Middle Eastern investors may have traditionally focused on governance, but they are increasingly turning their attention to the economic and social aspects of responsibly investing, says GIB Asset Management’s head of strategy and chief sustainability officer, Venetia Bell.
The growth of sustainable investment is undisputed. Assets in ESG and sustainable products have almost doubled between 2016 and 2020, growing to over $40.5 trillion worldwide.
Over 75% are institutional assets, with Europe remaining the global leader with 50% of total assets in ESG, while the US and Asia continue to grow.
By contrast, the Middle East is commonly seen to be at the early stages in the process, though in reality, this is somewhat of a misconception.
The region has a long track-record in contributing to sustainable finance and it has seen sizeable, though uncelebrated, successes.
Historic contribution to sustainable investing
Middle Eastern investors have been focusing on the ‘G’ of ESG for decades. Islam forms a major part of the region’s culture and Islamic finance prohibits Gharar (excessive risk).
Looking beyond Gharar, the values underpinning Middle Eastern family endowments, some of which go back over 700 years, are focused on long-term responsibility and stewardship. Regional endowments have survived for decades as a result of good governance, running on two main values: capital protection (al habs) and using earnings for charitable purposes.
Middle Eastern investors have historically applied Shariah screens to their portfolios, excluding business activities like alcohol, tobacco, adult entertainment and gambling. They have also typically engaged actively with investee companies to drive positive change and use capital for good within their local communities. This is evident from world-renowned development finance institutions (DFIs) like the Islamic Development Bank and major economic powerhouses like the Public Investment Fund (PIF) of the Kingdom of Saudi Arabia (KSA).
The Middle East is also a forward-thinking region, which continues to play an active role in the energy transition. KSA has constantly been managing the transition through its Master Gas Gathering System, NEOM, and launch plans for a $5bn green hydrogen plant. Today, Saudi Arabia is one of the most efficient countries in energy production.
Institutional adoption of ESG investing
It is against this backdrop that we are seeing conversations with investors and clients, coupled with quantitative data and insights, all pointing in the same direction – Middle Eastern investors are no different and are embracing ESG investing.
Regional governments have been managing the transition of power and energy, economic development and now sustainable development. A combination of government initiatives and enablers, coupled with changing investor preferences and business practices, have driven adoption amongst capital allocators.
Part of this can be attributed to the strong family values of the region. PwC’s recent Middle East Family Business Survey (2021) highlighted ‘Impact’ as a key business requirement, while 59% of family businesses saw a direct opportunity to integrate sustainable business practices, and 93% said they engaged in some form of social responsibility.
Considering 65% of Middle Eastern family businesses are reaching a critical succession stage, businesses are expected to develop robust sustainability strategies and re-align in this direction.
A recent Boston Consulting Group study (2021) found 80% of surveyed consumers were willing to adopt more sustainable practices – a significant demand driver for family-owned businesses and conglomerates.
These factors are translating into increased adoption of ESG policies and a high conviction from investors that ESG strategies outperform. A 2020 survey by HSBC found 36% of Middle Eastern investors currently had firm-wide ESG policies, and 41% (higher than the global average) intended to develop necessary policies.
As for government initiatives, Gulf Cooperation Council (GCC) states have long been at the forefront of national development. The UAE, and Dubai in particular, has transformed from a fishing village and port to a global business capital. In the space of just half a century, Dubai witnessed exponential growth in its population (50,000 in 1960 to over 3 million in 2021) and GDP.
This would have not been possible had it not been for the long-term vision of its leaders, coupled with strong governance controls.
Governments in the Middle East recognise the role of sustainability in satisfying the needs of the present without compromising that of future generations. This transition continues to be managed, albeit with a different agenda and the integration of global initiatives.
Bahrain’s National Development Program, Vision 2030, for example, is underpinned by sustainability, competitiveness, and fairness, and in October 2021, KSA announced it would cut its carbon emissions to net zero by 2060 and said it would invest more than $180 billion to do so.
Beyond local impact, Middle Eastern governments and institutions are key players in tackling some of the world’s global challenges. The One Planet Sovereign Wealth Fund Framework was founded in 2017 by six sovereign wealth funds, four of which are from the GCC. The framework sets out how they should factor climate change-related risks and opportunities into investment decisions in order to improve resilience of portfolios.
Since its inception, the initiative has added nine more members, mobilising trillions of assets towards the integration and consideration of climate-related risks.
Not to be overlooked
With over $3 trillion in combined assets, the scale and influence of GCC sovereign wealth funds is substantial.
At a macro level, they are at the forefront of diversifying national wealth away from oil and integrating sustainability regionally from the bottom up, with Saudi Arabia, Kuwait, Bahrain, Qatar and the UAE partnering with the Sustainable Stock Exchanges Initiative, which encourages stock exchanges to promote responsible investment in sustainable development.
Today, ESG is no longer an option or simply a theme for investors. Integration takes place at all levels with the abundance of data and ESG scoring approaches. Opportunities, risks and the financial materiality of ESG data are difficult to ignore especially in light of global initiatives.
Doing good does not always mean excluding certain securities or sectors. There is no-one-size-fits-all approach to responsible investing and certain sectors may prioritise specific areas.
While oil remains essential for many, for example, divestment is challenging. Transition is the solution – it’s a measured and steady way to re-focus to renewable energy sources.
ESG and sustainable development has been around in the Middle East for centuries, and we believe the region will continue to develop and transition in line with its global peers.
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