LexisNexis Middle East Law: The growing importance of Environmental, Social and Governance (ESG) considerations for public and private entities in the UAE
In an article for LexisNexis Middle East Law, William Reichert discusses the growing importance of Environmental, Social and Governance (ESG) considerations for public and private entities in the UAE.
The term Environmental, Social and Governance (ESG) is generally used by investors to measure the actions of entities on key environmental, social, and governance factors which may affect their financial performance. As responsible investing continues to gain popularity, there is a greater demand for ESG information from companies. In addition, the way a company manages its ESG issues can also affect its long-term performance and valuation. Therefore, ESG due diligence is gaining traction in merger and acquisition transactions and an increasing number of investors have started to integrate ESG factors into their investment decisions when evaluating a possible investment. In 2020, the UAE Securities and Commodities Authority (SCA) issued Securities and Commodities Authority Decision No. 3/2000 on the Adaptation of the Governance Code. In line with Article 76 of Securities and Commodities Authority Decision No. 3/2000, public joint stock companies listed on the Abu Dhabi Securities Exchange (ADX) and the Dubai Financial Markets (DFM) must now publish a sustainability report.
Following the SCA’s lead, the ADX and DFM have also made a commitment to developing sustainability in the financial markets by becoming part of the UN led Sustainable Stock Exchanges initiative. In addition, DFM also launched its Sustainability Strategic Plan 2025 which aims at supporting its efforts to promote ESG best practices amongst listed entities there. Both ADX and DFM have published ESG disclosure guidance to assist listed entities’ sustainability reporting. Companies listed on these markets have to produce a report demonstrating their long-term strategy in this area which must provide commentary on the company’s impact on the environment, society, and governance. This should include information on how the company has consumed energy and managed its environmental impact. Factors to be considered include carbon emissions, energy efficiency, climate change, deforestation, biodiversity, air and water quality and waste management. There must also be information on how the company fosters its people and culture and how that has affected the broader community. Factors to be considered here are gender and diversity, inclusivity, data protection, employee engagement, labour standards, customer satisfaction, community relations, privacy and human rights.
A company’s internal system of controls, practices and procedures should also be considered which will include areas such as shareholder rights, board composition, executive compensation, audit committee structure and bribery and corruption. Companies listed on ADX or DFM also have to comply with the Global Reporting Initiative Standards, which are set by a not-for profit organisation which provides sustainability reporting guidelines.
Companies currently listed on ADX or DFM had to submit their annual sustainability report for the 2020 financial year no more than six months following the end of that financial year. For subsequent financial years, their sustainability report must be submitted to the SCA within 90 days from each financial year end or before the date of the annual general assembly meeting, whichever is earlier. These reporting obligations are mandatory for publicly listed companies. However, it seems the UAE Government is also keen to develop this and encourage voluntary reporting by the private sector in line with other international initiatives. The UAE has also announced a Net Zero by 2050 strategic initiative to drive emissions down and wants to bid to host COP28 in 2023.
Internationally, the International Financial Reporting Standard (IFRS) Foundation has also launched a consultation on its first two proposed standards in this area. The first sets out general sustainability-related disclosure requirements and the other specifies climate-related disclosure requirements. While this is currently intended for capital markets, it is clear further ESG movements are being made and scrutiny in this area is increasing.
However, ESG reporting does not seem to have fully caught on with the private sector yet, among those who remain outside the mandatory reporting. Although, there are steps companies can take to embed an ESG strategy and implement clear frameworks and procedures which sit with the company’s ethos. For example, there should be clear roles and defined targets and where possible external audits. However, further regulation and guidance is needed to solidify ESG best practices in the private sector. This is a relatively new area of law for the Middle East and local regulators are likely to continue updating their requirements to keep up with global trends and developments. The massive investment flow towards ESG-related investments coupled with the regulatory and cultural shifts taking place are all indicators ESG is going to become increasingly important for investors and regulators in the UAE. Companies will therefore need to have a framework in place to ensure compliance and remain attractive to investors, even if it is not mandatory for them yet.
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