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3rd March 2020

Hawkamah promotes ESG, encouraging investors to assume stewardship role

By Dr Ashraf Gamal El Din, CEO of the Hawkamah Institute for Corporate Governance

‘Companies should not only concentrate on having good numbers on their financial statements, but on how these numbers came into existence.’

Covering more than 15 million square kilometres, the Middle East and North Africa (MENA) region accounts for approximately 6% of the world's population. Over the past century, MENA has experienced the world’s highest rate of population growth, increasing the demand for natural resources. The region’s natural environments, rapid development and diverse economies pose unique challenges in the push to meet the United Nations Sustainable Development Goals.

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Economies in the MENA region are undergoing significant change, and countries are positioned at different stages in terms of developing corporate governance frameworks.

The emerging market status of the Kingdom of Saudi Arabia, the United Arab Emirates (UAE), Qatar and Kuwait and Saudi Aramco’s initial public offering – potentially the biggest IPO in history – present the region with an opportunity to re-focus its efforts on sustainability by prioritising the environment, society and corporate governance (ESG).

The push for sustainability

No economy or organisation operates independently of its natural environment. The growing emphasis on sustainability is based on the realisation that natural resources must be managed to ensure their availability to future generations. While MENA has 60% of the world's oil reserves and 45% of the world's natural gas reserves, there is an urgent need to shift from the extractive industries – a driver of economic growth – to more sustainable industries. The UAE, Saudi Arabia, Kuwait and Qatar are investing in research and the development of renewable energy sources including solar and wind power, introducing legislation to limit pollution and encouraging the implementation of green initiatives and projects.

Regional governments are also focusing on building inclusive, cohesive societies in national agendas such as UAE Vision 2021 and UAE Centennial 2071, and companies and the societies in which they operate are highly interdependent. Organisations have a considerable impact on stakeholders and society, and companies rely on society for current and prospective consumers and human resources.

Any attempt to assess the sustainability of large companies should include an assessment of their social impact in terms of jobs generated, productivity and the provision of essential goods and services.

In line with the focus on sustainability, there is a growing trend for the region’s regulators to promote governance based on the recognition that well-governed companies are more likely to be profitable, responsible and sustainable. According to the S&P/Hawkamah ESG Pan Arab Index, the stocks of companies with good governance tend to out-perform other stocks in the same markets. Companies with good governance practices also benefit from better access to finance and higher operational efficiency, and they tend to attract a better calibre.

Answering the call for improved ESG reporting

With the support of the International Finance Corporation (IFC), Hawkamah and Standard & Poor's launched the first-ever MENA-wide ESG Index in 2011 to strengthen and promote the success of environmentally sustainable, socially responsible businesses in the MENA region. While the S&P/Hawkamah ESG Pan Arab Index shows that ESG reporting in MENA has improved, the focus has been on governance; regional corporations have considerable room for improvement in terms of reporting their environmental and social impacts.

In response to changing economic conditions and to the practices that played a role in sparking recent financial crises, institutional investors are increasingly focused on long-term risks and taking ESG reporting into account when assessing companies.

The approach to governance has shifted from shareholder-driven to stakeholder-driven. Over the last decade, investors have taken increasing responsibility for the stewardship of organisations and ESG. By helping to promote good corporate governance, stewardship enhances the stability of the financial market and contributes to economic growth.

The ESG Index is helping to attract international institutional investors looking for exposure to socially responsible companies in emerging markets. An increasing number of international and regional sovereign wealth funds and asset managers are also starting to take companies’ ESG disclosures into consideration. Investors are taking their stewardship role over the companies – and their impact on the society and environment – more seriously.

In order to make the region more attractive to institutional investors, there is a need to expand this ESG work to go beyond listed companies and include private companies, including some of the state-owned enterprises.

Dubai Sustainable Finance Working Group

With the aim of positioning Dubai as a leader for sustainable finance, Dubai Financial Market (DFM) and the Dubai International Financial Centre (DIFC) launched the Dubai Sustainable Finance Working Group in July 2019. As a member of this Working Group, Hawkamah Institute is contributing to the creation of a sustainable financial hub in the region, particularly focused on areas concerning ESG integration.

The Working Group seeks to encourage responsible investing and sustainable reporting. To cultivate sustainable companies and green financial instruments, the group aims to incentivise companies to be more proactive in terms of ESG and sustainability, and to educate banks to take sustainable business models into account. The group also seeks to promote diversity and inclusion by encouraging boards to appoint more women and young people.

The UAE – the most competitive economy in the Arab world for the 4th consecutive year – is now among the top 25 most competitive economies in the World Economic Forum’s Global Competitiveness Index 4.0. His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and Ruler of Dubai, called for hard work to improve the UAE’s performance on all competitiveness indicators, especially those associated with the UAE Centennial 2071.

The UAE’s Federal Competitiveness and Statistics Authority reported that government and private sector collaboration will be key to driving further sustainable development in the UAE. Hawkamah Institute is perfectly positioned to help facilitate this government and private sector collaboration, advancing the shared and mutually reinforcing goals of sustainability and competitiveness.

The history of Hawkamah

Established in 2006, the Hawkamah Institute for Corporate Governance has led the way to better corporate governance in the Middle East and Africa. The Institute was originally founded as a ‘think-and-do tank’ to research, advocate, advance and develop good corporate governance practices in the region by providing regulators, companies and organisations with practical tools to improve corporate governance. Hawkamah’s mission is to promote corporate sector reform and good governance by assisting regional countries and companies with the process of developing and implementing good and sustainable corporate governance policies, strategies and practices that enhance value creation.

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