Implementing ESG strategy: How Middle East banks are faring

Financial institutions (FIs) in the Middle East have adopted environmental, social, and governance (ESG) criteria as key strategic elements in their commitment to going green.

As more reporting requirements become mandatory and stakeholders determine the need for a comprehensive approach to ESG, banks, and other FIs have responded by shifting their focus from defining the strategy to implementing it, with data governance playing a key role.

The ESG landscape

ESG has become the new normal for financial institutions. Perhaps the most significant sign of this remains in the products and services being offered by banks, which reflect their sustainable ambitions. The volume of global sustainable debt instruments reached a staggering $1.47tn in 2021, which is more than double that was seen in 2020.

Green bonds alone brought in more than $480bn. More broadly, a 2021 report from Bloomberg Analysis noted that the ESG market is on track to exceed $50tn by 2025.

On the regional landscape, green issuances from countries across the MENA region are in fact outpacing global growth. In 2021, the region generated $24.55bn in green and sustainable finance, an impressive 532 per cent increase on 2020’s figure of $3.8bn.

At the country level, Qatar has enacted a series of initiatives to make at least $75bn available for sustainable investments, while in the UAE, Majid Al Futtaim’s fundraiser, led by First Abu Dhabi Bank, gathered $1.25bn in 2022 as the credit facility linked to the company’s ESG goals.

For its part, the National Bank of Bahrain is another prominent bank going green. It has been actively working to embed ESG principles into its business model and culture, and the majority of its workforce has engaged in ESG training.

Of course, different banks find themselves at different stages along their ESG journeys, but ESG is undoubtedly gathering momentum in financial institutions across the spectrum, both in the MENA region and on the global stage.

The challenges

Despite the momentum and apparent resolve among FIs to embrace ESG, several challenges stand in the way of effective implementation. For one, the complexity of ESG data has not been entirely captured and addressed by current data governance frameworks. This causes banks to resort to ad hoc solutions for collecting, managing, and governing related data.

The challenge of maintaining data transparency and high standards of quality is also amplified in the context of ESG, as requirements are often not yet fully standardised or detailed by regulators. In addition, certain ESG data use cases that existed prior to the strategy need to be incorporated within new initiatives to ensure consistent reporting while accounting for different forms, purposes, and requirements of each application.

A two-step solution

Arthur D. Little recommends a two-part scalable solution to resolve the difficulties of complex data and enable banks to properly and efficiently manage ESG information on a path to a comprehensive, bank-wide data strategy.

Step one centers on the creation of an ESG data catalogue to ensure transparency through a nondisruptive and easy-to-incorporate layer, while step two involves setting up a data governance framework to ensure quality control in a scalable, structured approach.

1. Increasing transparency: the ESG data catalogue

The data catalogue acts as a centralised repository that logs all ESG-related data points, offering data transparency without disrupting the existing data landscape of the bank. A data catalogue does not store specific data. Rather, it acts as a catalogue of data clusters, providing clarity on where data resides, who is responsible for it, and what it is used for.

Prioritising use cases is key to developing the ESG data catalogue, and the following elements can help in this task:

· Nature of the data requirement: this can be either external or internal, providing a one-stop shop for all ESG-related data applications, with external reporting receiving priority

· Reporting due date: this serves as a deadline for gathering and structuring data, with priority assigned to the closest date

· Use case history: this distinguishes between new and existing use cases and prioritises accordingly

The ESG data catalogue uses a top-down structure, with data clustered into use cases.

This fosters a targetted approach to identifying and structuring data points from the requirement to the application while ensuring that prioritised use cases are completed first.

Additionally, it enables a stepwise approach to expand the data catalogue’s application in the future.

2. Quality control in the data governance framework

As data goes through its lifecycle of creation, storage, usage, archival, quality control, and destruction, it needs a process to designate a clear alignment of responsibility and ensure quality across the ESG use cases. Here, identifying the ESG data owner is key. The data owner serves as a manager who is responsible for quality control of specific data points as they are being used for the different ESG use cases.

Three necessary attributes for the development of a data governance framework include:

1. Scalable. The framework should be built around comprehensive dimensions that can expand and adapt to the bank’s structure and requirements

2. Tailored. It should be tailored to the specific bank’s structure and ESG requirements, accounting for the existing organisational and ESG governance structures

3. Flexible. The dimensions should not be mandated but instead used as an initial draft of the bank’s assignment of responsibilities. A combined top-down, bottom-up approach can ensure actual skills are taken into account as ESG applications continue to be implemented

As the MENA region’s banks double down on their ESG efforts, the implementation of a comprehensive strategy with data governance at its core has never been more important. Many challenges lay ahead, but with the right approach, the region’s FIs can accelerate their journeys toward the green and sustainable futures they seek.

Andreas Buelow is partner, and Nael Amin is senior manager – Financial Services Practice at Arthur D. Little.