Insights – ESG Disclosure, Reporting and Rating

The imperative of ESG disclosure and reporting is undisputed. However, the confusion about this subject is real and the panel of experts will bring some clarity and ground reality.

Moderated by Monaem Ben Lellahom (MBL), Group CEO Sustainable Square, with guest speakers Fahima Al Bastaki (FB), Chief Business & Market Development Officer of ADX; Maali Qasem Khader (MQK), CEO, Middle East Institute of Directors; Raji Hattar (RH), Chief Sustainability Officer, Aramex.

Hosted by Capital Club Dubai’s Sustainability Action Society in partnership with World Urban Campaign and UN Habitat for a better Urban Future.

MBL: Integrating financial performance and non-financial performance indicators in one report makes sense to investors and to different stakeholders. What are the benefits?

RH: Integrating financial and non-financial indicators is extremely important and you should help your suppliers to embed good governance principles within their business processes, because this impacts your report. The investor pressure on ESG compliance has increased and the expectancy is to report beyond revenues and profits. Furthermore, with more awareness, the risk of not doing the right thing is high.

MBL: There is an increasing appetite from the investment community for ESG data. Why are investors pushing this and how would it help building a better equity story? 

FB: The roadshows and investment meetings over the last few years indicate an increase in questions around ESG indicators. The metrics and frameworks used are based on integrated reporting, including questions linked to talent acquisition, salaries, retention, etc. Investment funds, pension funds, and all the big funds are measuring metrics in this space, unlike ever before. They need frameworks for voting on their investment portfolio. For example, we were talking to Blackrock who have mandates on ESG investing and are also doing direct roadshows and meeting with specific companies to nudge for better metrics and reporting on the non-financial indicators. They are guiding companies on how to report more on ESG measures. I would advise companies to not shy away from having a direct conversation about ESG indicators with investors and find out what they want to really see. This is an evolving space, and sometimes companies might be doing the right things but do not realise that they have not disclosed or published their work.

The information gap is real, and a publicly listed company needs to understand what they are presenting to investors. Those who want to go public need to start looking at their ESG strategies now and all the information related to climate change matters, D&I, etc. For instance, the oil and gas sector need to have specific projects or transformation plans for decarbonization. How can they use AI to evolve from a conventional sector to becoming a more sustainable business? Can they attract investors and make sure that their equity story or IPO is successful? Besides the ADX, lead managers and investment banks also need to help companies shape their equity story.

MQK: The purpose of ESG data is impact. Just capturing and reporting the ESG data is not the journey. What are you doing with the information? How is it changing your business operations? How is it impacting your decision-making matrix? What is the impact of those ESG activities on which you’re reporting? How are you leveraging and using the ESG data internally first and then externally for investors and the market to promote your brand equity and the story behind what the organization is doing.

MBL: Is it mandatory to get a third-party assurance on your ESG reporting?

 RH: We do have one of the big four consultancies who check our data, just like you have external auditors who verify your financials. It’s not a requirement, but as a CSO, it gives me a level of confidence knowing that what we are doing is correct, and what are the goals. For example, the auditor will point out that this year our carbon emissions increased by 2% because of the change of transportation mode that we were using. If we use more air freight than land or sea freight, then the emissions will go up even though the profits might go lower. This data and advice given to the firm from the experts helps in our monitoring and decision making.

MQK: Certified assurance providers do add value. It validates, confirms, and makes sure that the right systems are in place. But more importantly the ESG conversations and decisions need to take place in the boardroom. Are they talking about their community, employers, suppliers, customers, the environment, operations and efficiency? This will impact the companies triple bottom line, which is the aim of integrated reporting. It needs a top-down approach with the right culture developed in companies.

MBL: What are the observations, and challenges of companies listed with the Abu Dhabi stock exchange with their ESG compliance?

 FB: There is an overall commitment from the UAE towards net zero 2050, which also motivates corporates to be more competitive and attract investors. I have observed that companies are assigning departments to move into becoming sustainability experts as well. The search for Chief Sustainability Officers has increased. It is only the beginning of the year, but we have already seen ten companies submit their integrated reports. This is a major change. People are noticeably more active.

MBL: What is the impact of the ESG compliance for publicly listed companies on the UAE market?

RH: When we get business enquiries from international markets, the first thing they want to know is our ESG strategies even before our prices and locations. This is because of the compliance requirements in their more mature jurisdictions, and their suppliers and subcontractors also need to be compliant. So, this will give the push for companies here to start being more serious about ESG metrics. The other trend is regarding internal pricing related to your carbon footprint, which will be a risk as debt in your balance sheet. There will be a significant legal mandate that is going to come, with liabilities and fines, which will also affect your share price.

FB: Many organization leaders perceive sustainability issues to be an increased cost for the company, however, in reality, it will help you become more cost-efficient in the long-term. With sustainable loans, you can receive better benefits from the banks with better terms, rates, and helps you control your budget.

MBL: What is ESG rating and how will this impact this region?

 RH: Stock markets are trying to attract the best investors from outside the region, rather than servicing just local and regional interest, so they need rating agencies to help them in this process. And the investors are showing more interest because they see that the stock markets are becoming more active here. Generally, investors ask rating agencies to help them look for opportunities in the region.

MBL: However, to answer all the questionnaires from the rating agencies, you need to hire a full-time person. Why are there so many different indexes?

 RH: Different industries have different standards depending upon the investors’ demands. And each index measures industries differently. If you want to be measured on all of them then you would need to answer all the questionnaires, but you can choose to be rated only on a certain parameter if you think that would get the attention of more investors.

MQK: If you want to disclose all the information on SDGs/ESG reporting, it can take away from the brand equity. Disclose your SDGs/ESG if it can genuinely balance your share value. Your share value goes up because your financial performance is good. Your ESG/SDGs performance can add further value or offset any negative value if your financials stagnate for a period. If you merge these two performance indicators it will give a more accurate representation of an organization’s performance. Be selective in choosing the right rating agency for your organization. This is about data and disclosure and not your brand story.