Carmen Cojocaru

Managing Partner at Kreston Romania

Carmen Cojocaru is a highly qualified professional with extensive experience in the fields of accounting, audit, tax, and business process outsourcing. Additionally, Carmen’s involvement with the ESG committee and Kreston Global highlights her commitment to promoting ethical business practices and fostering sustainable growth within the industry.

ESG reporting in the Middle East

April 13, 2023

Experts in our ESG committee comment on the progress of ESG in the Middle East, exploring the implications of new legislation and how it is changing doing business in the region.

ESG in the Middle East

ESG reporting is becoming increasingly important in the Middle East and North Africa, as investors and governments look for companies that are committed to sustainability. In this article, we will take a look at ESG reporting across the MENA, with a focus on Saudi Arabia, UAE, Turkey, Egypt, and Israel.

As stakeholders and investors seek greater transparency, the popularity of ESG is on the rise. According to Global Sustainable Investment Alliance 2020 biennial report, at the start of 2020, sustainable investment reached USD35.3 trillion for the five major markets United States, Canada, Japan, Australasia and Europe, a 15% increase in the past two years (2018-2020) and 55% increase in the past four years (2016-2020). This is expected to grow to $100 trillion by 2025.

The Middle East is not immune to this trend. Here are some ways that transparent, principles-driven businesses can benefit from this trend:

• Increased investment: as investors seek out companies that align with their values, businesses that prioritize ESG principles may see an increase in investment. This can help companies grow and expand their operations.
• Improved reputation: by prioritizing ESG principles, businesses can enhance their reputation among customers, employees, and the wider community. This can lead to increased loyalty and support from stakeholders.
• Reduced risk: ESG principles can help companies identify and manage risks related to environmental, social, and governance issues. By addressing these issues proactively, businesses can reduce the risk of negative impacts on their operations.

Some of the world’s leading ESG investors are already active in the region. For example, BlackRock, the world’s largest asset manager, has committed to investing $500 billion in sustainable assets in the Middle East over the next five years. This growing interest in ESG is driving demand for ESG reporting from companies in the Middle East. However, the region is still lagging behind other parts of the world regarding ESG reporting.

ESG Reporting Gap in the Middle East

A recent study by PwC found that only 42% of companies in the Middle East have a standalone ESG report. This compares to 73% of companies in Europe and 69% of companies in North America. The study also found that companies in the Middle East are more likely to report on environmental factors than social or governance factors. This is likely due to the fact that environmental issues are more visible and measurable than social or governance issues. The report commented:

“Environmental issues are increasingly coming to the fore as governments in the region seek to transition from oil and gas. In the run-up to the COP26 Climate Change Conference in Glasgow, the United Arab Emirates committed to net-zero carbon emissions by 2050; Saudi Arabia and Bahrain also pledged to achieve net zero by 2060.“

“Social values, such as supporting communities, are also important for businesses in the region. This commitment was seen clearly during the pandemic when family businesses in the region actively championed initiatives to help their people, suppliers and local communities. According to the results of PWC’s Middle East Family Business Survey (2021), 84% of the region’s family businesses retained as many staff members as possible, 56% took action to support the local community and 45% provided financial support or loans to their employees.“

“Governance standards and codes are already adopted in the region and are increasingly an area of focus. A review in 2014 by the OECD highlighted that several countries in the region had issued governance codes and guidelines for banks, insurance companies, state-owned enterprises, securities companies, and small and medium-sized enterprises (SMEs). Central banks, capital market authorities and corporate governance institutes issue these guidelines and codes. As the ESG agenda advances in the Middle East, some banks in the region are beginning to screen their investment products and loan portfolios for climate impacts, illustrating how governance is in constant evolution in the region.”

Opportunities for Improving ESG Reporting in the Middle East

Despite the challenges, there are a number of opportunities for companies in the Middle East to improve their ESG reporting such as adopting international standards such as the Global Reporting Initiative (GRI) or the Sustainability Accounting Standards Board (SASB) to help provide a framework for companies to report on their ESG performance in a consistent and comparable way. Sustainability Disclosure Standards being issued by The International Sustainability Standards Board (ISSB), where it has issued two exposure drafts:

1. IFRS S1 – General Requirements for Disclosure of Sustainability-related Financial Information

2. IFRS S2 – Climate-related Disclosures

The standards will likely become effective starting January 2024 and are expected to be issued by the end of Q2 2023.

Another opportunity is to engage with investors and other stakeholders. Investors are increasingly looking for companies that are committed to sustainability. By engaging with investors, companies can better understand their expectations and develop ESG reporting that meets their needs-High-quality reporting is directly related to increased value for an entity’s stakeholders. Entities with strong ESG performance, for example, are often perceived as lower-risk investments, making them more appealing to investors.

Finally, companies can also use ESG reporting to attract and retain employees. Millennials and Generation Z are increasingly interested in working for companies that are committed to sustainability. By reporting on their ESG performance, companies can attract and retain top talent.

In conclusion, ESG reporting looks increasingly important in the Middle East. Companies in the region can improve their ESG reporting by adopting international standards, engaging with investors and other stakeholders, and using ESG reporting to attract and retain employees.

ESG reporting examples

Here are some specific examples of ESG reporting from companies in the Middle East:

• Saudi Aramco, the world’s largest oil company, publishes an annual sustainability report that covers its environmental, social, and governance performance. Aramco unveiled a green initiative endorsing a circular carbon economy and commitment to plant 50 billion trees in the Middle East.  
• Emirates NBD, a leading bank in the UAE, publishes an annual sustainability report that covers its environmental, social, and governance performance.
• FAB, UAE’s biggest bank is the first bank in the MENA markets to set ‘financed’ emission reduction targets for the oil and gas, power generation and aviation industries. FAB is focused on the Net Zero push and is expanding the scope of green financing apart from operational changes.

• Turkish Airlines, a leading airline in Turkey, publishes an annual sustainability report that covers its environmental, social, and governance performance.
• EgyptAir, a leading airline in Egypt, publishes an annual sustainability report that covers its environmental, social, and governance performance.
• Israel Aerospace Industries, a leading defence company in Israel, publishes an annual sustainability report that covers its environmental, social, and governance performance.

The challenge is to eliminate energy poverty as well as to keep the goal of capping global warming at 1.5 degrees Celsius alive.

These are just a few examples of the many companies in the Middle East that are taking ESG reporting seriously. As the demand for ESG information continues to grow, we can expect to see even more companies in the region publishing ESG reports. It has to be mentioned that ESG reporting has been made mandatory for the Public Joint Stock Companies in the UAE. EY Carbon – a strategy to decarbonise businesses by developing a credible plan to achieve net zero – is highly focussed in the region.

Companies need to consider that ESG is supported by a generation that values its principles, and this factor makes the framework an increasingly sought-after component of modern business.