Value creation for shareholders, stakeholders, and society: Corporate sustainability in the Middle East
This article is available in Arabic.
Many studies demonstrate that better ESG practices are closely correlated with higher share price valuations of companies (Gunnar Friede et al., ESG and Financial Performance: Aggregated evidence from more than 2000 empirical studies, Journal of Sustainable Finance & Investment).
As reported by McKinsey & Company: “ESG links to cash flow in five important ways: (1) facilitating top-line growth, (2) reducing costs, (3) minimizing regulatory and legal interventions, (4) increasing employee productivity, and (5) optimizing investment and capital expenditures.” Sustainability is more than a business trend, and it should be embedded in the corporate governance rules of the companies.
We can say that corporate governance is the system by which companies are directed and controlled because it involves board structures as well as reporting lines and formal organization within the firm (Spitzeck and Hansen). In contrast, sustainability governance is concerned with the potential sustainability performance of the company in the future. It can be considered an enabler of potential value creation for shareholders, stakeholders, and society. The focus on sustainability shifts the priorities from the short to the long-term. In this context, sustainability governance can be understood as part of an overall corporate governance system concerned with sustainability issues.
Dimensions of sustainability governance
According to researchers Schneider and Meins, there are three dimensions of sustainability governance:
- The strategic and structural features of the system
- Processes within organizations for the implementation and control of corporate sustainability (CS)
- Features concerning the design of external relations with firms’ environment
Structures and processes are the core elements to transform sustainability into more than goodwill and fashionable business words in companies. Therefore, besides the analysis of CS and corporate social responsibility (CSR) reports published by companies, it could be an excellent approximation to identify the components of structures and procedures developed by corporations in these reports.
Most large companies in the Middle East are currently involved in some form of sustainability performance and reporting. The increasing level of sustainability reporting among the top companies in the richest MENA countries (Saudi Arabia, Qatar, and the United Arab Emirates) is linked to the sustainable development agenda. The governments initiated and adopted these commitments to express the transformational vision to adapt their countries to a post-Covid global panorama.
But beyond an in-depth analysis of the reports on the sustainability of the corporations, an excellent tool to measure the degree of progress of CS is the creation of the S&P/Hawkamah ESG pan-Arab Index. This index can be used by international and regional investors who seek to incorporate valuations of ESG considerations in investment processes. Therefore, it is a convenient tool for benchmarking ESG practices by companies and their share price.
The index is calculated for the 50 most prominent and most liquid companies listed on the national stock exchanges of the eleven main MENA markets: Bahrain, Egypt, Jordan, Lebanon, Kuwait, Morocco, Oman, Qatar, Saudi Arabia, Tunisia, and the United Arab Emirates. The weighting of environmental and social disclosure items differs based on their impact.
The index employs a unique methodology that quantifies each company’s ESG practices and translates them into a scoring system that analysts use to rank each company against its peers in the MENA markets. It is formed by qualitative, quantitative, and composite/final scores.
The ESG Index has 197 indicators or questions covering environmental, social, and corporate governance. This index measures the development level of sustainability.
- 127 corporate governance disclosure indicators identified:
- – Shareholder rights
- – Audit process
- – Financial and operational indicators
- – Board and management profile
- – Ownership structure
- – Business ethics
- 70 environmental and social disclosure indicators identified:
- – Environment
- – Employees
- – Community
- – Customers/Product
Companies listed on the index are those publishing their sustainability information in line with various sustainability-related guidelines. They can be considered leaders in embedding and implementing sustainability structures.
The top 10 companies by index weight, published in April 2022, are:
Top 10 Constituents by Index Weight
|ALDAR Properties||Real Estate|
|Saudi Arabian Mining Company||Materials|
|Abu Dhabi Commercial Bank||Financials|
|FIRST ABU DHABI BANK||Financials|
|Emirates Telecommunications Group||Communication Services|
|Aluminium Bahrain BSC||Materials|
|Sahara International Petrochemical Co.||Materials|
|SAUDI BASIC INDUSTRIES CORP||Materials|
|Dubai Investments (DI)||Industrials|
|Bank Al Bitad||Financials|
|COUNTRY/REGION||NUMBER OF CONSTITUENTS||INDEX WEIGHT [%]|
|United Arab Emirates||15||34.4|
Based on index constituents’ country of domicile
Source: S&P Dow Jones Indices
All of them are catching up with global best practices incorporating sustainability into some of their structures and processes. This is reflected in the sustainability and CSR reports published by these companies. Results indicate that the sustainability debate has found its way into governance structures. But not all companies incorporate the same elements in the design of sustainability governance. In summary, some of the following items can be identified as part of the structure of the companies in the table above:
- Sustainability department set-up
- Values related to sustainability declared
- Sustainability committee set-up
- Sustainability embedded in mission and vision principles
- Head of sustainability: dedicated direct ownership and leadership
- Sustainability policy: economic, social, and environmental affairs
- Sustainability strategy: opportunities and threats
- Code of conduct: corporation commitment to sustainability
Regarding processes, not all of them are present in each company’s governance. However, we can find the following elements among all of them:
- Sustainability reporting and assurance: short and long-term
- Sustainability related training: for all the employees
- Sustainability cross-functional executive committee and working teams
- Sustainability guidelines and external advisory councils
- Environmental management systems (EMS)
- Stakeholder engagement: suppliers, and administration, among others
- Commitment from leadership: CEO and Board clear direction, strategic influence, and committed leadership
Most of these companies are implementing and continuously updating social and environmental management systems. These systems improve organizations’ monitoring and implementation of sustainability performance through better information and results. Other companies are using global reporting initiatives (GRI) guidelines for reporting on sustainability. Both can be considered procedural level mechanisms of sustainability governance as they enable companies to better monitor and control their sustainability activities. Both environmental management systems and sustainability reporting improve the information system and transparency for business improvements.
We believe that to continue advancing in CS in MENA countries, some government intervention would be required in regulatory guidance on sustainability governance practice. Reporting could be helpful to homogenize corporation measures and communication reports towards stakeholders. Securities and exchange commissions or stock exchanges, through amendments in the corporate governance principles, could do it. The regulation may include best practices in sustainability governance as mentioned in the global reporting initiative guidelines. Examples of these regulatory initiatives worldwide could be the SASB standards and the toolkit of the International Finance Corporation (IFC, World Bank Group) for transparency and disclosure.
In addition, more emphasis should be placed on extending training and sustainability actions to all employees. There are already experiences in Saudi Arabian banks that show that this type of practice increases employee commitment to the company, improving the operating results of the various departments.
The most common CS initiatives in Saudi Arabian banks have been developed in education, training, and health care, addressing the problems of the underprivileged segment of society and creating job opportunities for the unemployed (Saudi Arabian Monetary Agency). Another example could be Boubyan Bank in Kuwait, which in its 2020 Sustainability Report highlights:
- Equal employment opportunities to promote diversity
- Capacity building through training and opportunity
- Focus on youth development
- High employee retention
- HR policies that promote employee rights, benefits and safety
- Performance recognition and rewards
Beyond analysing the information published by the companies themselves, it would be advantageous to assess more accurately the actual development of corporate sustainability in the MENA region, and have in-depth case studies to reveal whether companies are genuinely embedding sustainability within their core business strategy.
Looking to the future, another aspect of deepening corporate sustainability in MENA countries would be to measure the impact of sustainability governance on stakeholders’ social and environmental performance.