Environment, Social, and Governance (ESG) measures a company’s sustainability and societal impact, using metrics that matter to investors and stakeholders. ESG disclosures and reporting is now an essential factor in assessing the sustainability of businesses. The COVID-19 pandemic has generated a global interest in ESG reporting in various forms as stakeholders demand more ESG information and transparency from companies.
Businesses are now generally recognising that they are sustained by the society and environment. If these two key elements are not considered in the overall governance of the business, future operations may not be sustained. In addition, many companies and investors globally are increasingly considering the financial returns and the sustainability of those returns within the ESG factors (non-financial factors) to assess the company's performance. Therefore, companies must embed ESG in their operations and inform the various stakeholders periodically on the ESG initiatives and their impacts. Various governments globally are also incorporating ESG as part of public policy and long-term strategy for public enterprises – this is setting the ‘tone at the top’ for the country for the private sector to follow.
ESG – Background and Evolution
ESG disclosures and reporting evolved from Environment, Health and Safety regulations and Corporate Social Responsibility (CSR). Before ESG, organisations have mainly been focusing on CSR. ESG builds on the accountability to stakeholders brought by CSR by providing quantifiable indicators, which can be measured, monitored, and disclosed to stakeholders periodically.
ESG is mainly used by investors to assess and review the performance of companies on key environmental, social, and governance factors that may impact financial performance. These factors are not mainly detected from the analysis of financial information.
Environmental factors – these describe the company’s operations impact on the environment and how the company demonstrates stewardship to the environment. This may be reflected in the company’s environmental management system and its mitigation plans on risks that could harm the environment, e.g., energy consumption, water usage, waste generation and management emissions, biodiversity, and environmental pollution.
Social factors – refer to how a company manages its relationship with internal (employees) and external stakeholders (suppliers, and host communities) and how it creates value to these stakeholders. Some of the specific key areas investors would look at are the company’s attitude towards employees - diversity, well-being, human rights, customer protection, supply chain, anti-bribery and corruption and supply chain management, health and safety, and data privacy.
Governance factors – these refer to company leadership and management philosophy, practices, tone at the top, policies and shareholder rights, internal controls, and compensation. This is reflected in a proper corporate governance framework that supports transparency and long-term success, including board oversight over ESG and related reporting standards.
There is no universal categorization of ESG issues as these differ depending on the company sector, country, and business model. Some high-level examples of incidents that triggered ESG are as follows:
- BP 2010 – the BP Deepwater Horizon oil spill, where the company was fined USD53.8 billion, clean-up costs and reparations (environment)
- Volkswagen 2015 – Company was fined EUR27.4 billion for rigging 11 million vehicles to pass the emission tests (environment)
- Cambridge Analytica 2018 – Analytica harvested personal data of 87 million Facebook users resulting in Facebook losing USD 35 billion in value (social)
- Uber - The UK Supreme Court ruled that Uber must recognise its drivers as employees rather than contractors, granting them paid leave and pensions (social).
Environmental numbers are examined by investors; they point most specifically to the progress being made in the name of climate change and resilience – especially, when resilience pertains to physical threats like fire and floods.
The ‘G’ is getting some attention with transparency and diversity, becoming focal points on boardroom agendas.
However, post the COVID 19 pandemic, the future of ESG reporting will lie with the ‘S’ and particularly with stakeholder engagement (both internal and external). When the future of the office sector lies entirely in the hands of the employees, it is important to engage them as much as possible in everything you do.
ESG in the UAE
The emphasis on ESG reporting is in line with the UAE vision of creating an investment climate capable of attracting international investors and encouraging sustainable investments.
In 2015, the UAE government adopted the UAE Green Agenda 2015-2030, focusing on the following five key elements: competitive knowledge economy; social development and quality of life; sustainable environment and valued natural resources; clean energy and climate action; green life and sustainable use of resources.
The adoption of ESG reporting locally has been two-fold – voluntary and compliance with regulations. This has been mainly on public and large companies with public scrutiny. In the UAE, the Securities and Commodities Authority (SCA) has set the tone by requiring all public joint-stock companies listed in the UAE to comply with certain ESG elements and periodically reporting on these. In addition, some unlisted companies with an international footprint and some government entities had already been publishing sustainability reports annually. These developments present emerging risks from a compliance perspective and from business continuity and sustainability perspective.
The results from the HSBC survey on 180 issuers and investors regarding ESG undertaken in 2020 indicate that investors and issuers are responding to environmental risks and inequalities in society. The following key messages were extracted from the survey by HSBC:
- 58 per cent of UAE investors see obstacles to ESG investing.
- 91 per cent of issuers expect to be reallocating capital towards positive environmental and social outcomes to a substantial or noticeable extent in the next five years.
- Both issuers and investors want clearer data and guidance around ESG principles.
- UAE market participants see clear opportunities in electric vehicles and charging and carbon capture.
ESG Reporting Requirements
The Chairman of the SCA Board issued Decision No. (03) R.M) of 2020 - Adopting the Corporate Governance Guide for Public Joint Stock Companies (Governance Code), public joint-stock companies listed on the Abu Dhabi Securities Exchange (ADX) or the Dubai Financial Market (DFM) in the UAE (Listed PJSCs). Article 76 of this decision requires the entities listed on the ADX and DFM to publish a sustainability report annually. This was subsequently followed up by a clarification note setting out the details on the key requirements/contents of the sustainability report.
The UAE is now part of the global stock exchanges with guidance on ESG reporting. The global Sustainable Stock Exchange (SSE) monitors and tracks the implementation of ESG guidance on reporting by exchanges affiliated to it. According to their latest update of 14 May 2021 - 58 of the 107 stock exchanges tracked by the SSE have published ESG reporting guidance for their listed companies’ exchanges. The 58 are split are as follows.
- Europe - 21
- Africa - 4
- Middle East - 7
- Asia – 17
- America’s - 9
DFM ESG Reporting Guidelines
This guide aims to promote transparency and disclosure among listed companies by highlighting the key benefits of sustainability reporting to meet the demanding requirements of institutional investors for ESG information. This guide also encourages listed companies to disclose a set of 32 ESG metrics and indicators - in alignment with the recommendations of the SSE initiative and the World Federation of Exchanges (WFE).
ADX ESG Reporting Guidelines
Abu Dhabi Securities Exchange has deployed the following key initiatives to promote the adoption of Environment, Social, and Governance (ESG) among the listed companies and investors.
- Promoting sustainability reporting: Promoting market education through the deployment of a sustainability reporting disclosure guide, group, and individual engagement sessions with the listed companies
- Promoting sustainable financial products: Encouraging the development of green financial products such as Green Bonds or ESG indices
- Promoting responsible investment practices: Encouraging dialogue between investors and listed companies on responsible investing and promoting the integration of ESG factors in investment decisions
What are the ESG Requirements for Public Joint Stock Companies (PJSC) in UAE?
Listed Companies must submit their annual sustainability reports for the financial year 2020 no later than six months following the end of the financial year. This is a specific requirement for the 2020 financial year. For subsequent financial years, Listed PJSCs must submit the sustainability report to SCA within 90 days from each financial year-end or before the date of the annual general assembly meeting, whichever is earlier. The report should reflect the company’s long-term strategy and its impact on the following areas:
- the environment – the impact of the company’s operations and decisions on the environment and the company's communities.
- society – how the company’s policies and operations contribute or could contribute to social justice, the well-being of workers and employees and the surrounding community.
- the economy and governance –how the company contributes to society's economic benefit and the impact of the company's operations on the local economy.
In addition, PJSCs must comply with the Global Reporting Initiative (GRI) standards and any sustainability standards and requirements issued by the DFM or ADX, depending on which market the PJSC is listed on.
Listed Companies must submit their annual sustainability report for the financial year 2020 no later than six months following the end of the financial year. This is a specific requirement for the 2020 financial year. For subsequent financial years, Listed PJSCs must submit the sustainability report to SCA within 90 days from each financial year-end or before the date of the annual general assembly meeting, whichever is earlier.
Non-listed companies and state-owned companies are also encouraged to adopt ESG frameworks and reporting. The board and senior management will need to set the tone to ensure buy-in by employees resulting in smooth implementation of ESG frameworks and periodic reporting and disclosure. In our next article, we will discuss how companies can comply with these requirements and embed ESG in all their business operations.
Please contact Shivendra Jha, Head of Advisory Services at [email protected] and Charles Tungwarara, Associate Director - Risk Advisory Services at [email protected] for information on how we can support you further develop your ESG achievements and reporting.
- The Future of ESG Reporting (gresb.com)
- ESG Reporting: The past, present and future (gresb.com)
- Future of ESG reporting: Aligning with the ultimate customer to out-run the bear (gresb.com)
- ADX Environmental, Social and Governance (ESG) Disclosure Guidance for Listed Companies Dubai Financial Market ESG REPORTING GUIDE
- SCA Chairman Decision no. 3 of 2020 Concerning Joint Stock Companies Governance Guide
- The need to have a clear narrative on ESG - BDO