It has become increasingly clear from the vast array of information on climate change that advancing environmental, social, and governance (ESG) goals is an essential part of any long-term solution to the crisis. Although the loosely defined concept remains a work in progress, the United Nations Climate Change Conference (COP28) in Dubai provides an opportunity for business leaders and policymakers to agree on how ESG can best contribute to achieving net-zero emissions by 2050.
Sound ESG strategies that focus on robust standards, clear metrics, and strict compliance procedures can improve the investment decision-making process for firms in all sectors. This, in turn, makes it easier for companies to unlock debt and equity financing, while also yielding reputational returns.
Beyond offering substantial benefits, ESG has become a business imperative. As the global race to achieve net-zero emissions intensifies, firms looking to form new alliances and partnerships must be able to outline their ESG strategy and, crucially, explain how they plan to execute it. This makes it even more important to develop a cohesive, equitable, and transparent approach to ESG at COP28 and secure buy-in from a wide range of stakeholders.
ESG has gained significant momentum in the Middle East in the run-up to COP28: nearly two-thirds of regional organisations surveyed by PricewaterhouseCoopers (PwC) earlier this year reported adopting a formal ESG strategy in the last 12 months. This would have been unimaginable only a few years ago, when very few in the region were taking the concept seriously. And the trend looks set to continue, as 66 per cent of survey respondents want their CEO and board to allocate more time to ESG-related issues.
Moreover, the fact that 40 per cent of respondents hope that COP28 will lead to governments improving ESG infrastructure and providing incentives for green growth underscores the significance of the climate summit. Fortunately, the United Arab Emirates is already spearheading the reform effort, building awareness of how an ESG framework can pave the way to a net-zero economy. On the environmental side, the UAE has announced plans to invest $54 billion in renewables over the next seven years and has pledged $4.5 billion to finance climate projects in Africa. Mobilising these huge sums ahead of COP28, as well as undertaking major initiatives to support social and governance investments, demonstrates the UAE’s commitment to championing ESG at the summit and beyond.
Banks must also do their part, which means raising awareness of the central role that ESG plays in sustainable finance and ensuring that there are enough green financial products – including Sharia-compliant instruments – to meet soaring demand from customers. They should also improve ESG reporting metrics to streamline internal and sector-wide data collection. While such changes take time, a more immediate fix could be improving in-house training to help staff better incorporate ESG factors into investment decisions and overall bank strategy.
A meaningful shift in resource management is already underway. Today, 27 per cent of Middle Eastern companies responding to the PwC survey have a chief sustainability officer, and almost half of those individuals are primarily responsible for ESG. Relatedly, only 20 per cent of respondents this year said that the CEO had overall control of ESG, down from around 55 per cent last year. Corporate leaders across the region are clearly attaching more importance to these principles.
While large corporations will find it easier to navigate the increasingly complex framework of green financing, small- and medium-size enterprises (SMEs) will require more support and should not be an afterthought – especially in the UAE economy. According to government data published in mid-2022, the country is home to 557,000 SMEs, which account for 63.5 per cent of non-oil GDP, and that number could grow to one million by 2030. If ESG is to be successful, it must become a key component of business for companies of all sizes.
Global warming represents an existential threat, but the magnitude of the challenge has given rise to unprecedented dynamism: governments and business leaders are embracing new frameworks and radical measures to ensure rapid and significant progress on climate action. COP28 in Dubai will only accelerate this process, especially when it comes to building a consensus on ESG implementation. Speed is of the essence, because the sooner companies begin incorporating ESG into their investment decisions, the better they will do – both economically and environmentally – on the path to net-zero emissions.
Vijay Bains is group chief sustainability officer and group head of ESG at Emirates NBD.
Copyright: Project Syndicate, 2023.
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