How Kuwait's enhanced reporting framework to support capital markets growth

Kuwait has taken steps to align financial flows with environmental and socio-economic targets under the UN’s Sustainable Development Goals (SDGs), although the country’s pledge to reduce its greenhouse gas emissions by 7.4% by 2035 falls short of the reduction target of 45% set in the Paris Agreement.

Boursa Kuwait, which self-listed in September 2020 and had a market capitalisation of approximately KD41.1bn ($135.3bn) as of December 2021, has expanded its efforts to encourage market participants to adopt environmental, social and governance (ESG) principles. A partner in the UN-led Sustainable Stock Exchanges (SSE) initiative since 2017, Boursa Kuwait released an ESG reporting guide in 2021 to encourage listed companies to disclose sustainability information.

Reporting Guide

Boursa Kuwait’s ESG reporting guide recommends 30 ESG metrics that are derived from New Kuwait 2035, SDGs that are harmonised with the Global Reporting Initiative framework, and the recommendations of the SSE and the World Federation of Exchanges. The guide also emphasises the importance of sustainability reporting for listed companies and investors. Building on these efforts, Boursa Kuwait published its first sustainability report in 2022.

The guide builds on initiatives to raise awareness of the sustainable investment landscape among equity issuers. The exchange hosted online seminars and workshops in 2020 on the benchmarks and assessment metrics used in MSCI ESG ratings, and organised several virtual corporate days with global players such as HSBC, Morgan Stanley, Goldman Sachs and JP Morgan in 2021. Such initiatives could lead to sustainability improvements by aligning expectations between the offering of and demand for ESG-oriented capital.

Debt Instruments

Beyond equity, important developments have taken place in the debt segment. Throughout 2022 the Capital Markets Authority (CMA) amended regulations to authorise the issuance of green, social and sustainable bonds and sukuk (Islamic bonds) to encourage sustainability in the markets. The regulations require the prospective issuer of green, social or sustainable debt instruments to gain the CMA’s approval on an externally audited framework document for the respective offerings. The framework must indicate how the proceeds will be used, as well as how they will align with the standards of the International Capital Market Association or Climate Bonds Initiative. The framework also obliges issuers to disclose to instrument holders detailed information on the allocation and management of the proceeds through reports from both the issuer and independent third parties.

Wider Benefits

The amended CMA regulations will allow Kuwaiti companies to tap into the sustainable debt market, as well as accelerate the pace of the development of the country’s sustainable equity segment. As Boursa Kuwait-listed companies become issuers of sustainable debt, the ESG profile of their shares will increase due to the enhanced scrutiny to which they will be subjected. Moreover, banks, financial services companies and real estate groups also stand to gain from sustainable debt finance due to the sectors’ highly profitable debt leverage dynamics and the perceived extent of their sustainability impact.

A 2022 report from international management consulting firm Arthur D. Little estimated that a respective 30% and 10% of the GCC’s top-ESG performers operate in the financial and real estate sectors, boding well for Boursa Kuwait, as more than a third of its listed companies operate in those industries. Additionally, Kuwait’s sustainable debt market could further interest ESG-minded equity investors. Financial corporations and real estate investment groups that tap into the sustainable debt market could see a significant and cross-sectoral sustainability boost to the bottom lines of various companies and projects that benefit from the mobilised funds because, as debt issuers, they are capable of attracting relatively large sums and have robust technical means to ensure their proper allocation.