Insight

ESG Investments: The Middle Eastern and African Regulatory Perspective Part 1

13 août 2024

The Middle East is witnessing a significant shift in its investment landscape. Environmental, social, and governance (ESG) considerations are no longer on the fringes but are increasingly becoming central to investment decisions.

The global emphasis on ESG investing is influencing Middle East markets and policies, with investors seeking opportunities that align with environmental and social responsibility goals. Governments in the region are actively developing frameworks and regulations to promote ESG practices, creating a clearer path for sustainable investment and mitigates potential risks. As the Middle East grapples with climate change and resource scarcity, there's a growing recognition of the need for sustainable development. ESG investing offers a solution that aligns with these long-term goals.

This trend presents exciting possibilities for investors and businesses alike. This Insight delves deeper into the evolving regulatory landscape for ESG investments in Saudi Arabia, Oman, and the United Arab Emirates (UAE), and explores the opportunities it unlocks.

Saudi Arabia

ESG investment trends in Saudi Arabia are evolving as the country pivots towards sustainable development that aligns with its Vision 2030 plan, which emphasizes economic diversification and reduction in oil dependency.

Renewable Energy Investments

Under its Vision 2030 plan, Saudi Arabia aims to leverage its vast solar and wind resources to generate renewable energy. As part of the National Renewable Energy Program, the country set an ambitious goal to produce 58.7 gigawatts (GW) of renewable energy by 2030—with 30 GW derived from solar and 16 GW derived from wind energy—which is attracting ESG-focused investors to this sector.

The Saudi Public Investment Fund (PIF) is committed to developing 70% of Saudi Arabia’s renewable target by 2030, according to official reports. PIF is also one of the six founding members of the One Planet Sovereign Wealth Fund initiative, which aims to accelerate efforts to transition to a low greenhouse economy among sovereign wealth bonds and asset managers. PIF has made significant investments in the development of renewable energy sources, one notable development being the renewable energy capacities being developed as part of the $500 billion NEOM mega-city project, which aims to be powered entirely by renewable energy.

More recently, the PIF announced three joint ventures aimed at strengthening the renewable energy sector. It is reported these joint ventures include agreements to transform Saudi Arabia into a manufacturer of wind turbines and related components, localize production of photovoltaic cells and modules, and localize production of ingots and wafers for solar power.

Sustainable Finance Framework

Saudi Arabian companies are increasingly adopting sustainable finance frameworks and issuing green bonds and sukuks. These financial instruments are used to finance environmentally friendly projects, indicating a growing trend towards sustainable investment options. This sector has grown from approximately $1 billion in 2019 to nearly $8 billion in 2023.

The PIF has established its green finance framework, setting out its strategy and roadmap to usher in the Kingdom’s green initiatives and outline the projects eligible for green financing in line with international standards. An independent assessment has confirmed that PIF’s Green Finance Framework is aligned with the International Capital Market Association’s 2021 Green Bond Principles and the Loan Market Association’s Green Loan Principles.

ESG Reporting and Transparency

There is a growing emphasis on ESG reporting and transparency among Saudi companies. The Capital Market Authority introduced its ESG disclosure guidelines in 2019, requiring listed companies to disclose ESG-related information.

The Saudi Stock Exchange (Tadawul) launched an ESG index, encouraging companies to improve their ESG performance and reporting. Signing companies are increasingly adopting global reporting initiative standards for sustainability reporting. The Global Reporting Initiatives is an international, independent organisation helping businesses and governments understand and communicate to the broader audience their impact on sustainability issues.

Tadawul is also a partner exchange of the Sustainable Stock Exchanges Initiative, a UN partnership program organized by UN Trade and Development and the UN Global Compact, among others. This partnership underlines Saudi Arabia’s commitment to promoting transparency and sustainability in its financial market.

Social and Governance Factors

Alongside ESG factors, issues such as gender diversity, employee welfare, and corporate governance are increasingly being considered in investment decisions, reflecting a broader understanding of ESG criteria within the Kingdom.

Women’s participation in the Saudi workforce has seen a notable increase, according to the Saudi General Authority for Statistics, which reported that the female labour force participation rate rose from 19.4% in 2016 to approximately 33.6% by the end of 2020. The Saudi Women’s Report 2022 indicated that women’s participation in the labour market was 36%. This growth indicates a remarkable increase and push within the kingdom to focus on gender diversity.

Circular Economy Initiatives

Investments in projects and companies that promote a circular economy are on the rise. This includes investments in recycling, waste management, and water conservation projects in line with Saudi Arabia’s goal to achieve environmental sustainability through its investments.

In 2017, PIF launched the Saudi Investment Recycling Company to establish recycling capacities in the country and build a circular economy for its sustainable future, utilising various methods like recycling, treated wastewater reuse, and waste-to-energy conversion. Its goals include diverting 82% of all waste from landfills by 2035.

In July 2024, Saudi Arabia’s Ministry of Economy and Planning and Ministry of Energy issued the Carbon Capture and Utilization Challenge, a global call to action for innovative startups working toward carbon utilization through industrial carbon capture and utilization technologies. The call challenge encourages startups to submit unique solutions that drive carbon reductions through sustainable systems transformation. Winners of the challenge will benefit from targeted support, networks, and the chance to share part in a monetary prize.

Technological Innovation for Sustainability

There has been a strong focus on investing in technological innovations that contribute to sustainability goals, including clean technology, sustainable agriculture, and water desalination technologies. PIF is actively engaging in various technology investments across multiple sectors, including renewable energy, green technologies, and innovative solutions that promote sustainability and diversify the economy from oil.

Investments in technologies that promote efficient water use and desalination are part of PIF’s sustainability initiative. PIF is also focusing on sustainable agriculture technology that will promote water efficiency and higher crop yields, contributing to food security, as well as sustainability investments in agricultural technology startups and technologies that support vertical farming.

Collaboration with Global Partners

To achieve its ESG objectives, Saudi Arabia is increasingly cooperating with international organisations and other countries to adopt best practices in sustainable development and green investments. Saudi Arabia has collaborated with various UN agencies to advance its ESG goals. For example, its partnership with the UN Development Programme and the UN Environment Programme supports initiatives in renewable energy, sustainable cities, and environmental conservation.

As a member of the International Renewable Energy Agency, Saudi Arabia is part of a global intergovernmental organisation that helps countries transition towards a sustainable future. Saudi Arabia has partnered with World Bank on several projects aimed at environmental protection, water resource management, and sustainable urban development.

Oman

The Omani government is taking steps to encourage sustainable practices and ESG initiatives aimed at diversifying its economy away from oil dependence. Its Vision 2040, which focuses on sustainable growth, environmental stewardship, and social development, is an example of its efforts. The government is looking to expand its electricity generation capabilities through renewable independent power projects, with plans to derive at least 30% of electricity from renewables by 2030, mainly through onshore wind and solar projects.

Enacted in March 2022, a royal decree mandated the formation of a new division dedicated to hydrogen and clean energy, as well as the creation of Hydrom, a government-owned company that has been mandated to develop the green hydrogen sector. The law allocates land for renewable energy research and development.

In addition, there has been an increase in human capital development to support Oman’s renewable energy ambitions. The government is investing in education and training programs to build local expertise and renewable energy technologies that serve purposes beyond environmental concerns. Oman’s growing focus on the “S” and “G” aspects of ESG includes efforts to enhance corporate governance practices, promote labour rights, and improve workforce diversity and inclusion.

Sustainable Finance and Green Bonds

The concept of sustainable financing is also gaining ground in Oman, which has seen increased interest in green bonds and other ESG-aligned financial instruments. In January 2024, Oman’s Ministry of Finance announced a sustainable finance framework, which identifies seven project categories that are available for green finance in the country. This is a landmark effort by the Oman government to unlock sustainable funding sources, notably in the form of green bonds.

ESG Reporting and Transparency

In 2023, the Muscat Stock Exchange (MSX) issued ESG disclosure guidelines for public joint stock companies, which encouraged MSX-listed public companies to voluntarily report their 2023 activities, with mandatory reporting of 2024 activity to commence in 2025. The 30 ESG reporting metrics to be included in the reporting is meant to align with the recommendations of the UN Sustainable Stock Exchanges Initiative and the World Federation of Exchanges. MSX is a member of the GCC Stock Exchanges ESG Committee and a participant in the UN Sustainable Stock Exchanges Initiative.

The UAE

The UAE designated 2024 its second consecutive “Year of Sustainability,” following on from the COP28 conference in 2023, to emphasize its commitment to this important initiative. The United Arab Emirates is also undertaking ambitious national action plans like the UAE’s Net-Zero 2050 Strategy, and significant investments in renewable energy and green technology (e.g., the Mohammed bin Rashid Al Maktoum Solar Park in Dubai and the Barakah Nuclear Energy Plant in Abu Dhabi).

The UAE has formed the Sustainable Finance Working Group (SFWG), a cross-jurisdictional initiative to promote sustainable-finance-related regulation and ensure harmonization. Its members include various government ministries, all four UAE financial services regulators, and all three UAE securities exchanges.

The SFWG released principles for the effective management of climate-related financial risks and principles for sustainability-related disclosures, which include ESG-disclosure-and-report requirements that apply in the UAE. It is also working on UAE taxonomy design principles.

The Abu Dhabi Global Market (ADGM) is a financial free zone in the United Arab Emirates. It implemented its own sustainable finance regulatory framework in July 2023, which is one of the first comprehensive sustainable regulatory frameworks in the Middle East. It is designed to accelerate the transition of the UAE to net zero and functions currently as an opt-in regulatory framework. It encompasses funds, discretionary managed portfolios, bonds, and sukuks and sets out the ADGM’s ESG-disclosure requirements in the UAE.

The Securities and Commodities Authority, the non-bank financial services regulator in mainland UAE, has also issued various ESG regulations, including requiring ESG disclosures from listed companies and designating ESG funds as a specialist class.

Investment Funds

ADGM-domiciled investment funds may use the designations “Green” or “Climate Transition” if they meet two conditions:

  • The “investment requirement,” which is the requirement for investments to meet a minimum criterion for environmental sustainability by reference to agreed taxonomies worldwide
  • The “attestation requirement,” which mandates that a third party, or in certain cases, the fund manager, provides ongoing or at least annual certification of the product’s compliance with the applicable investment requirements

“Green” funds invest in assets considered environmentally sustainable or equivalent, while “Climate Transition” funds invest in assets aligned with an acceptable climate transition taxonomy or benchmark, or securities issued by an entity which has published and is on course to meet credible net-zero targets, or which are intended to facilitate the transition of real estate or infrastructure assets to become more environmentally sustainable, in the reasonable opinion of the fund manager.

ESG is a specialist class of fund in the mainland United Arab Emirates too, under the 2023 funds rules of the Securities and Commodities Authority. They are defined as funds with investment policies that are consistent with UAE-issued ESG criteria.

Bonds

The total amount of green and sustainable bond and sukuk issuances from the Gulf Cooperation Council rose to $28.5 billion in 2022, from just $605 million in 2021. Major issuers in the region include Saudi Arabia’s PIF, which in October 2022 listed a debut $3 billion green bond on the London Stock Exchange. Abu Dhabi National Energy Company and Masdar, also known as the Abu Dhabi Future Energy Company, have successfully issued green securities.

Nasdaq Dubai, the Dubai International Financial Centre’s (DIFC’s) securities exchange, has emerged as the world’s largest ESG sukuk market, with more than 60% of US dollar-denominated ESG sukuk and close to 50% of all-currencies ESG sukuk. The Dubai Financial Services Authority has also announced it will waive all regulatory fees for issuers wishing to list sustainability-related debt securities in the DIFC throughout 2024.

Conclusion

As the global landscape for ESG investing continues to evolve, it has become increasingly crucial for stakeholders across the investment and financial services industries to stay informed about the regulatory frameworks governing these considerations and the increasing availability of ESG investment products, both in the Middle East and worldwide.

Learn More

To learn more about the ESG and sustainability regulatory landscape around the globe, please check out Morgan Lewis’s ESG Investments: Global Regulatory Series.