ESG Reporting for Public and Listed Companies

Overview

Environmental, social and governance (ESG) factors represent risks and opportunities that have become critical to the performance of corporations and their ability to create long-term value.

A decade ago, ESG issues were only considered by a small group of ethically and socially responsible investors. Today, however, particularly following the COP26 Conference, it is clear that these issues will continue to become more and more relevant. Corporations in particular will be the subject of attention as there will be a focus on their activities and the decisions that they take from an ESG perspective.

As part of UAE Vision 2021, two new national priorities in the United Arab Emirates (UAE), namely gender balance and ESG, emerged with the introduction of the corporate governance guide for public joint stock companies. This guide was issued by the Securities and Commodities Authority (SCA) through Securities and Commodities Authority Decision No. 3/RM/2020 On the Approval of the Public Joint Stock Companies Governance Manual[1]to regulate public joint stock companies in the UAE.

Definitions

• ADX: Abu Dhabi Securities Exchange.
• DFM: Dubai Financial Markets.
• ESG: Environmental, social and governance.
• SCA: Securities and Commodities Authority.

Practical Guidance

The term ESG is generally used by investors to measure the actions of entities on key environmental, social, and governance factors that may affect their financial performance. As investors seek to be responsible (a trending investment strategy), there is a greater demand from investors for ESG information from entities. The way an entity manages its ESG issues can affect its long-term performance and its valuation. Therefore, ESG due diligence is gaining traction in merger and acquisition transactions. An increasing number of investors have started to integrate ESG factors into their investment decisions when evaluating a possible investment. ESG analysis can provide assurance for investors allowing for valuable insights on aspects with a significant impact on the financial metrics of an entity.

Following the lead of the SCA, the Abu Dhabi Securities Exchange (ADX) and the Dubai Financial Markets (DFM) are endorsing sustainability reporting amongst listed companies. Both ADX and DFM have made a commitment to the development of sustainability in the financial markets by becoming part of the sustainable stock exchanges initiative (SSE), a United Nations-led initiative. Additionally, the DFM launched its sustainability strategic plan 2025 aimed at supporting its efforts to promote ESG best practices amongst listed entities.

In 2020, the SCA issued Securities and Commodities Authority Decision No. 3/RM/2020. In accordance with article 76 of Securities and Commodities Authority Decision No. 3/RM/2020, public joint stock companies listed on ADX or DFM must publish an annual sustainability report.

Both ADX and DFM have published ESG disclosure guidance to assist sustainability reporting of listed entities. Entities listed on ADX or DFM are required to provide a report demonstrating the entity’s long-term strategy. Additionally, such report must provide commentary on the entity’s impact on the environment, society, and governance. This commentary should include:

• Environmental: Information on how the entity has consumed energy and managed its environmental impact. Factors to be considered are carbon emissions, energy efficiency, climate change, deforestation, biodiversity, air and water quality, and waste management.
• Social: Information on how the entity fosters its people and culture, and how that has affected the broader community. Factors to be considered are gender and diversity, inclusivity, data protection, employee engagement, labour standards, customer satisfaction, community relations, privacy, and human rights.
• Governance: Consideration should be given to an entity’s internal system of controls, practices, and procedures. Factors to be considered are the entity’s shareholder rights, board composition, executive compensation, audit committee structure, and bribery and corruption.

There is a further requirement for entities listed on ADX or DFM to comply with the global reporting initiative standards. The global reporting initiative is an international, not-for-profit organisation which provides sustainability reporting guidelines.

Entities currently listed on ADX or DFM were required to submit their annual sustainability report for the financial year 2020 no later than six months following the end of the financial year. For subsequent financial years, these entities must submit their sustainability report to the SCA within 90 days from each financial year end or before the date of the annual general assembly meeting, whichever is earlier.

Reproduced with permission from LexisNexis Middle East. For further information, please visit their website.