Where next for ESG investing in the UAE?
Appetite for ESG funds in the MENA region has historically been lower than in other markets, but awareness of the strategies among institutional and retail investors has been building in recent years.
And with COP 27 due to take place later this year in Egypt’s Sharm el-Sheikh and COP 28 taking place in UAE next year, interest in ESG investing is set to grow further.
However, it will take more education and greater communication of the long-term benefits of ESG investing for it to become more mainstream in the Middle East. This is where the private sector and government can take an exciting role in helping the industry to develop ESG demand in the region, and particularly in the UAE.
Tackling ESG in the region
Authorities and the private sector still have much work to do to promote and incorporate ESG standards into companies across the MENA region.
For example, governance at portfolio companies and potential investment targets in some markets remains a challenging issue for investors. But more education and awareness on governance issues, along with pressure from investors should encourage a greater focus on governance in the future.
Awareness of the environment and the impact of climate change was already high before record temperatures hit throughout the region in June this year, and governments may now be encouraged to support green investment instruments, such as green bonds. And any incentives to issue more green instruments will only help develop the marketplace further.
Furthermore, regulators will be able to play a key role in improving diversity standards and corporate board governance enhancing companies’ social credentials.
There are challenges, however.
A lack of consistency in ESG ratings make it difficult to compare and use them consistently and will need regulatory intervention in order to develop new products and services to meet investor demands. Regulators will also need to encourage firms to identify and adopt measures that protect against any potential instances of ‘greenwashing’.
It’s not just the regulators that need to act. UAE-based LPs and sovereign wealth funds need to be more prescriptive on their ESG requirements for local managers to drive greater inflows into these strategies.
How can fund managers develop the ESG market?
We know there is growing interest in ESG investing, and there are many instances of fund managers working with the wider market to help develop new solutions and drive demand in the UAE and the wider MENA region.
Greater collaboration between the industry and corporate treasurers should help enhance demand for carbon credits in Abu Dhabi and the UAE and help grow the market, create more products, improve pricing and risk management tools.
Many investors will already be familiar with Islamic Finance, but there is often an overlap with sustainable finance. By raising awareness and educating investors, managers of sustainable finance strategies could reach a new audience.
What else can managers in the UAE do?
UAE and the region are well served by trade associations to tackle these important issues, but more thematic clusters could emerge to address issues being raised by regulators and government bodies.
For example, Abu Dhabi Global Market (ADGM) will soon be contacting signatories to the Abu Dhabi Sustainable Finance Declaration regarding potential next steps to set in motion sub-groups and working committees, and the region’s two leading investor associations – Middle East Investment Management Association and the Middle East Venture Capital Association – are also set to act further on ESG.
Further events in the sustainable finance and ESG space are planned in the future, so please keep an eye out on the ADGM and Apex Group website for further information.
Over 350 GPs in over 45 countries are already using Apex’s ESG services, to report on their investments in-line with ESG standards and regulations.