How MENA banks are bridging gaps to progress their ESG performance

Almost three-quarters of MENA banks have introduced ESG strategies, yet it is notable that far fewer have robust ESG governance and accountability frameworks that promote rigorous implementation.

A carefully conceived ESG strategy is an important foundation. It is both a way of aligning ESG objectives with the bank’s broader business strategy and a preparation for new ESG regulations. In a key finding, our analysis shows that 70% of the banks reviewed have published ESG strategies. Of the remaining 30%, half intend to introduce a strategy and the balance is not disclosing any plans yet.

Among those with ESG strategies, though, progress toward rigorous implementation remains uneven. Encouragingly, half of all the banks surveyed describe the main pillars that support their ESG strategy. Specific pillars vary depending on a bank’s approach and priorities, but MENA banks generally encompass the following:

• Preserving the environment
• Committing to fight climate change
• Fostering ethics in activities and relationships with employees and suppliers
• Engaging with stakeholders and communities
• Promoting sustainable financing

A further 20% regarded as top performers specify robust ESG frameworks backed by key performance indicators for measuring ESG implementation.

Gaps in ESG governance

While banks are making progress in introducing ESG strategies, fewer have ESG governance structures extending to the board or senior management level. This suggests they may lack the support and means to drive the execution of ESG measures throughout the bank.

More than half (55%) of the banks reviewed have a formal ESG committee at the board level (20%) or at the management level (35%), showing that they are moving toward having accountability at senior levels. Yet approaching half do not have any type of ESG committee at any level.

What is more, this picture of governance gaps extends throughout the banks. Notably, while many MENA banks have set up ESG working groups and committees for operations and decision-making, only a third (35%) have appointed a Chief Sustainability Officer (CSO).

Finally, only a fifth (20%) of banks have explicitly linked senior executive remuneration to ESG targets. By not doing so, MENA banks are falling behind international peers: banks elsewhere increasingly link variable remuneration to ESG performance.

The establishment of sustainable finance frameworks by 45% of the banks surveyed, typically linked to environmental and social consideration is the evidence of how MENA banks are shaping its progress. These frameworks tend to be backed by international standards such as the International Capital Market Association’s (ICMA), Green Bond Principles (GBP), Social Bond Principles (SBP) and Sustainability-Linked Bond Principles (SLBP) but banks should seek second-party validation to improve investor confidence.

In fact, more than half of the banks surveyed provide sustainable finance, and a further 10% of the sample do so without having a formal framework. In general, they are lending to projects in the fields of renewable energy, low-carbon buildings and employment generation. When it comes to providing sustainable financing products to corporate and institutional clients, MENA bank’s offerings compare favorably with global banks.

To that end:

There is less emphasis on sustainable retail bank products. The most popular is the green or hybrid vehicle loan, provided by 35% of banks. Additionally, 25% of banks extend solar loans and 10% green mortgage loans.

However, there is room for growth in all types of sustainable financing products, as indicated by the fact that only 25% of surveyed banks have set sustainable finance targets. Most of these (20%) plan to commit capital to green projects such as renewable energy and green buildings, while the balance (5%) aims to grow their ESG-specific lending. These targets matter because they drive banks to create ESG-aligned product offerings and actively market them.

Significant effort needs to be made to improve resilience for financial institutions. Rising temperatures are expected to have serious repercussions for the region’s agriculture, energy, water, coastlines and tourism. Yet few banks appear to have integrated climate risk into their risk management frameworks.

More than 80% of the banks surveyed do not have a climate risk policy or a commitment statement. Consequently, there is little evidence to suggest climate risks are being analyzed or mitigated.

This stands in sharp contrast to the concerns of the global banking community. Most MENA banks do not embed sustainability considerations, especially climate change, into their overall strategies.

As a result, most of them have not calculated their financed emissions, do not know their exposure to high-emitting sectors, and have not set a timebound commitment to achieving net zero. Further, less than 30% of the banks surveyed have set sectoral-level climate risk ambitions (exclusion lists, winding down of exposures to high greenhouse gas (GHG) emitting sectors, etc.)

Currently, the actions of MENA banks are primarily driven by local and subsidiary jurisdiction regulations, international best practices and pressure from international counterparties in jurisdictions with strict regulations on climate risk management. Even though most of the regulatory guidance in MENA is on a voluntary basis today, effective climate risk management will require significant preparatory actions. For this reason, CEOs and CROs need to act immediately to improve climate risk management.

Even though most of the regulatory guidance in MENA is on a voluntary basis today, the regulators expect banks to be fully prepared for a future mandate to integrate all material risks in their risk management framework, including ESG risks.

Approximately 60% of the banks surveyed claim to integrate ESG into risk management, however, only 40% of banks surveyed have an ESG policy, risk statement or undertake ESG risk assessments. Further, just 60% of the banks conduct ESG materiality assessments. This analysis demonstrates inadequate coverage of all the components required for full integration of ESG within risk management frameworks. In conclusion, there is a lot of CEOs and CROs who can do to broaden the ESG risks considered and integrate them into enterprise risk management frameworks.

Qualitative analysis indicates that 19 of the 20 banks surveyed have introduced some measures to cut carbon and reduce waste in operations. However, few are currently attempting the challenging task of doing so throughout their value chains.

Common measures include energy-saving strategies, purchases of renewable energy, recycling and steps to reduce water consumption. Some banks have green buildings at headquarters and branch levels, with Leadership in Energy and Environmental Design (LEED) ratings. LEED provides a framework for healthy, efficient and cost-saving green buildings.

Yet this activity is not matched by a commitment to reporting their progress within formal frameworks related to scopes 1 and 2. Just 45% of surveyed banks are committed to measuring and reporting scope 1 and scope 2 emissions. Moreover, under half of the banks have formal targets for cutting carbon toward net zero, or generally shrinking their environmental footprints.

When it comes to scope 3 emissions, which encompass banks’ entire value chains, only 30% are committed to reporting. Banks are reducing their footprints through:

• Energy efficiency
• Waste management
• Sustainable procurement

Climate change requires banks to look into the future and decide how to respond. That makes international engagement important. Banks can learn about best practices from their peers, while also influencing emerging norms and standards.

However, participation of MENA banks in international sustainability frameworks is low. Only five out of the banks surveyed, which represents 20%, have signed up to the UN Principles for Responsible Banking (PRB), the world’s foremost sustainable banking framework with 356 signatories in total.

Membership of other initiatives is even lower. Just 10% of MENA banks have signed the equator principles and only 5% have joined the Net-Zero Banking Alliance (NZBA). Besides, none of the banks surveyed have signed up for the Paris Agreement Capital Transition Assessment (PACTA) or the Banking Environment Initiative (BEI).

For context, beyond the scope of our survey, 29 MENA banks have signed up to the PRB. Only four have joined the NZBA, as of September 2023 which has 130 banking signatories.

EY analysis finds that 70% of the banks surveyed now publicly disclose their ESG metrics and related information, either through annual reports or sustainability reports. They are likely to increase the scope of reporting in the future, which is likely to lead to greater ESG progress.

Equally important, many have signed up to international reporting standards. Notably, 65% report their alignment with GRI sustainability reporting standards for banks in their annual reports, which is compulsory in the UAE.

Meanwhile, 30% and 5% respectively report in line with the SASB and Task Force on Climate-related Financial Disclosures (TCFD). Anecdotally, several banks have committed to adopting TCFD standards in the future, while one of the banks surveyed has committed to adopting the Partnership for Carbon Accounting Financials (PCAF) standard to calculate financed emissions.

As standards are adopted more widely, stakeholders will have a much clearer picture of a bank’s sustainability performance, which in turn will increase pressure on banks to improve that performance. However, a number of banks may be poorly prepared to do so.

Conclusion

As COP28 will highlight, climate change is a pressing issue for banks in MENA. It will serve as an opportunity to engage with regulators and peers, as well as to learn more about best practices in terms of integrating ESG’s opportunities and risks into strategy and operations.

It is no exaggeration to argue that COP28 represents a new era for banks in MENA — one in which ESG will become far more of a priority. It is a time of change in which successful banks will be those that not only understand the risks but also grasp the business opportunity. ESG is far more than a compliance issue — it is also an opportunity to gain a competitive advantage through sharpening risk management and winning new clients.