The financial services sector is at the epicentre of ESG progress

01 August 2022 7 min. read

The movement towards a more sustainable and human-centric future continues to gain traction, and financial services institutions are not only at the epicentre of change – but also among its key drivers, according to a new global report by Arthur D. Little.

In its report, the strategic consultancy outlines how environment, social and corporate governance (ESG) have risen to the higher echelons of corporate agendas, and how progress by banks, insurers, asset managers and other financial services institutions is placing the sector at the forefront of developments.

The authors describe financial services as a “crucial player” in the transition to a better world, in part by its willingness to adopt sustainable business models from within, but more importantly, by funding and de-risking the massive journey required across industries to achieve Paris 2050 goals.

The ecosystem of financial institutions

The large and central position the financial services sector plays in the ecosystem of any economy makes its role unique, and as a result – if executed well – the sector can according to Arthur D. Little’s analysis be the “orchestrator” of change.

On top of propelling the broader movement forward, ESG comes with its considerable benefits for institutions themselves. A sustainable value driver map by Arthur D. Little for the banking sector for instance found that ESG efforts can be rewarded across a range of areas, impacting both top and bottom line.

Reaping the benefits is however one of the hardest challenges around. Arthur D. Little’s authors describe this process as one that needs a long-term commitment, coupled with transformational change across the organization, and both internally and externally. “ESG transformation is a marathon, and should focus on moving ESG talk and commitments to concrete, positive action.”

ESG & Sustainable Value Drivers

A lens on GCC highlights

Honing in on developments in the Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates), the report finds that progress in the region is notable; however, at the same time, institutions come from far and therefore there is “still considerable room to grow” to meet the world’s top performers on their ESG endeavours.

One of the report’s four co-authors, Andreas Buelow, is based in the Gulf Cooperation Council, and has been advising financial services institutions in the region for over a decade (earlier in his career he worked in the insurance sector).

Buelow walks through through some of the most notable achievements and priorities in the GCC:

Across the GCC region, adoption of ESG requirements is largely optional, but the development of requirements remains ongoing. High performers on ESG come from a variety of countries and sectors, proving that any company can achieve excellence in ESG, including Telecom, Logistics, Industrials (20%), Real Estate (10%), and Financial Services (30%).

Other major regional public-private organizations are developing frameworks for involvement in ESG finance. Majid Al Futtaim, a leading retail conglomerate in the MENA region with 40+ shopping malls and other developments, is implementing a Green Finance Framework to support its ESG activity.

Saudi Arabia’s Public Investment Fund (PIF), a $430 billion sovereign wealth fund that has been actively involved in the transformation of the country, partnered with BlackRock on ESG finance. Next, HSBC and Saudi National Bank have created a Sustainable Finance Framework making Saudi National Bank the largest banking group in the Kingdom, creating the first sustainable finance framework.

The Red Sea Development Company was recognized as a global ESG leader in the Real Estate sector as sustainability has been a core guiding principle since the inception of the regenerative tourism project.

Rating the leaders

The Arab Federation of Exchanges currently references three ESG rating systems which cover companies in the region – Refinitiv ESG Score being mostly recommended as it is widely used and directly measures company ESG performance (versus risk) offering a 97% share of MENA sustainability leaders score out of 100 points.

Refinitiv rates ESG performance, commitment, and effectiveness across 10 main themes while accounting for industry and company size biases, examples include Aramco (44), Zain (68), and Emirates NBD (35).

Another main ESG rating systems used in the region is S&P, one of the world's biggest rating agencies which recently expanded into the ESG rating segment by combining the ESG profile of a company with the company's readiness to cope with ESG topics; whereas MSCI has developed an ESG index that measures how well a company is prepared for ESG risks.

Key regulatory requirements

Much of the transition to a more ESG friendly economic environment is being driven by plans, agreements, and frameworks from global and local regulators and supervisory authorities.

The UAE was the first country in the region to commit to a net-zero emissions target and has undertaken large sustainability projects under its Net Zero 2050 Initiative. It also requires mandatory ESG reporting from publicly listed companies. The UAE market participants see opportunities in electric vehicles, charging, and carbon capture.

Overall, 58% of UAE investors see obstacles to ESG investing, and 91% of issuers expect to be reallocating capital towards positive environmental and social outcomes to a substantial or noticeable extent in the next five years. Both issuers and investors want transparent data and guidance around ESG principles.

Kuwait Investment Authority, the 3rd largest sovereign wealth fund in the world, recently announced it will make its entire portfolio compliant with ESG standards. The ESG objectives of Kuwait Vision 2035 are linked to 4 of the 7 pillars of Kuwait’s National Development Plan: Sustainable Living Environment, Sustainable Diversified Economy, Effective Civil Service, Creative Human Capital.

Overall, Kuwait has developed state-level support for ESG and encourages listed companies to engage with voluntary ESG reporting.

In Saudi Arabia, the Ministry of Economy and Planning is the lead organization realizing KSA’s commitment to meet the UN Sustainable Development Goals, Vision 2030, and National Transformation Program, overseeing major sustainability projects in the Kingdom, with the ultimate goal of reaching net zero by 2060.

Saudi Arabia is active in sustainability initiatives in the region but has yet to develop private-sector ESG requirements. While Saudi Exchange has not developed ESG indicators, it recommends several international initiatives, such as the Global Reporting Initiative.

In Bahrain meanwhile, ESG objectives are linked to 3 of the 6 pillars of the National Development Strategy: to maintain a safe and pleasant environment; achieve sustainable quality growth; and enhance the quality and accessibility of social services.

While government stakeholders oversee specific aspects of ESG compliance, Bahrain encourages but does not require ESG reporting per se. Overall, Bahrain Bourse recommends companies to report on 32 indicators: 10 Environmental, 12 Social, and 10 Governance indicators.

Making an impact

All in all, financial services companies can make a huge impact on ESG progress. While they can – and must – achieve net zero in terms of their operational footprint, true sustainability requires ensuring that their clients and customers are also net zero. That means leveraging customer relationships and driving ESG impact by changing their behavior and becoming an internal sparring partner to drive transformation, rather than simply excluding certain industries or clients.