ESG Investments Gain Momentum In Middle East

This is a welcome change given that the region has fallen behind in ESG investments. Gulf Cooperation Council (GCC) countries used an economic model highly reliant on non-renewable energy exports has limited interest in ESG practices, especially environmental ones. However, this trend has been changed by Saudi Arabia and the United Arab Emirates who are devising national plans to overcome hydrocarbons dependence, increase the share of renewable resources in their energy mix and boost the private sector.

Alena Dique is the founder of ESG Insights Middle East, a regional ESG databank. She told Al-Monitor, "ESG investments in the Middle East have boomed since the pandemic, and this trend will probably remain popular until 2030.” He also added a word of caution, “However, there is still a long way to go regarding the governance aspect, even though the Middle East is no stranger to responsible investing, ethical practices or sharia-compliant strategies."

Sustainable assets are also profitable. A recent GIB asset management report highlights that ESG-compliant investments generally have higher long-term profits. "This is difficult to evaluate as ESG is both qualitative and quantitative. We need to look at how investors choose to assess ESG risk and what areas they look to emphasize. ESG rating might not evaluate all companies the same way or give a true depiction of return on investment all the time. Still, there is no denying that sustainability evaluation exists and can impact the flow of investments," Dique added.

The increasing interest in ESGs — both at the private and the government levels — has also introduced changes in Middle Eastern business practices. "In the region, ESG strategy has been embraced as a mechanism to drive companies to demonstrate their sustainability credentials alongside their global peers," said Dique. "New trends, such as creating ESG positions or adopting green policies, show a growing interest in sustainability issues. Regional governments are hands-on with the transition of energy and natural resources, human capital and economic development and now have taken ESG on board too. Change is challenging, but transition takes time — and that can be monitored and measured."

Despite the growing enthusiasm, finance experts argue that ESG funds worldwide have a poor track record in financial performance.Even from a regional perspective, some investors are still skeptical about the potential of ESGs. "The Gulf was rather late adopting ESG initiatives, which isn't necessarily bad, as it is a rather ambiguous and subjective term. The current energy crisis demonstrates what can happen when an initially reasonable idea is taken too far. In this case, the overall shortfall in hydrocarbon capital expenditure can become counterproductive in the long run," said Ali Al-Salim, Co-Founder at Arkan Partners, an independent investment consulting firm.“A dose of common sense and a holistic approach to ESG investing — thinking about unintended consequences — is critical for regional investors to consider," Al-Salim concluded.

Experts and entrepreneurs also criticize ESG investment because of the lack of clear measures to define what is sustainable. They are ambiguous — and problematic — with various regulatory approaches in different jurisdictions, which means that there is no standard legal framework to deal with them.