Corporate sustainability in the MENA region

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Corporate sustainability in the MENA region Ethical BoardroomBy Ashraf Gamal – CEO Hawkamah Institute for Corporate Governance

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Sustainability has been gaining momentum in the Middle East and North Africa (MENA) region. Despite the fact Hawkamah and S&P launched the first MENA region ESG index in 2011, things have started to move only in the last few years, with growing discussions in the business community and among regional regulators about corporate sustainability.

Corporate sustainability is viewed in the region as the concept of creating long-term stakeholder value through designing and implementing business strategies that consider every dimension of how a business is run. While the term corporate social responsibility is usually used only in relation to philanthropic activities, corporate sustainability covers three key areas: environment, social and corporate governance (ESG) practices. These factors are increasingly recognised as essential elements for protecting and creating value for companies while positioning themselves for a better future. Therefore, regulators have become active in various ESG-related areas.

It is in the economy’s – and companies’ – best interest to avail robust ESG disclosures. Investors increasingly rely on companies’ disclosures to make investment decisions – when disclosure is lacking, investors are likely to assume that things are not that well in the company and are likely to invest elsewhere. Moreover, disclosure puts companies in control of their own ESG narratives. It is highly recommended for the organisation to provide accurate data for its ESG practices to communicate the right message. Most regulators in the region, in their efforts to attract foreign direct investments have started to mandate some sort of sustainability reporting from banks and listed companies. This can be in a separate report or as part of their annual reports.

What is the role of boards in sustainability?

Tone at the top Boards need to discuss and agree on what sustainability means for them?

Boards need also to prioritise and focus on the key sustainability areas relevant to them and to their own stakeholders. This is important as MENA companies are mostly starting their sustainability journeys and they cannot focus on every sustainability factor and measure

Strategic inclusion Boards need to make sure that the factors they have considered to be strategic, are included in the overall company strategy. Some MENA companies create a ‘sustainability department’ whose role is to conduct sustainability-related activities. This indicates that sustainability is not part of the overall corporate strategy.

Follow-up Boards need to follow up with the management to make sure that sustainability is part of strategy and is being adhered to. This is best done through creating a set of relevant KPIs that reflect sustainability achievements.

Reporting Boards should ensure that their companies provide meaningful statements of their activities, not as a compliance activity, but to demonstrate awareness of risks and their skill in managing them. By reporting on ESG performance, companies send a message to investors that they can manage risks and generate sustainable long-term financial returns. Some question that boards should ask with this in mind include:

What is the best way for us, as a board, to increase our internal and external engagement on ESG? How often should we discuss ESG among ourselves and with management? How can we make those discussions more robust and productive?

Do we have a process in place to monitor disclosure trends and investor expectations? How do we compare with our peers in this regard?

Countries in the MENA region, including the GCC, are ramping up efforts to attract global investors and to diversify their economies. These efforts have resulted in a growing prominence of GCC countries among international investors, which has been reflected in the inclusion of the United Arab Emirates, Saudi Arabia, Kuwait and Qatar in leading emerging market indices.

However, this inclusion also means that there will be extra scrutiny on regional companies and increasing demands on their transparency and disclosure practices by international institutional investors driving meaningful ESG reporting.

While a company produces financial reports to show its performance and numbers, it should also produce ESG or sustainability reports to provide ‘the story behind the numbers’. They should produce a summary of quantitative and qualitative disclosures, supported by analysis of performance across these ESG factors and specific metrics.

As some of Hawkamah’s previous market reports have shown, whereas governance reporting in the MENA region has improved significantly over the years (partly as a response to the issuance of corporate governance codes and mandated disclosures in the region), environmental and social reporting remain weak. This is an area where the MENA region has significant room to improve.

We came to realise through our work with large MENA companies that when companies are not reporting, that does not mean that they do not have anything to report. We came across companies with relatively good environmental and social programmes, but they simply did not think that it was important to disclose them.

Nonetheless, it is noteworthy that the percentage of MENA companies producing meaningful sustainability reports, whether as standalone reports or as part of their annual reports, has increased significantly over the past five years. Ten years back, it would have been impossible to find a listed company in the region producing a sustainability report. Last year, as part of our work on the S&P Hawkamah ESG index, covering the largest 150 MENA-listed companies, we realised that the percentage had came up from zero to almost 20 per cent. Approximately half of the 150 companies are disclosing their environmental policies.

It might be worth mentioning that, while water supply sources in the Arab world – two-thirds of which originate outside the region – are being stretched to their limits. The level of water scarcity is the highest in the world and is rapidly growing, threatening to lead to confrontation, to ‘water wars’ – currently only 17 per cent of companies in our 150-universe report on their water consumption and policies. Disclosure practices around gender diversity is another topic, which illustrates that the region’s companies have much room for improvement. Currently, approximately 30 per cent of the companies provide a breakdown of their employees, based on gender. However, it should be noted that there has been progress on this front over the recent years as well.

While the better non-financial reporting and significant increase in the number of MENA-listed companies issuing sustainability reports is commendable, the overall level of sustainability reporting remains very low in the region when compared to developed markets. For example, according to the Governance & Accountability Institute’s 2021 Sustainability Reporting in Focus, 92 per cent of the S&P 500 companies published a sustainability report in 2020, up from 90 per cent in 2019, while 70 per cent of the Russell 1000 companies published a sustainability report in 2020, up from 65 per cent in 2019.

From a board perspective, ESG in the MENA region is most often overseen at the full board level or by the board’s strategy or risk committee. The audit committee should also initiate or strongly support efforts to provide high-quality ESG assurance to the board, or to the primarily responsible board committee. Many large companies have also appointed a chief sustainability officer, while others have given the CEO or other C-suite executives explicit ESG responsibilities.

Although there are global efforts underway to try to harmonise different frameworks and standards, there are currently several main reporting frameworks that aim to guide companies on how to measure, assess and report on their ESG initiatives, risks and opportunities.

Regulators of the region who mandated such reporting, did not favour any specific framework. However, boards and management should be aware of organisations and initiatives that promulgate ESG reporting guidelines; these include the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), and the Task Force on Climate-Related Financial Disclosures (TCFD) standards. Other significant frameworks include those developed by the International Integrated Reporting Council (IIRC), the UN Global Compact and related Reporting on the Sustainable Development Goals (SDGs), the CDP (formerly the Carbon Disclosure Project) and the Climate Disclosure Standards Board.

“MENA companies today need to look beyond short-term corporate sustainability initiatives. Instead, they need to focus on developing roadmaps for corporate sustainability implementation”

It is often a challenge for companies to decide which framework to follow. The largest US-listed companies often report against some portion or a combination of frameworks. According to research by the Governance & Accountability Institute, 51 per cent of the S&P 500 reporting companies use GRI. In the MENA region, 16.7 per cent of the 150 largest listed companies use GRI.

MENA companies today need to look beyond short-term corporate sustainability initiatives. Instead, they need to focus on developing roadmaps for corporate sustainability implementation. Corporate sustainability is part of business durability and of conducting responsible and sustainable business. By setting up a corporate sustainable strategy and adopting impactful activities, companies will have a big opportunity to improve their business models, increase their competitiveness, and positively affect the success of SDGs. Markets will then be able to attract more FDI and serious long-term investors.

 

About The Author:

Dr. Ashraf Gamal El Din is the Chief Executive Officer of Hawkamah, the Institute for Corporate Governance. Prior to joining Hawkamah, Dr. Ashraf was the Executive Chairman of Egypt Post. Before that, he was the Deputy Executive Director of the Egyptian Banking Institute, the training arm of the Central Bank of Egypt. He was also the founder and Project Manager of the Egyptian Corporate Responsibility Center working on promoting the concepts and application of CSR in Egypt. Furthermore, he was the Executive Director of the Egyptian Institute of Directors (EIoD), the Institute of Corporate Governance in Egypt and the Arab Region Dr Ashraf served as a board member and head of the Audit Committee in a number of listed, non-listed, State Owned and family owned companies. He also served a member of the General Assembly of the Holding Company for Transportation.