GCC firms can attract foreign investment by embracing ESG business opportunities

This year looks set to mark a turning point for Environmental, Social and Governance (ESG). In the near two decades since the term was coined, it steadily gained momentum and today 89 percent of global investors are ESG adopters, according to Capital Group research. Traction has been slower in the GCC, but with the UAE set to host COP28 from November, there are already signs that this will change rapidly and significantly. Now more than ever, local enterprises — encouraged by both opportunity and regulation — will need to demonstrate their commitment to ESG principles.

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Last month, the GCC Exchanges Committee published a set of unified ESG disclosure metrics for listed firms in the region. These comprised 29 standards, aligned with the World Federation of Exchanges and the Sustainable Stock Exchanges Initiative. While currently the metrics serve as a guideline for companies looking to establish ESG reporting functions, they represent a milestone in the region's move towards standardised ESG disclosure.

This dovetails with upcoming ESG legislation in Western markets that GCC enterprises will be well served to be informed about. Specifically, two pieces of legislation currently being finalised in the EU and the US are expected to expand sustainability disclosure requirements for companies worldwide. The extra-territorial nature of both laws means that few companies will escape their reach. And while many firms have made great strides in raising their ESG disclosures in recent years, the new laws are more comprehensive.

In the case of the EU, the requirements will apply to all companies generating a net turnover of €150 million across member states and which have at least one subsidiary or branch there. These companies must provide a report on their ESG impacts. For the US, any firm acting as a supplier or distributor for a US company overseas may become subject to the new SEC rules and enforcement.

The framing of both the EU Directive and the SEC revision have been deliberately aimed to catch the widest number of companies, irrespective of where they do business. They cast a wide net, potentially capturing many companies that never expected to be regulated by US financial authorities or the EU. In the short term, any GCC companies with commercial relationships in the US or EU will have to make rapid and large-scale investments into developing the capability to report in a compliant way. Longer term, they will also have to bring net zero target strategies into the boardroom and into their operations.

Compared to the precisely structured world of financial statements with its well-established standards and practices, the realm of ESG reporting has been more like the Wild West. The GCC Exchanges Committee’s decision to introduce its 29 ESG disclosure guidelines, comprised of 10 Environmental, 10 Social, and 9 Governance metrics is a significant step in the direction of standardisation. They will no doubt prove invaluable to enterprises that have thus far been lingering on the side-lines or delivered ESG reporting falling short of expectations.

To turn obligation into opportunity however, organisations cannot simply stop here and treat this set of metrics as comprehensive. They need to instead place themselves in the shoes of investors and analysts to understand what disclosures these professionals value. Analysing guidelines prescribed in other sets of industry standards to uncover and include other metrics which are most relevant to the organisation’s specific industry will greatly enhance the quality and value of the ESG disclosure.

They must also shed the misconception that ESG is synonymous with Corporate Social Responsibility (CSR). To emphasise and enhance only the social aspect of their operations would be to miss the larger part of the ESG equation. The Capital Group study highlights that for investors, it is the Environmental (47 percent) aspect that dominates mindshare, with Governance (27 percent) being more of a focus for them than Social (25 percent). With Dubai playing host to COP28 this year, local businesses should expect the global investment community to closely scrutinise action across ESG.

Perhaps most important, GCC organisations need to change their very perception of ESG reporting. To adopt a ‘tick the box’ exercise would yield no long-term positive impact. Worse still, any insincere efforts would quickly be unmasked by the industry for what they truly are — “greenwashing.”

Instead, if organisations change their mindset, they will rapidly realise the tremendous potential that this exercise can help unlock. World-class reporting, developed in line with industry best practices, can deliver unparalleled insight that will serve to inform an organisation’s near- and long-term sustainability strategies, enabling it to successfully embark on the journey towards most responsible and reputable operations.

In a world where companies are being called upon to do more than just turn a profit, companies that engrain ESG into the very fabric of their organisation, and prove this in a measurable way, will enhance their attractiveness to customers, investors, suppliers, and employees.

Regional organisations are presented with an unmissable opportunity. Last year, the net flow of foreign investment into GCC stock exchanges reached $23.4 billion, with Saudi Arabia drawing in $11.6 billion, and the UAE $7.8 billion. As the global investment community becomes fixated on ESG, an increasing share of this funding will go to companies that have measurable strategies in place. Success begets success and local investors will follow the flow of funds, further backing these organisations. Regulations might soon dictate that all GCC enterprises adopt ESG reporting, but those that rightly recognise it as the incredible opportunity it is, will stand to reap the rewards.

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