Is ESG Reporting now a part of the compliance landscape?
Environmental, Social, Governance (ESG) is rising to the top of corporate agenda, driven primarily by the rise of responsible investing.
Adding to investor demand, there is an increasing number of voices calling for corporate action – and transparency – in the face of the top global challenges of our time; climate change, rising social inequality and the issue of corporate ethics.
With the UAE in the spotlight as the host of the upcoming COP28 summit, ESG will remain will a focus for the government who will look to business to support the UAE national agenda and in turn, the UN Sustainable Development Goals (SDGs).
So what are the current reporting requirements, and why should businesses adopt an ESG reporting framework if it’s not mandated for them to do so?
Current ESG reporting requirements
In 2020, the UAE Securities and Commodities Authority (SCA) – which regulates listed companies onshore in the UAE – issued a requirement for public joint stock companies listed on the Dubai Financial Market (DFM) or the Abu Dhabi Securities Exchange (ADX) to publish a sustainability report.
In 2021, the SCA issued a general clarification that set out in more detail the required contents of sustainability reports and a confirmation the reports must be published annually.
Listed PJSCs must submit the sustainability report to SCA within 90 days from each financial year end or before the date of the annual general assembly meeting, whichever is earlier.
The requirement mandates that the sustainability report must include details on the company’s long-term strategy and the impact of its activities on the environment, society, economy and governance.
In July 2023, the Abu Dhabi Global Market (ADGM) implemented its sustainable finance regulatory framework “comprising the region’s most comprehensive ESG disclosure requirements and a regulatory framework” for ADGM companies.
Regulation: FSRA Rules (Sustainable Finance)
Importance of ESG reporting frameworks
Further regulations in the UAE are likely not far behind. Additionally, Middle East businesses and D&Os may be impacted with global developments, such as the implementation of new International Financial Reporting Standards (IFRS) accounting standards.
In the 2023 Middle East Report, PWC reported that the survey found “Compliance with regulations remains the most important driver for adopting an ESG strategy, indicating that organisations remain motivated for reactive reasons”.
In the same report, PWC found that being prepared for future regulation, understanding the requirements and having the right skillset in place is a strategic priority for many businesses. However, the wider benefit of adopting an ESG reporting framework outside of compliance, are less well understood – or prioritized.
In their ESG Disclosure Guidance for List Companies, the ADX lay out the importance of sustainability reporting:
Alignment with the UAE vision and SDGs
Demonstrate your company’s commitment to the UAE vision by reporting sustainability indicators against key priorities and objectives depicted in the vision and the Sustainable Development Goals (SDGs).
Investor interest in sustainability
Investors and ESG rating agencies are already analyzing the ESG performance of your company based on publicly available data to inform their investment decision process whether your company report on ESG information or not. The lack of disclosure on key ESG indicators by companies is often interpreted by the investment community as a signal that the company may not be able to mitigate sustainability risks or capture opportunities.
Understand your stakeholders’ needs to enhance market competitiveness and drive cost reductions by measuring and monitoring such issues as water, energy consumption, materials use, and waste.
Address reporting requirements on financially material factors and mitigate compliance risks related to financial disclosure regulations. Enable management and board scrutiny of ESG opportunities and risks and promote company – wide alignment with long term shareholders’ goals.
Building trust and reputation
Enhance reputation, open dialogue with stakeholders such as customers, communities and investors, and demonstrate leadership.
Enhance access to information
Ensure that your company’s key stakeholder(s) have the relevant information that is needed to make informed decisions about the company’s ability to create value in the short, medium and longer term.
In the much earlier published Dubai Financial Market (DFM) ESG Reporting Guide, the DFM also emphasises support of UN SDGs:
Incorporating ESG factors into a company’s reporting directly contributes to the fulfillment of the SDGs. Target 6 under SDG 12 “Ensure sustainable consumption and production patterns” requires member states to encourage companies, especially large and transnational companies, to adopt sustainable practices and to integrate sustainability information into their reporting cycle. Based on this specific target, one of the leading sustainability reporting initiatives – the Global Reporting Initiative (GRI) engages with national and regional governments to enable, monitor and accelerate company progress on SDG reporting and fulfillment.
The Reporting Frameworks
In Appendix A of the ADX’s ESG Disclosure Guidance, it lists 31 ESG indicators that are considered essential to report in alignment with Sustainable Stock Exchanges (SSE) Initiative and the World Federation of Exchanges (WFE). The indicators are also mapped against Global Reporting Initiative (GRI) indicators and the Sustainable Development Goals (SDGs).
The ADX guidance also states that companies “should report on their sustainability performance using a standardized reporting framework”. Their list of recommended frameworks are provided in Appendix B of the guidance.
- Global Reporting Initiative (GRI)
- The International Integrated Reporting Council (IIRC)
- The Sustainability Accounting Standards Board (SASB)
- CDP (formerly the Carbon Disclosure Project)
- The United Nations Global Compact (UNGC)
- The Sustainable Development Goals (SDGs)
The earlier DFM ESG Reporting Guide also includes a list of 32 ESG metrics (Appendix A) and list of industry specific reporting frameworks.
Both guides call out the options on the type of report acceptable:
- Annual Report
- Sustainability Report
- Integrated Report
Regardless of which reporting framework is selected, what a company measures is critical.
Not all sectors /industries face the same ESG issues. For example, greenhouse gas emissions would not be as much a factor for financial services as for the manufacturing industry. This difference is called materiality, and companies report on issues that are financially material to them.
Materiality, in the context of ESG, refers to the effectiveness and financial significance of a measure as part of a company’s overall ESG analysis.
The SASB defines material ESG issues as “issues that are likely to impact the financial condition or operating performance of a company”.
GRI defines material topics as “topics that represent an organization’s most significant impacts on the economy, environment, and people, including impacts on their human rights”.
Their standard GRI 3: Material Topics 2021 provides step-by-step guidance for organizations on how to determine material topics. It also contains disclosures for organizations to report information about their process of determining material topics, their list of material topics, and how they manage each of their material topics.
In the full set of standards, the GRI also provide ‘Sector Standards’ that provide information for organizations about their likely material topics, this can provide a steer for companies wanting to be more proactive in their efforts.
The rise of responsible investing may be a key driver in the adoption of ESG reporting, and in the mandating of reporting. It is likely that the regulation of ESG disclosures will increase and widen their sector scope.
Responsible businesses should become more proactive in understanding what is material to their company and adopt a relevant ESG reporting framework not only in preparation for any compliance requirements, but to enjoy the much broader business benefits from demonstrating your company’s commitment to sustainability.