5 minute read 5 Jun 2022
Low angle view looking up at green plants growing on green wall of building

Five ways MENA companies can embrace sustainability

By Yasir Ahmad

EY MENA Climate Change and Sustainability Services Leader

Focused on combating climate change through sustainability. Working with businesses, regulators, and governments to attain ambitious environmental, social and governance (ESG) targets.

5 minute read 5 Jun 2022

As MENA economies diversify and become more closely integrated into global capital markets, environmental, social and governance (ESG) considerations are becoming increasingly relevant to the region’s companies.

In brief
  • As MENA economies diversify and become more closely integrated into global capital markets, environmental, social and governance (ESG) considerations are becoming increasingly relevant to the region’s companies.
  • Executives are answerable to investors, regulators, customers and employees, all of whom are increasingly demanding clear ESG commitments from companies they work with.
  • Basic sustainability disclosures are no longer enough in today’s scenario. Companies must publish strategies with clearly stated performance indicators, and then use them to transparently measure progress toward ESG goals. The robustness and authenticity of the data points being published are of considerable importance.
  • Far from being left behind, the region’s state energy companies are at the forefront of this movement, embracing carbon intensity reduction and net zero emissions targets, and innovative methods for offsetting carbon emissions. There is also a shift toward renewable energy pathways and energy efficiency initiatives.

ESG goals are no longer a tick box exercise for companies, but are increasingly crucial to their success. ESG investment funds, which only back companies that meet specific ESG criteria, doubled in size last year. By 2025 they are expected to reach US$53t, or a third of all global assets under management. That is forcing a rapid change in strategy among business executives.

Traditionally, MENA executives might have been responsible to private investors or government owners alone. But as states across the region seek to diversify their economies, they are encouraging local companies to seek international capital and adopt global regulatory norms. That brings questions about sustainability into the day-to-day work of business leaders across the region.

MENA executives now report that ESG commitments are among the first issues raised by potential investors. Without a clear strategy, the pathway to raising capital can be difficult. Exchanges in Dubai and Abu Dhabi have made ESG reporting mandatory for their listed companies. Customers and employees too, younger ones in particular, increasingly value sustainability.

Here are five ways companies in the region can ride the ESG wave:

1. Engage with stakeholders

It is vital for MENA executives to understand what ESG is and what it means for their different stakeholders. Private equity investors, for example, while not subject to the same restrictions as an ESG equity fund, may still face pressure from their own investors to require sustainability standards at portfolio companies.

Companies should engage directly with governments, regulators and investors, but also speak internally to employees and survey customers to understand what each group expects from a responsible company.

The above engagement also helps to strategically assess the “material” ESG issues as relevant to an organization from the lens of both internal as well as external stakeholders. Once a company clearly understands its ESG responsibilities with respect to the material ESG issues, a sustainability strategy can increase the value of the business, by making it more appealing to employees, customers and investors.

2. Define specific targets and put numbers on them

Goals should be ambitious but realistic and measurable at the same time. It is also important to have the leadership buy-in for each of the target and companies should consider how these targets will interact with each other.

Take employment as an example. MENA companies may want to adopt a goal for both gender diversity and localization (hiring more national staff). But pursuing one could make the other more difficult, for example, in case there are fewer qualified women in the domestic population for a specific position. A good ESG strategy will acknowledge these limitations, and explain how competing goals can be addressed concurrently, over time.

3. Solve the data problem first

ESG strategies do not need to be published overnight and data collection must come before goal setting.

The worst thing a company can do is publicly set an ambitious goal before benchmarking existing performance. Instead, to understand what is achievable, companies should invest time and money defining relevant sustainability metrics for a given business and identifying how to gather them. This might require companies to perform an audit of practices within their supply chain, creation of sound data templates and capacity enhancement of the data owners in each case.

Stakeholders will reward a well-thought-out ESG plan over a rushed and glossy one.

4. Take the initiative

As governments across the MENA region seek to transition their economies toward greener, more sustainable models, regulators are gearing up to introduce sustainability requirements. Rather than waiting for these regulations to appear, companies should get a head start, with strategies that articulate the role the company will play in the new economy.

Here, the region can learn from its energy giants. State-owned energy companies have faced less pressure than publicly listed oil majors in Europe and the US to deal with emissions. Nevertheless, they have taken the lead on the topic, voluntarily announcing targets and initiatives rather than waiting for pressure to build.

It is important to have a sound governance structure to drive the ESG agenda within the organization. Clear definition of roles and responsibilities, board oversight, dedicated committees, capacity and skill development, and proper infrastructure and tools to support the strategic plans are a must requirement for a successful transformation to happen.

5. Embed sustainability in workplace culture

Sustainability should not only be an agenda item of the core sustainability team in any organization, but needs buy-in and participation of everyone to be successful. In current times, this is not a difficult ask, as their internal stakeholders (especially millennials) are giving a lot of importance to this theme. For instance, at a recent town hall for MENA employees of a global company, half of the questions raised were about the company’s sustainability goals. In common with their peers across the world, the region’s youngest generations are increasingly preoccupied with sustainable business practices.

Companies need to recognize this and embed sustainability within offices and facilities, as well as operational activities, in order to attract and retain the best young talent.

Summary

The diversification and close integration of MENA economies have resulted in companies publishing ESG strategies to measure progress. They have further embraced carbon intensity reduction and zero emission targets to shift toward a renewable energy pathway and energy efficiency.

About this article

By Yasir Ahmad

EY MENA Climate Change and Sustainability Services Leader

Focused on combating climate change through sustainability. Working with businesses, regulators, and governments to attain ambitious environmental, social and governance (ESG) targets.