If asked, would you like to invest your money more responsibly, in more sustainable, more ‘green’ assets, how would you answer? Scruples would likely force your hand: yes, you would reply, of course I would like that, for my portfolio to reflect conscientiousness.
The question is biased, built-in with a ready answer, and it provides no real clue to whether values-driven investing is actually profitable, and more importantly, whether it is here to stay. That responsible investing — best known as ESG investing, or screening an investment for environmental (E), social (S) and governance (G) integrity — is surging without doubt. Globally, a record USD 490 billion of green, social and sustainability bonds were sold in 2020, along with a further USD 347 billion allocated to ESG-focused investment funds.
The trajectory is promising: the total market value of ESG investments has almost doubled over four years, and more than tripled over eight years, to USD 40.5 trillion in 2020. Projections have it this total will swell to USD 53 trillion within the next five years — which works out to more than the GDP of the USA, the UK, China and Germany combined.
But perhaps the best indicator that ESG investing is more than just a passing fancy is the response it has stirred up in the Middle East. For a region historically reliant on oil, there is now a marked shift, and even a sense of urgency, to weave ESG-based objectives into national agendas and economic visions across the region.
ESG DEVELOPMENTS IN MENA
In April last year, the Dubai Financial Market (DFM) launched an ESG index for companies in the UAE, while in August the Saudi Stock Exchange (Tadawul) announced plans to launch its own ESG-themed index in 2021. Then in September, Saudi Electricity Company (SEC) issued bonds valued at USD 1.3 billion, a green sukuk (Islamic bond), which was five times oversubscribed — driven by growing appetite for ESG-compliant investments.
Incidentally, a month after, Saudi Arabia also witnessed the cost of ignoring ESG requirements: the kingdom was excluded from the investment portfolio of top global fund Candrian, alongside Russia and China — according to the fund’s representatives, the three countries scored low in ESG ratings.
In another major step, the Abu Dhabi Investment Office (ADIO) launched an ESG policy in February, which aims to apply ESG principles in partner companies and public-private partnership transactions. And Abu Dhabi sovereign wealth fund Mubadala — the third largest in the world after Norway and China — has established a responsible investing arm to deploy billions of dollars across the Middle East and North Africa (MENA) region, with ESG standards at the core of its investment strategy.
In 2020, the UAE, Egypt, Saudi Arabia and Qatar, all issued new green and sustainability-linked bonds. Qatar National Bank (QNB) set up its Green, Social and Sustainability Bond Framework in February, and in September it launched its USD 600 million green bond, for which it received more than USD 1.8 billion in subscriptions.
ESG AS A DIVERSIFICATION STRATEGY
Investments guided by ESG — for example, in renewable energy — offer a way to augment diversification. And as well all know, the slump in oil prices have underlined the importance of a more broad-based economy.
Globally speaking, ESG-guided companies have proven remarkably resilient in the face of the COVID-19 pandemic. The pandemic was a lesson in risk management, in future-proofing an investment portfolio against disruptions to the supply chain. If you didn’t diversify, if you didn’t take into account the possibility that everything could change overnight, you may have found yourself on the wrong side of 2020. An increased focus on ESG is not just a nod to changing social conventions, it’s good financial policy.
EXPAND YOUR REAL ESTATE KNOWLEDGE
Subscribe to the Cityscape Intelligence newsletter here