESG data points.
This is increasing scrutiny on the funds managers are choosing to invest in. This is not solely about the underlying investments, but also the integration of ESG best practice for the entire lifecycle of an investment.
Managers are upping their game by showcasing the decision-making process. This spans the pre-investment stage, the company’s lifecycle, and even the exit stage, too. Apex Group is receiving many requests from managers for support in carrying out ESG due diligence. They want us to work closely with companies to drive the specific positive change they seek.
When managers choose to exit companies, which is inevitable at some point, they can highlight and show how they have improved the firm’s ESG baseline over the course of the investment lifecycle.
A key part of this procedure is for managers to think long and hard about the specific ESG data points they want to collect. It’s imperative for us at Apex to find out what they want to measure their underlying companies against. This provides managers with a clear idea of what they are trying to achieve.
As Pitts-Tucker explained to Jaffer during the podcast, in Apex Group’s experience, there are three core areas where managers are seeking help: deciding what data to collect, working out how to collect that data, and using our ESG expertise to generate reports. To help managers achieve their goals, we turn to our gap analysis report. In short, the data we collect goes into an anonymous pool, enabling each company to draw comparisons against sector peers.
We must stress that this is an ongoing process – data is collected and analysed every year. “It’s a very powerful and very useful tool for monitoring and maintaining the ESG status of a company to see how it’s doing against its peers. But more importantly, so it can see how it’s changing over time,” observed Pitts-Tucker.
The future for the Middle East is bright to say the least. There is significant scope for innovation, not least due to the region’s vast cash resources, offering the facilities to accelerate some of the superb emerging business practices. But also, for the time being at least, the Middle East is not hampered by significant regulation – it’s doing what it feels is the right thing to do.
It’s this moral-driven approach that should push the Middle East to the forefront of ESG integration, moving the region from a laggard to an exemplar.