The Rise of ESG       |       Embracing the Change       |       Integrating ESG      |       Responsible Investment Approaches

 

As the demand for responsible investing grows, here’s how organizations in the Middle East can implement Environmental, Social and Governance (ESG) into their investment portfolios targeting sustainable returns and long-term outcomes.

  • Meeting the Rise in Demand for ESG Investing in the Middle East | Mercer
  • ESG Investing for A Sustainable & Future-Ready Middle East | Mercer
  • Balancing ESG Investing in the Middle East | Mercer

Meeting the rise in demand for ESG investing in the Middle East

 

Events in recent years have alerted institutional investors to the severity of global systemic risks—climate change, technological disruption, geopolitics, water scarcity, and more. The need for a more unified global approach to risk mitigation has never been more apparent.

 

Thus, investors are pivoting towards ESG funds and projects for their portfolios, both within their own organizations and with external clients.

 

The Middle East investment community continues to embrace ESG as part of their strategy to address the fundamental shifts towards ESG as a haven for sustainable returns. According to a senior executive officer at Lombard Odier, sustainability is at the top of the agenda for most investors in the GCC region[1], with increased demand for ESG-conscious portfolios giving rise to multiple new investment opportunities.

 

Frameworks and guidelines are setting the standard for ESG in the region. Sharia-compliant green bond issuance, , doubled between 2020 and 2021. Dubai also launched its UAE ESG Index in April 2020, with Saudi Arabia planning to follow suit. Investor and consumer pressures, especially from the younger population (almost half the population of the Middle East is under 24)[2], are further accelerating the sustainable investment trend.

 

[1] Singh, S. (2021, November 8). ESG: How Middle East's net zero ambition is shifting the future of investing in the region. Wealth Manager. Retrieved August 2, 2022, from https://citywiremiddleeast.com/news/esg-how-middle-east-s-net-zero-ambition-is-shifting-the-future-of-investing-in-the-region/a1578813

[2] PricewaterhouseCoopers. (n.d.). ESG - reimagining our region. PwC. Retrieved August 2, 2022, from https://www.pwc.com/m1/en/esg.html

 

How investors in the Middle East are embracing the change

 

Tangible steps are being made to address climate change, sustainability, and ESG investing in the Middle East. More than ever before, discourse surrounding these trends are filling conversations between investors and asset owners.

 

As a whole, GCC asset owners are rapidly catching up with their global peers for ESG investing, most notably, and understandably with climate-related challenges. Regional asset owners are also starting to understand the impact they can have over these issues throught their investment practices as the solution expand from the historical realms of the policy makers. They are starting to use their size and collective ‘power’ to exert influence over the community, which is driving the adoption of more ESG investing amongst the region’s corporates.

 

Notably, many of the emerging sustainable investment opportunities are globally aligned in adopting forward-looking perspectives and methodologies that assess future risks and transition opportunities, while embracing a more holistic approach to sustainability that goes beyond environmental impact alone.

Leaning into the sustainable investment trend is key to uncovering new opportunities for converting systemic risks into sustainable returns. Institutional investors need to constantly pay attention to which direction the investing world is going. Only then can they position their portfolios to benefit from, rather than be hindered by, these advancements. From an investor perspective, the growing preference is to be investing in companies that have a detailed plan  to address these concerns related to sustainability and ESG,  The question used to be ‘what is the performance costs to investing in ESG’, the question now however is ‘what is the performance costs by not investing in ESG’.

 

Leaning into the sustainable investment trend is key to uncovering new opportunities for converting systemic risks into sustainable returns. Institutional investors need to constantly pay attention to which direction the investing world is going. Only then can they position their portfolios to benefit from, rather than be hindered by, these advancements. From an investor perspective, the growing preference is to be investing in companies that have a detailed plan  to address these concerns related to sustainability and ESG,  The question used to be ‘what is the performance costs to investing in ESG’, the question now however is ‘what is the performance costs by not investing in ESG’.

 

Integrate ESG into your end-to-end investment process

 

As regulations tighten in response to greenwashing in the market, companies need to ensure that their ESG processes and portfolios are robust enough to hold up against future scrutiny.

 

Regional asset owners also face challenges when it comes to ESG performance indicators to measure long-term impact.

 

“Without standardized metrics or reporting, it’s difficult to know if you’re doing enough and how you are performing relative to the crowd. You can’t manage what you don’t measure.”

Robert Ansari.

Approaches to Responsible Investment

Mercer simplifies ESG compliance factors for companies by incorporating sustainable investment strategies into investment portfolios. Through our Responsible Investment (RI) framework, companies can transform everything from board training, to policies and processes, to asset allocation and ESG reporting.

 

Our RI approach is divided into four main elements, which can be implemented individually or in a combination depending on your organizational needs

 

 

1. Integration

Companies ignoring ESG-related issues potentially leave themselves open to multiple risks, including physical, competitive, and reputational risks. By actively accounting for ESG considerations in research, analysis, and decision-making processes, companies can ensure that securities or asset classes meet ESG criteria while also aligning with their fiducial responsibilities. 

 

 

2. Stewardship

As an integral part of RI, stewardship gives creditors or investors active influence over their investees’ actions through tools such as direct engagement or proxy voting. Stewardship gives investors a say in key topics such as environmental management, labor standards, director remuneration, and more. This helps mitigate governance-related risks in ESG investing—which have inflicted losses on investors in several high-profile governance cases in the past.

 

3. Investment

Choosing the right sustainability-themed funds, whether they’re listed equities, fixed income assets, properties, or alternative projects, is key to driving long-term growth and returns. Clients are given assistance on evaluating, picking, and allocating funds based on measurable social and environmental impact—referencing guidelines such as the United Nations Sustainable Development Goals (SDGs), the Global Impact Investing Rating System (GIIRS), or the Global Impact Investing Network (GIIN) IRIS+ metrics—alongside financial returns. 

 

4. Screening

Clients are given the lowdown on any negative or positive social and environmental impacts in future investments, allowing them to pre-emptively exclude funds or assets that do not align with organizational values. Examples include investments with ties to child labor, modern slavery, and weapons production. Screening also protects companies from any unforeseen reputational, financial, and/or ethical risks related to their investment portfolios. 


Opportunities abound for ESG investing in the Middle East with Mercer

 

As a leader in the field of responsible and sustainable investing since 2004, Mercer has close to two decades of innovation, research, and global experience to help our clients achieve their ESG investing goals. Our RI team regularly stays up to date with sustainability trends and offers thought leadership to global discussions related to ESG integration and assignment of ESG ratings across asset classes.

 

Find out more about Mercer’s Responsible Investment (RI) approach, or contact a Mercer RI specialist to learn how to incorporate ESG into your company’s investment portfolio today.


Meet the author

Robert Ansari 

Robert Ansari

Investments and Retirement business leader, IMETA