Insights: Maximising the potential of ESG investing in the MENA region

As the Middle East and North Africa (MENA) readies for its second UN Climate Change Conference in a year; environment, social, and governance (ESG) investing remains a challenge for the region’s investors due to a paucity of data.

Only about 12 per cent of publicly listed companies in the Gulf, Egypt and Jordan disclose any ESG data, according to Bloomberg data.

Companies and investors in the region could be missing a big opportunity, as investment firms globally are facing increasing demand for ESG investment products that integrate thematic ESG strategies and comply with regulatory requirements.

Climate risk and its impact

The financial industry is also increasingly concerned about the risks posed by the impending climate and biodiversity crisis. Climate risk can be divided in two interrelated risks; physical risk to assets, for example from flooding and storms, and transition risk associated with the transition to a low carbon economy, for example if fossil fuel reserves need to be written off. If not managed well, these two risks can have a significant impact on companies’ financial results. This is notably why we’re starting to see initiatives in the MENA region aimed at supporting the transition to net zero emissions.

As we look towards COP28, the UAE specifically has taken a significant step in this direction with the launch of its plan to reach net zero by 2050. First Abu Dhabi Bank is also leading the charge as the first Gulf bank to join the Net Zero Banking Alliance, committing to align lending and investment linked to net zero emissions by 2050.

ESG investing in the region

However, to fully realise the potential of ESG investing in the MENA region, there are a few key challenges that must be addressed. While there is a significant amount of evidence demonstrating the impact of climate change, there is a lack of reliable data on corporate greenhouse gas emissions and projections for the short, medium, and long term, as well as on their green revenues and capex.

Investors need this information to make informed investment decisions that consider the carbon footprint of their portfolio and the potential contribution to temperature increases. They also need more and better data on how companies are managing and preparing for climate risks.

Another challenge is the potential for ‘greenwashing’, or the practice of presenting a company’s sustainability efforts as more significant than they are. Investors can avoid falling victim to greenwashing by thoroughly researching a company’s ESG practices and seeking out independent, third-party verification of their sustainability claims.

This challenge further highlights the importance of addressing the lack of company-reported data on ESG performance which makes it difficult for investors to make informed decisions about which companies to invest in, as they may not have access to all the necessary information to assess risks and opportunities.

To solve this problem, it is essential for the business community, government and regulators to come together and play an active role in driving better disclosure and availability of this data in the region, and the alignment with global standards.

Despite these challenges, ESG investing in the MENA region offers significant potential for investors to make a positive impact on the world while also realising financial returns. More data with better quality will increase investors’ confidence and attract more foreign flows to the region.

The writer is the global head of Sustainable Finance Solutions at Bloomberg LP

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