In recent times, there has been a global rise in strategies that emphasize responsible investing, sustainable development, inclusive growth, and a more conscious approach to ethical business conduct.
In this article, our aim is to highlight the regulatory regime on ESG (Environmental, Social, and Governance) in the United Arab Emirates (UAE) and shed light on its relevance to the corporate community.
Introduction
Over the last few decades, the planet and its resources have been exploited to an extent that it now requires immediate and urgent action by the government and/ or regulators. This needs to further be backed by amplified efforts of corporates, local communities, and society at large. With global issues such as climate change, resource scarcity, income inequality, diversity, and corruption on the rise, there is a need for fundamental change that involves a holistic focus on ESG factors.
From a regulatory perspective, specifically in the UAE, the adoption of an ESG regime is on the rise. The nation is witnessing significant development in terms of frameworks and practices to effectuate corporate governance mechanisms that reflect transparency and accountability while aligning with different ESG parameters.
Furthermore, adopting measures to achieve ESG compliance aligns with the nation’s vision which is a comprehensive agenda focused on achieving sustainable development, technical advancement, quality education, economic growth, increased resource efficiency, and healthy ecosystems. As one of the signatories to the UN SDGs (United Nations Sustainable Development Goals), the UAE has made achieving these goals a fundamental part of its vision and future ambitions. As a collective effort, out of the 17 SDGs, the nation particularly concentrates on the following 6 SDGs:
SDG 5: Gender Equality and the Empowerment of Women and Girls
SDG 8: Decent Work and Inclusive Economic Growth
SDG 9: Industry, Innovation, and Infrastructure
SDG 10: Reduced Inequalities
SDG 12: Responsible Consumption and Production
SDG 17: Partnerships for the Goals
While focusing on the above SDGs, the nation has pledged to “leave no one behind” and to shift the world to a sustainable and resilient path.
Regulatory Authority in the UAE
Applauding the nation’s progress made in 2022, H.H. Sheikh Mohammed bin Rashid Al Maktoum Vice President of the UAE and Ruler of Dubai unveiled UAE’s priority list for 2023 which includes –
Consolidating national identity
Championing the environment and sustainability
Developing the education system and its vision
Boosting Emiratisation policies
Expanding economic partnerships across the globe
When analyzing the new priorities list, one will understand that the core elements therein are synchronized and go hand in hand with the 6 SDGs that the UAE is focused on achieving.
Now coming to the corporate sector, to formulate a strong ESG reform, in 2020, the UAE SCA (Securities and Commodities Authority) issued the revised Corporate Governance Guide applicable to Public Joint Stock Companies (PJSC) listed on the Abu Dhabi Securities Exchange (ADX) and Dubai Financial Market (DFM). The UAE SCA is a regulatory body established to ensure the development of the organizational and supervisory framework of the listed joint-stock companies and other companies operating in the securities field. In 2021, under Article (76) of the Chairman of SCA Board Decision No. (03 R.M.) of 2020, the SCA introduced integrated reporting, making it mandatory for the PJSC listed on ADX and DFM to furnish a consolidated ESG report.
Integrated reporting is a way of understanding the relationship between financial and non-financial factors that determine a company’s performance and how a company creates sustainable value in the longer term. The report shall entail disclosures pertaining to the ESG components relevant to the respective business structure. The integrated report shall serve as a combination of the financial and non-financial performance of the company and is expected to reflect the company’s long-term strategy and impact. The ESG parameter assessed under the report shall be further mapped against global standards such as the GRI (Global Reporting Initiative) and UN SDGs.
How can companies ensure ESG compliance?
1. ESG Due Diligence:
The baseline of an ESG due diligence is to understand current behaviors in line with the market trends. It involves a detailed analysis of the Company’s conduct by way of bifurcating its operations and processes under respective ESG parameters. For example, a review of the company’s environmental policies and environmental clearance certificates shall fall under the Environmental category, whereas processes pertaining to Anti-Bribery and Anti-Money Laundering shall be assessed under the Governance category. Similarly, the company’s approach to recruitment including anti-discrimination and equal opportunity policies shall fall within the ambit of the Social category.
The outcome of ESG due diligence is available in the form of an analysis that can help identify and evaluate the gaps between the company’s actual performance and its potential/desired performance with respect to different ESG parameters. Furthermore, the gap analysis is supported by recommendations that include measures needed to be implemented to address these gaps.
An ESG due diligence may be carried out by a company on an annual or half-yearly basis. However, normally the primary objective of the procedure is aimed at either assessing internal controls and accordingly implementing corrective and preventive actions; or ascertaining the locus standi of a third party with respect to its business conduct which is evaluated in line with ESG parameters. This report whether for internal or external use serves as a risk assessment for the company to identify loopholes in the existing structure and accordingly integrate solutions that can help enhance the position of the company in question with respect to its ESG alignment.
2. Materiality Assessment:
Based on the findings of the gap analysis that may suggest corrective and preventive measures, the company then has the appropriate structure in place to carry out a materiality assessment. An ESG materiality assessment is a tool used to identify and prioritize ESG issues that are the most critical to a company. This assessment serves as a blueprint for the company’s ESG strategy.
As part of the materiality assessment, the idea is to identify goals and set realistic outcomes while keeping in mind different stakeholder groups. Here it is important to note that there is no one-size-fits-all approach. ESG materiality varies from business to business and industry to industry, depending on the risk and opportunity factors in the sector. For example, in the real estate industry, particular importance is given to the ‘E’ component. However, the relevance of components ‘S’ and ‘G’ to the industry shall not be undermined. With respect to the social aspect, internally a company shall ensure workplace safety and foster high standards in labor practices. Whereas, under the governance aspect, a company shall ensure adequate and transparent remuneration, promote transparent disclosure of governance issues, take adequate action against corruption, and so on.
3. Risk Matrix
The outcome of the materiality assessment results in a representation of the current key ESG issues and their contribution to companies’ overall ESG ratings. Below is a sample ESG materiality map for an information technology company –
The risk matrix helps graph the issues by their impact on ESG issues and their value for your business. From a stakeholder perspective, the matrix supports identifying the reporting framework most suitable to the business and helps avoid overlapping reporting areas.
The process also helps enhance stakeholder engagement as their involvement is required to get inputs, insights, and assistance with gathering and reporting relevant information. The strategies implemented and disclosures made thereunder are of particular importance to investors, who frequently seek transparency and accountability on internal systems and processes. Keeping in mind the risk matrix, the strategies devised, and reporting standards adopted by the company assist with more effective target setting and data-based ESG growth.
4. Reporting:
ESG reporting is a way of furnishing a company’s non-financial and sustainable annual performance to all stakeholders including the public at large. It conveys the strategic objectives of the business toward ESG components while highlighting specific topic areas and targets relevant to the future sustainable development of the company.
ESG reporting involves both qualitative and quantitative data and can include sustainable reporting. And while in most parts of the world, annual integrated reporting is a mandate for listed companies; the space is ever evolving with several companies reporting ESG parameters on a voluntary basis as well. The primary objective of the reporting is to assess and identify risk-adjusted returns.
Conclusion:
The importance of ESG is on a substantial rise and is here to stay for good. The coming years will see a rapid increase of governments striving to enhance regulations on the regime and companies undertaking proactive measures to branch out as leaders demonstrating strong ESG reforms. From a financial and investment standpoint, investors are prone to evaluate assets by considering ESG factors alongside financial metrics. It is important for companies to understand that ESG is not merely about doing the right thing but is also important from the perspective of long-term return on investment.
