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Is the Middle East waking up to ESG?

Regulators in the Middle East are smelling the sustainable finance coffee, while funds have realised that it is good business. But what about oil?

By Adrian Murdoch

Middle East, ESG
Morning brew. Investors are getting excited about green opportunities in the Middle East. (Photo by Dotshock via Shutterstock)
  • Regulators in the Middle East are developing sustainable finance regulatory frameworks.
  • Renewables and vertical farming have attracted some of the $3trn fund capital in the region.
  • But it is hard to talk about sustainability with the region’s continued focus on oil – Saudi Aramco remains the world’s largest oil producer and polluter.

The Middle East as a region has long been regarded as a laggard as far as ESG is concerned, but there is a sense that this is changing.

Some corporations have been leading the way, and at the Cop26 summit in Glasgow in 2021, the United Arab Emirates (UAE) committed to net-zero carbon emissions by 2050 while Saudi Arabia and Bahrain also pledged to achieve net zero by 2060.

ESG is certainly moving up the agenda especially as Cop28 is due to take place in the UAE in November next year. Sign of the shift is that, on 9 November, the Abu Dhabi Global Market (ADGM) published a consultation paper on a sustainable finance regulatory framework.

The framework, which covers both funds and the debt capital markets, intends to help Abu Dhabi grow its sustainable finance sector and support the country’s attempts to reach net-zero.

The amount of capital to be mobilised in the region is significant.

Alex Murray, vice president of the research insights team at Preqin in London, estimates that the sovereign wealth funds in the region, as well as numerous family offices, can currently mobilise around $3trn in total assets under management.

He was speaking at the “Alternatives in the Middle East 2022” webinar organised by Preqin on 16 November.

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“The ecosystem is coming together. The industry wants to do things, and the regulators and the investors are also coming in. Everything is coming together,” said Bhaskar Dasgupta, head of strategic development for the Middle East and Africa at asset management platform Apex Group.

He pointed to the Middle East Investment Management Association, a trade association, which launched in July this year as a representative body to “support, champion and advance the growth and development of the asset management industry in the region”.

“One of the key strands within this which most of the members have very strongly indicated that they are interested in is ESG,” he added.

Getting serious about ESG

Karim El Solh, co-founder and chief executive officer of Dubai-based alternative investment firm Gulf Capital ($2.5bn AUM), confirmed that the region is getting serious about ESG, specifically renewables.

“What has been done in renewables is impressive, especially in solar,” he said on the webinar.

Gulf Capital was an early investor in the sector. It took a stake in SES Smart Energy Solutions, a Dubai-headquartered power provider in 2012 and installed the first hybrid solar plant in Saudi Arabia in July 2015.

He points out that Gulf Capital was the first Middle Eastern signatory to the Terra Carta Sustainability Initiative launched at Davos in 2020 to help the private sector accelerate its progress towards a sustainable future. But the bottom line remains that it is profitable.

“One thing we realised the more we focused on sustainability – clean water, water treatment, renewables, food security – is that it is a good investment opportunity. In this environment, you can do good and do well at the same time,” he said.

It was a point picked up by Laura Merlini, managing director for industrial relations for Europe, Middle East and Africa for Massachusetts-based global professional body the Chartered Alternative Investment Analyst (CAIA) Association.

“Failure to consider ESG factors in your portfolio is simply a failure of your fiduciary duties,” she said. A number of asset managers in the Middle East, she says, are doing it well.

“We’ve already seen the Qatar Investment Authority which has recently invested in vertical farming as a way to enhance food security,” she said.

The state’s sovereign wealth fund ($445bn AUM) has been investing in vertical farming, notably a part of a $200m Series D stake in Dutch indoor farming startup Infarm in December last year.

The elephant in the room

But there is, however, an elephant in the room. Merlini also mentions Saudi Arabian Oil Company’s (Aramco) announcement of the creation of a $1.5bn sustainability fund at the end of October.

Managed by Aramco Ventures, the venture capital arm of Aramco, the fund says that it plans to invest in technologies that support the company’s net-zero goals and the development of new lower-carbon fuels.

All good news. But Aramco remains the world’s largest oil producer. The most recent MSCI Net Zero Tracker report from the very end of October still names it as the world’s largest polluter, responsible for 3.1% of global annual greenhouse gas emissions.

The company’s sustainability report makes for depressing reading. The company expects to have cut emissions only marginally between 2021 and 2035, all while boosting oil production from 12m barrels per day today to 13m by 2027, and gas production by 50% by 2030.

More to the point, there is no mention at all in the sustainability report of Scope 3 emissions – those connected with a company but outside its direct control.

According to the MSCI report, Aramco’s Scope 3 emissions of 2bn tonnes of carbon dioxide for the 12 months to the end of August, make up 96.2% of the company’s total emissions.

No wonder that London-based think tank Carbon Tracker called the group’s sustainability report “heavy on rhetoric and light on substance”.

Aramco’s position was not discussed in those terms during the webinar. But the sense is given that whataboutism should not halt the work that is going on.

As El Solh says: “It’s the first time where we see sustainability becoming an exciting investment.”

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