Sustainable finance is gaining momentum in the Middle East. While fewer investors than elsewhere have firm-wide policies on responsible investing or ESG (36%, against a global average of 51%), a large share (41%, more than anywhere else) are intending to develop a policy.
This stage in the region’s evolution of sustainable finance means the survey produces some contrasting results. Among issuers, 93% say environmental and social (E&S) issues are important to them — but only 65% of investors feel that way. Within these majorities, the shares saying E&S issues are ‘very important’ are lower than in other regions, though this is somewhat less true in Saudi Arabia than the rest of the Middle East.
Yet for market participants that do respond to these issues, the level of engagement with some issues — such as the UN Sustainable Development Goals (SDGs) — is high. Issuers and investors also adhere strongly to core values, while the COVID-19 pandemic has clearly strengthened interest in sustainable finance in the region. Issuers and investors also see significant opportunities for sustainable infrastructure investment, especially in energy and water. Some aspects of sustainable financing and investing are coming from a low base, though. An exceptionally meagre 7% of investors say they always take ESG factors into consideration in their investments, for example. Nor will many support environmentally or socially desirable projects at the risk of lowering their returns.
Similarly, despite the SDGs’ focus on prosperity, health and security for all, fewer investors than elsewhere (17% versus a 28% global average) view this as vital for economic success.
Despite 49% having expressed interest in the product last year, few issuers have issued green bonds or green/sustainability-linked loans yet — perhaps unsurprising when 50% of investors in the region say they will not buy the former. Issuers also feel that as few as 3% of their investors are excited by their sustainability efforts and drawn to invest as a result.
This could change, though, as Middle Eastern investors are now ahead of both Asia and Europe in regarding client demand as an E&S driver. The share of investors in the region who say they feel held back from pursuing ESG investing more fully and broadly has fallen, from 77% last year to 69% — though this is still much higher than in other regions. Among those who feel held back, the most commonly cited reasons are the same as in 2019: lack of ESG data comparability between issuers (55%, from 54% last year), shortage of expertise or qualified staff (50% from 46%) and lack of demand from clients (44% from 41%).
More positive signals emerge from the number of investors who expect to adopt ESG policies. And among the minority who have done so already, very high numbers seek out material ESG issues when they invest and incorporate impact goals. Also, Middle Eastern investors are optimistic about the benefits of ESG.
More in this region than elsewhere see potential for ESG strategies to outperform. Yet investors do feel held back in responsible investing. They attribute this to a range of factors, including lack of comparability of ESG data, shortage of expertise locally and a lack of demand from asset owners.
More generally, moral values remain influential in the region. When asked why they care about environmental and social issues, 62% of issuers and 47% of investors say ‘we believe it’s right’ — in each case, the strongest level globally (though the proportions have fallen from last year, as in other regions, as other factors have grown in importance, such as financial performance and external pressures). This year’s global averages are 55% and 38%. Moreover, an exceptional 70% of issuers in the UAE answer this way.
Pandemic awakening Growing attention to employees’ health and wellbeing
The global COVID-19 pandemic has accelerated engagement with ESG issues in the Middle East. Above average proportions of issuers (44% versus the 41% global average) and investors (30% versus 29%) now believe more strongly than before in the importance of becoming sustainable or considering ESG issues in investing. Saudi investors have particularly increased their ESG focus.
An above average proportion of UAE issuers say they temporarily lowered their emphasis on sustainability to focus on other issues, however. The pandemic has also raised emphasis on social welfare in the region, with an unmatched 43% of issuers and 36% of investors regarding this as more important than before. Moreover, two thirds of issuers put greater emphasis on employees’ social wellbeing than before and over half of investors see greater value in organisations that take care of employees’ health and avoid excessive management pay. Each of these proportions is the survey’s highest level globally for that issue.
All the same, responses are inconsistent. For example, despite the increased emphasis on social welfare and wellbeing, only 7% of Middle Eastern issuers say the pandemic has made being sensitive to society’s needs more important to them. A higher proportion (15%) regard this as less important now.
Similarly, the share of investors that see greater value in organisations that support employees’ social wellbeing is below average.
Disclosure to grow Investors and regulators will demand more information
Most issuers in the Middle East disclose information about their environmental and social impacts, but the nature of disclosures appears quite light.
Only 2% say they do not disclose — well below global levels — and most are content to do so, with only 4% saying they disclose too much, again below the worldwide norm.
Moreover, more than anywhere else, issuers in this region expect their disclosure to increase. Altogether, 57% expect this, against 45% globally. Some 21% of issuers welcome the increase; 36% believe what they are doing now is about right but say investors or regulators want them to disclose more.
The expected rise in disclosure makes sense when issuers are asked what they disclose. Now 90% reveal details of their sustainability strategies, but this is below the global average of 96%. Middle Eastern issuers are the most likely in the world to disclose their strategies for climate change — 98% say they do. And they are well above average for reporting on their alignment with the Paris Agreement, with 84% claiming to do this. Many disclose how they are aligned with the Sustainable Development Goals, too.
of issuers regard social welfare as more important than before the pandemic
But when it comes to more factual information, less is revealed. Of issuers in the Middle East, 18% publish their carbon footprints, against a global average of 54%, and for other environmental metrics it is 73% in the Middle East, 84% globally.
Issuers here make greater use than elsewhere of channels other than annual and corporate social responsibility (CSR) reports, such as websites. Of seven areas of disclosure scrutinised, for six of them, Middle East issuers have above average disclosure through other channels.
Like issuers, the region’s investors have limited alignment with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) or other reporting frameworks. Both groups lag their global averages significantly.
Infrastructure potential Water and energy top of investment priority lists
Middle Eastern issuers and investors see clear potential for sustainable infrastructure investment, though they emphasise different areas for this.
Unsurprisingly, given the region’s climate, investors particularly highlight opportunities in improving water and waste water infrastructure — ahead of those elsewhere.
Issuers emphasise a different area, but again one prominent in the region — energy.
The intensity of their enthusiasm for opportunities in lower carbon forms of fossil fuel energy, such as gas, is unmatched. Their appetite for emissions-free sources such as wind, solar and tidal is also very high.