Are MENA Companies Keeping up with their counterparts in ESG?

Are Middle Eastern Companies Keeping Up with International Counterparts in Sustainability Reporting?

Are Middle Eastern Companies Keeping Up with International Counterparts in Sustainability Reporting?

Despite the benefits that come with analyzing and disclosing their environmental impact, corporations in the Middle East and North Africa (MENA) region have been slower to adopt such practices, posing challenges to their operations.

As the pace of climate change accelerates, businesses across MENA must intensify efforts to document and mitigate their carbon footprint to appeal to investors increasingly focused on environmental, social, and governance (ESG) factors. According to a forecast by PwC, asset managers worldwide are expected to nearly double their ESG-related assets under management to $33.9 trillion by 2026, highlighting the growing importance of sustainability in investment decisions.

However, a study by KPMG in October 2022 revealed a stark contrast between global and regional practices. While 96% of the world’s largest 250 firms publish sustainability reports, only 56% of the top 392 companies in the MENA region released such information in 2021, a decline from 59% the previous year. In comparison, Asia Pacific, Europe, and the Americas boasted significantly higher rates of sustainability reporting at 89%, 82%, and 74%, respectively.

One challenge faced by MENA companies is the multitude of sustainability reporting guidelines available, including those from the European Union, the G20, the IFRS Foundation, and the GRI. While most Middle Eastern companies follow GRI guidelines, the IFRS launched the International Sustainability Standards Board (ISSB) in November 2021 to develop comprehensive global standards for sustainability disclosures. The ISSB plans to issue its first two standards by June and will align its efforts with EU reporting rules and those of the GRI.

The chairperson of the ISSB, stressed the need for a shift in traditional business and accounting practices, emphasizing the importance of resilience in the face of climate change.

The European Union’s Corporate Sustainability Reporting Directive (CSRD), which came into force in January, is expected to significantly enhance reporting standards within the bloc. The directive will require most EU companies to publish detailed data on their environmental and social impact, with estimates suggesting coverage of 75% of Europe’s economy. Submissions under CSRD will undergo independent auditing and will replace the existing Non-Financial Reporting Directive (NFRD), which was deemed insufficient and unreliable.

Key provisions of the CSRD include mandatory disclosures related to pollution, climate change, water and marine resources, biodiversity, and the circular economy. Companies will also be required to disclose their scope 1, 2, and 3 emissions, covering emissions from sources controlled by the organization, energy consumption, and emissions across their value chain, respectively.

The interoperability of sustainability standards will be crucial to ensure consistency in reporting across jurisdictions and prevent excessive reporting burdens on multinational companies operating in different regions. Failure to achieve interoperability could deter comprehensive environmental reporting and hinder efforts to combat climate change.