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ESG stands for environmental, social and governance and is undertaken to capture the non-financial risks and opportunities associated with day-to-day activities within an organization. Post the pandemic, a growing connection between sustainable development and financial gains is resulting in major organizations to shift to best practices for ESG. Additionally, many organizations are switching their focus to ESG and its associated elements for meeting regulatory compliances and strengthening customer and stakeholder loyalty.
ESG encompasses three main facets including:
Environment: In this, organizations addressing the challenges related to carbon emission, deforestation, air and water pollution, climate change, deforestation are included. Organizations need to take the requisite and necessary steps to curb their malpractices and adhere to certain compliances so that their businesses have the least adverse impact on the environment.
Social: This includes how an organization treats its employees and people and their quality-of-life within the system. This further evaluates and includes gender equality, diversity, social responsibility, data protection compliances, privacy, human rights, labor standards, customer satisfaction, etc.
Governance: Corporate governance deals with the methodologies which are required to run the businesses. This encompasses red tapism, bribery and corruption, lobbying, board composition, political campaigns, etc.
ESG guidelines should ensure that a business employs correct and open accounting practices, selects its executives with integrity and diversity, and is answerable to the shareholders for its actions. There are various steps which an organization should undertake to remain sustainable in the long run:
Have a strategy: From an organizational perspective, integrating an ESG strategy should start with defining goals and priorities that are consistent with the corporate’s mission. The full range of ESG functions should ideally be managed and carried out by a single business function which should be adept in handling all the challenges.
Ensure KPIs to track progress: KPIs must be established to track progress, and they should be supported by reliable systems for data collection and reporting metrices. One needs to ensure that compliance is met as per the standards. Further, one should report and publish the audited ESG report for credibility.
Sustain priorities as regulatory frameworks: Companies that act quickly to match their ESG priorities with those of their governments are expected to attract a lot of traction and business opportunities. Early adopters might develop new services and products for businesses that could have a real impact on society and provide wider benefits.
Develop an integrated approach: ESG is a complicated topic, and many of the problems are interrelated. Reorienting businesses toward a value-creation ecosystem requires taking an integrated approach to ESG and implementing a strategy across various functions. In this system, new factors that add value should also be included such as: environmental sustainability, employee engagement, external partnerships, and broader societal wellbeing.
Further there are various benefits poised for an organization which meets its ESG criteria. These include:
Increased optimization: ESG enables optimal utilization by identifying the areas and gaps where the business is wasting resources. ESG strategies help bridge the gap by carving out steps, policies, and procedures for prime usage of capital and assets within the organization.
Streamlined regulatory compliances: It is witnessed that organizations which exhibit greater tilt towards ESG targets, and their fulfillments are perceived more responsible by regulators. It is thus mandatory that organizations publicly report their ESG performance while meeting their permit limits and regulatory requirements for improved compliance processes.
Reduced costs: ESG is undoubtedly a unique method which helps businesses lower operating costs as well as reduce the environmental impact in tandem. For ex, if an organization decides to reduce its energy consumption, it will undertake steps such as switching to renewable sources of energy, saving water and raw material usage, etc. This simultaneously helps save money on utilities and have a positive impact on the environment.
Improved shareholder returns: In present times, with growing awareness on the importance of clean environment, businesses are undertaking strict measures to meet ESG compliances. Seeing this, investors typically want to invest in only those businesses which care for the environment and want to make a positive impact. Thus, undertaking ESG initiatives correlates better with investor returns and helps raise capital.
Driving a more purposeful ESG strategy across the Middle East
The Middle East is undertaking various initiatives to stay at the forefront of sustainable practices. Environmental degradation, climate change, carbon emission, greenhouse gas emissions, disaster management are some of the core focus areas of ESG for most of the organizations and government agencies in the region. Further, in addition to more general ESG and sustainable investment, the GCC region has been at the forefront in fighting against global warming and climate change. Due to its significant role as a supplier of fossil fuels, the area has a stake in developing strategies for reducing emissions while still meeting the world’s demand for energy. The Paris Agreement, which requires nations to develop long-term plans to reduce greenhouse gas (GHG) emissions and limit the increase in global temperature to 1.5 C relative to pre-industrial levels, is in line with the UAE’s Net Zero 2050 strategic initiative. Furthermore, Middle Eastern investors are changing their investment preferences and are now equally keen on embracing ESG investments.
While many regions of the Middle East are still in the early stages of development, countries there have made significant progress in addressing issues related to social, governance, and climate change.
More businesses are now setting Net Zero targets since the governments of the UAE, Saudi Arabia, and Bahrain made their national Net Zero commitments as per the 2021 United Nations Climate Change Conference (COP26) held in Glasgow.
Prince Abdulaziz bin Salman Al Saud, the Saudi Arabian Minister of Energy, declared that the Kingdom’s objective is to achieve Net Zero carbon emissions by 2060, without having any negative financial or economic impact on oil exporters. The minister was quoted by the Saudi Press Agency (SPA) as saying that by 2030, Saudi Arabia will be a model for the production of all energy sources and the best in terms of energy efficiency. Bahrain became the latest Gulf state to announce a plan aiming for Net Zero carbon emissions by the year 2060. Abu Dhabi Securities Exchange (ADX) also announced that it is a Partner Exchange of the United Nations Sustainable Stock Exchanges (SSE) initiative aimed at fostering sustainability and transparent trading environment by deploying ESG – related initiatives.
Further, Kuwait also launched its ESG guide corresponding to the UN Sustainable Development Goals (SDGs), to meet the growing needs of stakeholders for sustainable development and transparent information, enabling Kuwait to meet its “New Kuwait”
vision for 2035. Furthermore, major banks across the region are issuing green bonds focused on sustainable finance frameworks. With increased commitment towards ESG debt financing – green and sustainability-linked bonds and loans are continuing to deepen and mature in the region. Also, the banks in the region are committed towards financing and refinancing green and social development projects eligible under their Sustainable Finance Framework.
Thus, it is evident that ESG is one of the top-most priorities and focus area for stakeholders, regulators, investors, customers, and employees. Within the Middle East, there is a rising momentum and numerous initiatives being undertaken for sustainable practices and compliance reporting. Conscious efforts are being undertaken to integrate ESG goals into corporate and investment strategies. The region is also establishing frameworks that set out the parameters for what qualifies as sustainable and what serves as the basis for tracking and disclosing performance against commitments.
Way forward with Xebia
Xebia helps its clients stay ahead in their ESG commitments by offering its one-of-a-kind ESG app. The app leverages Appcino’s Low Code platform to create a robust solution to automate end-to-end ESG process – from strategy to execution. This helps organizations to stay ahead, adhere to constantly changing regulatory policies, drive higher enterprise value and establish trust with investors and customers. This app also helps solve major ESG obstacles related to data, regulation, reporting and impact.
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