Middle East | Publication | May 2023
With an ongoing focus by governments and regulators on environmental, social and governance (ESG) principles, global businesses are becoming more aware of the risks that organisations and company boards face and are taking proactive steps to manage and mitigate ESG risk.
This article considers the ways in which Middle East entities and directors and officers (D&Os) increasingly face risks connected with ESG.
In the run up to COP26 in 2021, the region saw multiple government net-zero pledges being made. The UAE committed to net-zero carbon emissions by 2050 and both Saudi Arabia and Bahrain pledged to achieve net zero by 2060.
The UAE is set to host COP28 this year, which has driven momentum in the region for ESG and sustainability to be at the top of the corporate agenda.
Some of the initiatives implemented in the Middle East region include:
We focus in this article on the ways in which exposures to Middle East D&Os are increasing as a stronger strive for ESG practice and regulations is set to be implemented with time.
ESG laws and regulations are developing in the region.
Listed UAE businesses
In 2020, a Board Decision was issued by the UAE Securities and Commodities Authority (SCA), which is the regulator for listed companies in onshore UAE. This requires public joint stock companies listed on the Dubai Financial Market (DFM) or on the Abu Dhabi Securities Exchange (ADX) to publish a sustainability report. The sustainability report must detail the company’s long-term strategy and the impact of its activities on the environment, society, economy and governance. The sustainability report must be produced on an annual basis.
Further regulations in the UAE are not far behind. The ADGM has confirmed that it is developing a regulatory framework for sustainable finance and at the end of 2022 it published draft proposals, which included a framework for environmental disclosures by ADGM companies.
Within the financial services sector, personal accountability regimes have been implemented in several international jurisdictions (such as the Senior Managers and Certification Regime (SMCR) in the UK and the Banking Executive Accountability Regime (BEAR) in Australia). As a result of these regimes, D&Os in those jurisdictions may find that regulators focus more on individual and board accountability, when dealing with enforcement action. The decisions of the company board and its key decision makers is a key focus area for regulators and has globally led to significant multi-million dollar fines against individuals found to have breached the expected standards.
Although there is no equivalent regime to SMCR or BEAR in the UAE, regional regulators in the Middle East are increasingly focused on enforcement action against management individuals. This is particularly the case under the DFSA regime, where large fines have recently been levied against management individuals in enforcement proceedings.
As laws and regulations around ESG develop, management individuals need to keep under review the potential for them to be individually liable and to face regulatory and legal exposure.
A growing global area of D&O risk comes from greenwashing litigation. This is where a company makes inaccurate or misleading statements about a company’s environmental or social performance and subsequently faces claims from parties that relied on those statements.
Businesses are increasingly questioned by investors and key stakeholders, including consumers, about their ESG credentials. ESG queries now routinely form part of panel pitches issued to professional services firms, for example in relation to the company’s diversity and equality statistics.
Globally, regulators (most notably in the US) have taken action against companies and company boards for false claims about their “Green” credentials. Claims have also arisen from investors with a “Green” agenda who have pursued claims against listed companies and their boards for misrepresenting their climate credentials.
The UAE, and Saudi Arabia in particular, have seen an increase in ESG focused investment arms and funds. UAE government investment arms are increasingly investing into “Green” businesses and the DFSA and ADGM are hosts to several “Green” funds and companies.
As businesses are increasingly under pressure to be greener and more sustainable, they will inevitably want to advertise their actions and plans. However, it is imperative that D&Os mitigate greenwashing risks by ensuring that proper governance processes are in place so that the board has clear oversight about the company’s ESG strategy and its progress, and there is control over how the company represents itself and who it associates itself with in order to avoid any greenwashing exposure.
Although there is no class action regime within the UAE, the DIFC and ADGM Courts can grant a group litigation order to co-manage multiple claims that are related or connected. This can allow multiple claims to be handled together in a streamlined way but can also encourage multi-party litigation.
Notably, a class action regime for securities claims in Saudi Arabia does exist and several high profile class actions have now been determined under that regime, including claims for accounting misstatements and consequent board and audit liability.
We expect to see further developments in the implementation of group and class action litigation, as the Middle East region’s court systems increasingly cater for complex multi-party litigation.
ESG risk is an active area of the UAE government’s focus, particularly as the UAE takes centre stage at COP28 this year. We anticipate that as the ESG legal and regulatory frameworks in the Middle East develop, there will be a greater exposure to regulatory and legal liability against Middle East D&Os.
Furthermore, Middle East businesses and D&Os will be impacted when global developments occur, such as the implementation of new IFRS accounting standards, bringing direct obligations of climate change and ESG disclosures on Middle East businesses, when preparing their financial statements.
This is an optimum time for company boards to be prepared and to consider their internal governance and risk processes. As Middle East ESG laws and regulations develop, Middle East businesses must keep a track of these developments and ensure that they are fully aware of the obligations upon them. Businesses can also benefit from running pre-emptive audits of their own ESG risk/compliance and those of their vendors.
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