This post is a guest-authored commentary piece discussing the findings of  Diligent Institute and Spencer Stuart’s 2023 report, Sustainability in the Spotlight: Has ESG lost momentum in the boardroom?  This is the second blog in a series of global commentary pieces analyzing how the global results compare with ESG practices and oversight in specific regions. 

This commentary explores findings revealed in the Spencer Stuart and Diligent Institute’s report titled “Sustainability in the spotlight: Has ‘ESG’ lost momentum, in the boardroom?” specifically from the perspective of boards of companies in the Middle East & North Africa, hereafter referred to as “MENA” boards or the “MENA region.” It examines how companies in the region are considering and addressing Environment Social and Governance (“ESG”) issues, with a particular focus on board engagement and oversight, and disclosure. The commentary concludes that although the region may not be at the same level as Europe or the US in terms of the board’s maturity in dealing with sustainability matters, it is experiencing significant traction and gathering an unprecedented level of attention. 

Acknowledging the new reality 

One reason for increasing government attention to ESG in the MENA region is the growing recognition of the link between sustainability and economic diversification. Many countries, through government initiatives, are seeking to reduce their dependence on hydrocarbons and transition towards more sustainable and inclusive economies. This focus on economic diversification and climate action has propelled companies to address ESG issues to attract investments, enhance competitiveness, and ensure long-term viability.  

In response to this imperative, groups and companies owned by governments or sovereign funds, as well as listed and regulated companies and large conglomerates have an important role to play in leading the way towards sustainability. Their commitment to supporting their countries’ national visions and ambitious targets sets the tone for other companies to follow suit, inspiring them to align their strategies with broader governance, societal and environmental goals. 

The journey towards sustainability is shaped by several other factors including compliance and competition. Compliance with international sustainability standards and regulations, for example, is paramount for regional companies seeking to thrive in the global market. Similarly, the presence of global influential players operating in the MENA region adds another layer of complexity to the sustainability landscape. These players often set high ESG standards, making it essential for other companies to keep pace and demonstrate their commitment to sustainability. 

The power of purpose-driven leadership 

Board members in the MENA region are asking critical questions and actively seeking to take a leadership role in setting ESG goals and targets, developing strategies to achieve them, and monitoring progress. They are increasingly looking to drive sustainability and ensure the integration of ESG considerations into their companies’ strategy setting, risk management, and decision-making processes, with the goal of future-proofing their businesses.  

This shift in mindset is indicative of the growing awareness of the potential risks and opportunities associated with ESG factors and the need for the boards to be up-to-date on all sustainability issues. Indeed, most of the board members we surveyed and interviewed conveyed a strong interest in integrating sustainability into their board’s continued development program. Similarly, the inclusion of directors with sustainability expertise has been raised during recent board composition and diversity discussions. 

To what extent do board members in MENA perceive that ESG considerations are integrated into their strategic decision-making? Throughout our board evaluation surveys and interviews, we have gathered insights from board members of a diverse sample of regional companies across various industries, operating both in the MENA region and internationally. Our objective was to assess the directors’ views regarding the extent to which ESG considerations were integrated into their boards’ strategic decision-making process. The responses showed that approximately 29 percent of the directors felt that their boards did not adequately incorporate ESG, in contrast with 21 percent who believed their MENA boards performed very well in this regard. Moreover, 6 percent could not judge, and 44 percent indicated that ESG integration was deemed satisfactory with some room for improvement.  

In terms of specific areas for improvement, 36 percent of directors emphasized the importance of setting ESG targets and objectives that reflect the company’s values; 35 percent were of the view that ESG ought to be given more focus in the board meetings; while 29 percent stressed the significance of having the right information to effectively monitor their companies’ ESG performance.  

Nurturing a culture of accountability 

The importance of sustainability oversight in the MENA region is growing as boards acknowledge their responsibility in addressing ESG issues, and the monitoring of the business performance and corporate culture. Performance monitoring entails measuring and tracking progress toward ESG strategic goals and compliance with regulations.  The specific approach is still evolving, and additional time may be needed to determine the most effective model. Increasingly, ESG is primarily overseen at the full board level, with certain boards integrating ESG considerations into existing committees, such as strategy or risk committees. Audit committees are expected to play an important role in providing support and ensuring the delivery of high-quality ESG assurance to the board or the relevant board committee. 

Companies in the region are gradually moving away from the previous model where ESG was solely regarded as a compliance and reporting exercise, handled by the executive team with or without consultants’ support. We are recently witnessing a shift in the approach and accountability culture. A number of companies have already taken the lead in including sustainability as part of the CEO and executive management team KPIs.  

Transparency, trust, and long-term stock performance 

This momentum is evidenced by the growth in sustainability reporting by the region’s companies in recent years. A decade ago, sustainability reports were only issued by a handful of companies, but the latest data by Hawkamah indicate that approximately 50 percent of the largest listed companies across the region are now producing meaningful sustainability reporting, whether as stand-alone reports or as part of their annual reports. These reports are increasingly based on the GRI reporting covering areas such as health and safety, greenhouse emissions, water consumption, and community initiatives.  

The transparent disclosure of ESG data in the MENA region supports the growth of a more sustainable and responsible business environment, strengthening trust among stakeholders. 

The S&P Hawkamah ESG Index has been assessing a sample of about 150 listed companies across the region based on their public disclosures since 2007. The results have shown that companies with stronger ESG practices consistently outperformed their counterparts, implying a positive correlation between companies adopting high ESG practices and their share price valuations. 

Unlocking competitive advantage  

In conclusion, the MENA region is gaining significant traction and unprecedented attention in its journey to becoming a sustainability leader. While it may not have reached the same level of board maturity as Europe or the US in terms of sustainability, the region’s governments’ strategic direction and initiatives are making an impact. They are driving companies and boards to prioritize ESG issues and adopt a different approach by integrating sustainability into strategic decision-making and fostering a culture of accountability. Furthermore, the increasing number of companies issuing meaningful sustainability reports and the positive correlation between ESG practice disclosures and share price valuations are promising indicators of progress.