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Challenges for ESG Investing in the UAE | |
| Staff Writer |
Post-Pandemic in an increasingly uncertain world whose future was reshaped dynamically but faster than ever before, the financial lessons learned included the policy of wait and watch. Risk management took a 360-degree turn. The policy of caution that everyone has been exercising also meant fewer takers for anything remotely risky; in this case ESG.
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ESG, a concept that seeks to replenish the earth’s lost investments by ensuring that bigger players incorporate a sense of conscious responsibility to alter the course of devastating the climate crisis has three fundamental challenges, according to the European Institute of Management and Finance
Should one look at the ESG Regulatory challenges, we can easily understand the primary reason for this is the standardization of compliance regulations. Given the scope and ambit of all three elements Environment, Social and Governance, standardization is still an issue. Setting the standards for such broad ideas means that it is close to impossible to randomly accord the tite “eco-friendly” “sustainable” or “green”. That is why the EC set up stricter requirements.
Closer home, In accordance with Article (76) of the Chairman of SCA Board Decision No. (03 R.M.) of 2020 concerning 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) must publish a sustainability report. This means that it is a regulatory requirement.
Should we look at the other more intrinsic challenges in certain cases, businesses are expected to accurately meet the desired level of sustainability which could also become a hurdle for potential investors.
One cannot neglect the fact that ESG investing means differently to different institutions and individuals as also to different countries. That means that it varies within the institution itself depending on the targeted investors. A thorough audit and risk assessment can also help determine if the proposed ESG investment goals are being met. ESG credentials with the management of factors, such as credit risk, cost reduction, and consolidation may help with such risk management.
ESG analysis requires due diligence processes given the nature of risk, and the length of the use of ESG criteria is a way to evaluate potential operational, reputational, or regulatory risks. This can only happen, however, when there is access to accurate, reliable, and relevant ESG data.
One of the biggest challenges for investors is that this information takes on many forms and requires an assortment of sources that must be continually updated, including financial data, operational and organizational data, environmental impact metrics, and market data, among others. The absence of reliable data on ESG investments puts a question mark on the fruitfulness has been an issue.
However, there is hope. Should one read Christophe Lalandre’s thoughts as shared in Citywire, he says, “Sustainability is at the top of the agenda in the region, and investment opportunities are rising due to the growing demand for investment approaches that go beyond just backward-looking ESG metrics, to a forward-looking methodology that assesses future climate risks and embraces all aspects of sustainability.” This means that the UAE is going beyond the EU and conducting its investments sans metrics but with ethical responsibilities levied on investors.
In short, integrated investing showcases an excellent opportunity for financial institutions and investment firms to reduce investment risk, while simultaneously catering to value-driven investors while concomitantly promoting higher ethical standards.