Ethical investments to contribute to the GCC’s post-pandemic recovery

The Covid-19 pandemic has raised awareness among GCC countries of the importance of environmental, social and governance (ESG) standards. If current trends continue, ESG could become a valuable element of the region’s recovery. ESG standards are used to evaluate potential investments, as well as to enable business leaders to formulate responsible and sustainable corporate strategies. Environmental criteria take into account a company’s environmental footprint, as well as the actions it takes to offset it. Social criteria evaluate how it manages relationships with its various internal and external stakeholders. Lastly, governance criteria evaluate the inner mechanisms of a company’s management and operations.

Strong Demand

Demand for investments that are ethical and sustainable has been increasing in recent years. Globally, more investors are turning to businesses that embrace ESG and this trend has been accelerated by the pandemic. ESG standards have become a central focus of the world’s major financial bodies. In January 2021 at the World Economic Forum (WEF) in Davos, it was announced that a coalition of multinationals and business leaders had signed up to the Stakeholder Capitalism Metrics, a set of ESG standards released by the WEF and the International Business Council in September 2020. “Stakeholder capitalism [has become] mainstream,” Klaus Schwab, founder and executive chairman of the WEF, told international media at the time. “The public commitments from companies to report not only on financial matters but also their ESG impacts are an important step towards a global economy that works for progress, people and the planet.” This trend is expected to continue; according to an April 2020 report published by S&P Global, “Strong ESG performers with stakeholder-focused and adaptive governance structures are likely to remain resilient amid these rapidly changing dynamics.”

Meanwhile, the International Financial Reporting Standards Foundation is moving forwards with its plan to develop a single set of internationally recognised sustainability standards. In early February 2021 the foundation announced the goal of producing a definitive proposal by September of that year.

Green Shoots

In the GCC ESG has become increasingly popular. In late 2020 the CFA Institute – an investment association – announced the results of a study that found that 94% of retail investors in the UAE were interested in or applied ESG principles in 2020, up from 90% in 2018. Significant steps have been taken to transition to a more ESG-oriented future. Qatar National Bank (QNB) established its Green, Social and Sustainability Bond Framework in February 2020, and in September of that year it launched its $600m green bond, for which it received more than $1.8bn in subscriptions. The proceeds will be used to finance or refinance assets in verified eligible projects. QNB’s bond was the second such issuance from a commercial bank in the GCC, following the bond issued by the National Bank of Abu Dhabi, as it was then known, in 2017.

In a further sign of interest in such instruments in the region, in April 2020 the Dubai Financial Market launched the UAE ESG index, while in early February 2021 the Abu Dhabi Investment Office launched an ESG policy, which it will deploy in different operations, among them public-private partnerships.

The growing focus on ESG standards dovetails with development priorities shared by countries in the GCC, and the standards tie in to different diversification strategies. The slump in oil prices in early 2020 served to underline the importance of a more broad-based economy, and investments guided by ESG – for example, in renewable energy – offer a way to augment diversification. The Gulf is also on the front line of climate change, where ESG can help to boost resilience and reduce emissions. Moreover, ESG-guided companies have proven resilient in the face of the pandemic. An increased focus on ESG may, as such, constitute a way to drive a sustainable recovery from the health crisis.