Middle East Capital Markets Watch: ECM

Introduction

On January 9, 2023, the Financial Markets Committee of the Gulf Cooperation Council (“GCC”) (the “GCC Exchanges Committee”) published a set of unified metrics for voluntary ESG disclosures (the “GCC ESG Disclosure Metrics” or the “Metrics”) by regional listed entities. The Metrics include 29 standards that are aligned with the World Federation of Exchanges (“WFE”) and Sustainable Stock Exchanges (“SSE”) Initiative. While currently the Metrics serve as guideline for listed entities, they represent an important milestone in the region's move towards standardised ESG disclosure.

The following is a high-level overview of the purpose and structure of the GCC ESG Disclosure Metrics, and of the current wider context of emerging ESG disclosure regulations in which the publication of the Metrics take place.

GCC ESG Disclosure Metrics

The GCC Exchanges Committee is chaired by the Saudi Exchange, and includes the Abu Dhabi Securities Exchange, Bahrain Bourse, Boursa Kuwait, Qatar Stock Exchange, Muscat Stock Exchange, and the Dubai Financial Market.

The Committee’s main objectives are to support the development and accelerate the growth of regional capital markets, create an advanced capital market ecosystem in the GCC region, and to elevate the regional stock exchanges’ position on the global stage. 

Unified Disclosure Guidance

The GCC ESG Disclosure Metrics constitute ESG related guidance and performance metrics which may be adopted by any listed entity across the GCC region, and are a significant step towards standardising ESG disclosure across the region.

The Metrics provide ESG indicators across all three pillars of sustainability: environment, social, and governance, and include categories such as GHG emissions, climate risk mitigation, child and forced labour, global health and safety, gender diversity, and data privacy, among others. They comprise a total of 29 metrics, which are aligned with both the WFE and the SSE equivalent requirements.

The WFE is the global industry group for exchanges and clearing houses around the world, and it seeks to create and agree best practices and standards for the industry. Members include the Abu Dhabi Securities Exchange (“ADX”), Dubai Financial Market (“DFM”), as well as other stock exchanges in the GCC region. The SSE Initiative is a UN Partnership Programme providing a global platform for relevant stakeholders, aiming to enhance performance on ESG issues and encourage sustainable investments. 

The GCC ESG Disclosure Metrics are also mapped against the Global Reporting Initiative (“GRI”) general standards, which are a set of guidelines that are used by more than 10,000 organisations in over 100 countries, aiming to advance the practice of sustainability reporting. The GRI Standards remain the most widely used sustainability reporting standards globally.

The ESG Disclosure Metrics are, for the time being, voluntary, and do not replace the existing guidelines on ESG disclosure previously issued by the GCC stock exchanges. They do represent, however, an important development for companies and investors in the GCC region, and are seen by many as a necessary step to align the differences in reporting standards. Although they do not constitute a comprehensive framework, they should facilitate and provide a basis for uniformity in ESG disclosure by listed companies.

Global Emerging Regulations on ESG Disclosure

Pre-Existing Regional ESG Disclosure Regimes

The Metrics complements the various efforts already undertaken by some GCC exchanges to encourage issuers to incorporate and embed ESG considerations into their operations. Indeed, in the United Arab Emirates, each of the three stock exchanges has its own voluntary ESG disclosure guidance, illustrating their commitment to drive sustainability in financial markets, with the DFM being  one of the first exchanges in the GCC to launch the UAE ESG Index in 2020 to track and promote ESG best practices among listed companies. ADX also issued ESG disclosure guidelines in 2020 for listed companies, and its participation in the establishment of the Metrics reinforces its support for the adoption of reporting and disclosure standards.

Other Stock Exchange Disclosure Regimes

The publication of the Metrics has occurred against the backdrop of a global trend towards greater disclosure and transparency around ESG metrics. A number of regulators around the world have considered the need for mandatory sustainability disclosure regimes, including the United States and United Kingdom. Stock exchanges in Asia-Pacific, including Singapore, Malaysia and Hong Kong have imposed mandatory disclosure requirements for listed companies, on a “comply or explain” basis. Various other stock exchanges globally have also adopted their own ESG voluntary disclosure guidelines, including Euronext Paris, Euronext Brussels and Johannesburg Stock Exchange. 

Conclusion

With COP28 being held in the United Arab Emirates this year, local corporates can expect the global investment community to continue to pay close attention to ESG considerations. The Metrics are a concrete indicator that the GCC countries, all of which are oil-producing, are committed to creating more green and more sustainable economies. Furthermore, the Metrics are a positive response by the GCC to regulatory, political and market pressures related to the ESG narrative.

Furthermore, in the context of the current IPO boom in the region, the publication of the Metrics aligns with the priorities of local and international investors, and as such, has the potential to contribute to increased interest by international investors in regional markets.