Bloomberg Intelligence forecasts that the total market value of ESG investments will reach $53 trillion within the next five years, and that ESG will represent a third of the assets under management.
Real commitments are being made by buy-side players throughout the world into achieving net zero emissions by 2050 and restricting global warming to within two degrees above pre-industrial levels. This includes the six member countries of the GCC (Gulf Cooperation Council) in the Middle East – United Arab Emirates, Saudi Arabia, Qatar, Oman, Kuwait and Bahrain – which are still heavily reliant on fossil fuels for a significant portion of their GDP.
Still, questions remain. What is the perspective on ESG in the Middle East? How is a region which has been so reliant on oil preparing for the future? Why is ESG data so important? When’s the right time to disclose ESG data? How to navigate the plethora of ESG analytics? How to truly measure and compare performance? These were the kinds of questions being asked – and answered – by two expert panels during the first event in Bloomberg’s Middle East Insights Series, held virtually on March 9, 2021, and hosted in collaboration with Fitch Ratings.
The picture in the Middle East
Transitioning away from oil and gas is a major focus for countries in the GCC which have historically been —and still are — dependent on oil and gas.
Revenue from fossil fuels makes up 40% of the GDP in the GCC, except for Bahrain (where it is 20%) which has diversified.
“There is an increased sense of urgency in discussions around sustainability and achieving sustainable development goals. You really can’t separate the various economic visions of the countries from their capability to meet ESG goals, because they go hand in hand,” said Suha Karzoon of Mumtalakat.
“ESG is at the forefront of the agenda for many of the governments in the region,” agreed Sarah Usmani of First Abu Dhabi Bank, going on to point out that the UAE has had initiatives in place for some time now.
The panelists also pointed out that in addition to sustainability concerns, attention on the “S,” or social component of ESG, is high in the Middle East.
Habib Abdur-Rahman of Investcorp highlighted the synchronicity between Shariah-compliant investing (which complies with Islamic law and therefore disallows particular income sources) and a number of ESG’s social desirables.
Zainab Faisal Kufaishi of Invesco Asset Management commented that shifting the balance away from fossil fuels is going to be a multi-generational process and that the social aspect of ESG has come to the fore in the Gulf in the wake of the COVID-19 global health pandemic.
Data disclosure is essential to ESG
All panel members agreed that ESG has quickly moved from the periphery of company and shareholder concern to center stage and that the time to disclose data is now.
The speakers also agreed that strong action around ESG is likely to lower risk and bring returns, particularly in the medium- to long-term. Venn Saltirov of BlackRock shared that BlackRock’s entire business (not just the sustainable portfolios) considers sustainability and climate as investment risks.
“We want to integrate them into our decision-making process, whether the data is perfect or not. We cannot wait for that because the lack of data doesn’t mean that the investment risk is not there,” said Saltirov.
“We are asking companies in carbon-intensive industries to discuss how aligned they are to a net-zero scenario. We’re asking them to disclose their emission reduction targets. We want to understand what their business will look like in 2050.”
The challenge of standardization
Standardization of data remains a challenge, both within a region and across regions.
“We’re seeing a massive increase in investor demand for information around ESG. But there are over 650 different metrics out there from different standard setters. And so, the biggest issue we’re facing is the ability to get hold of consistent, transparent and cross comparable data,” said Steel.
Corinne Neale of BNY Mellon pointed out that dense or conflicting data make it hard for investors to be confident their investment choices match their values and can cause concern about green or social washing.
“Asset owners around the world tend to have different focus areas. The reality is that there are multiple frameworks right now. Asset owners typically pick and choose; we see them blending frameworks and building their own framework to meet their own purpose,” said Neale.
Several data service providers have developed tools that will help to standardize and improve data to help investors navigate the transition towards a low carbon economy and as well as greenwashing risks.
“It is precisely because of the strong momentum of the industry, that investors need to be cautious in evaluating the data and navigating the risk of greenwashing, or exaggerated claims of environmental compliance,” said Adeline Diab, head of ESG and thematic investing EMEA for Bloomberg Intelligence. “For example, the number of companies racing to set carbon targets increased 319% in 18 months, pausing significant challenge for investors because the data is disparate, difficult to understand and impossible to compare.”
“So this is the problem we are trying to solve with the development of BI Carbon – curated dataset and score that Answers one of the most critical questions in ESG: it look at where companies’ emissions are, where a company is planning to be in 2030 and 2050 with respect to carbon performance and how does this compare with peers and more importantly to the requirements of the Paris Agreement to limit global warming by 2 degrees Celsius.”
Recognizing and offsetting climate risk
The “E” in ESG embodies climate risk and continues to be the acronym’s most dominant paradigm, both in the Middle East and throughout the world.
Global companies like Bahrain-based Alba (Aluminium Bahrain, the world’s largest aluminum smelter outside of China) have progressed their ESG strategies and reporting, particularly in the past five years. Yet Alba still faces significant challenges.
“They will be heavily impacted by the EU’s carbon border tax. In addition to the normal carbon footprint reduction measures, they are investing in alternative energy sources to position themselves in a more environmentally friendly way,” said Karzoon.
For climate-focused portfolio managers, the question is whether to divest assets that represent a climate risk, or to engage with companies in the hopes that they will transition.
“Our viewpoint is that we should continue to invest and engage. There’s a lot of investment benefit to be had by tilting the portfolio towards the companies that are performing on things like climate metrics and carbon intensity,” said Lacaille.
Looking ahead, Diab said that with COP26 (the 26th UN Climate Change Conference) coming up in November this year, she expects ESG disclosure will soon be pushed into financial accounting and reporting.
She added, “a perfect storm created by the pandemic and the green recovery in the US, EU and China and the race to net zero will likely reveal how ESG can help assess a new set of financial risks and harness capital markets to drive change.”
Andrew Steel of Fitch Ratings agreed and said that he anticipates companies will follow net-zero target announcements with details of how they plan to meet those targets soon. He also pointed out that timeframe and speed of action are important variables because the closer a company gets to 2050, the higher their risk profile becomes.
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