Is ESG reporting now integrated into the compliance landscape?

Is ESG reporting now integrated into the compliance landscape? The prominence of Environmental, Social, Governance (ESG) considerations is on the ascent in corporate priorities, fueled predominantly by the surge in responsible investing.

In response to mounting investor expectations, there is a growing majority advocating for corporate responsiveness and transparency in tackling global challenges such as climate change, escalating social disparities, and ethical concerns in the corporate workplace.

With the COP28 summit in the past, ESG remains a focal point for the government, which expect businesses to align with the UAE national agenda and, consequently, the UN Sustainable Development Goals (SDGs).

What are the important reporting requisites, and why should businesses agree to an ESG reporting framework even if it’s not obligatory?

Current ESG Reporting Requirements:
In 2020, the UAE Securities and Commodities Authority (SCA), regulating listed companies onshore, mandated public joint stock companies listed on the Dubai Financial Market (DFM) or the Abu Dhabi Securities Exchange (ADX) they publish a sustainability report, as stipulated in Article (76) of The Governance Guide for Public Joint-Stock Companies. In 2021, the SCA provided a detailed breakdown on the requisite contents of sustainability reports, confirming the annual publication obligation. Listed PJSCs must submit the sustainability report to the SCA within 90 days from each financial year end or before the annual general assembly meeting, whichever happens earlier. The report must cover 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 a comprehensive sustainable finance regulatory framework with extensive ESG disclosure requirements for ADGM companies, as drafted in FSRA Rules (Sustainable Finance).

Importance of ESG Reporting Frameworks:
2024 and onwards further regulations in the UAE are expected, and global developments, including the implementation of new International Financial Reporting Standards (IFRS), may impact Middle East businesses and Directors & Officers (D&Os). According to a 2023 Middle East Report by PwC, compliance with regulations remains a primary driver for adopting an ESG strategy, highlighting that businesses are often motivated by reactive reasons. While planning for future regulations is a strategic priority, the bigger benefits of adopting an ESG reporting framework beyond compliance are not always well understood or prioritized.

The ADX underscores the significance of sustainability reporting, emphasizing alignment with the UAE vision and SDGs, attracting investor interest, enhancing competitiveness, facilitating risk management, building trust and reputation, and improving access to information.

The Reporting Frameworks:
Appendix A of the ADX’s ESG Disclosure Guidance lists 31 essential ESG indicators, aligned with the Sustainable Stock Exchanges (SSE) Initiative and the World Federation of Exchanges (WFE), mapped against Global Reporting Initiative (GRI) indicators and the SDGs.

Companies are encouraged to use a standardized reporting frameworks, including GRI, IIRC, SASB, CDP, UNGC, SDGs, and the earlier DFM ESG Reporting Guide.

Materiality Matters:
Regardless of the chosen reporting framework, the metrics a company measures are critical. 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. Different sectors and industries face distinct ESG issues, with companies reporting on matters that are financially material to them.

In conclusion, the surge in responsible investing is propelling the adoption and potential mandating of ESG reporting. The regulation of ESG disclosures is likely to expand, highlighting the need for responsible businesses to proactively understand material issues and adopt relevant ESG reporting frameworks, not only to comply with regulations but to enjoy broader business benefits by showcasing their commitment to sustainability.