The Middle East is rapidly embracing ESG integration in business and finance, driven by COP28, with executives adopting sustainability strategies while facing standardisation and talent challenges.

• Middle Eastern executives increasingly prioritise sustainability in business strategies.
• Regulatory frameworks evolving to support ESG integration regionwide.
• Challenges remain in standardisation, data infrastructure, and sustainability expertise.

In December 2023, delegates from 198 countries gathered in Dubai for the COP28 summit to take stock of the world’s efforts to address climate change under the accords of the Paris Agreement. The symbolism wasn't lost on anyone: the world's climate future was being debated in a nation built on oil wealth. 

But what emerged from those twelve days of intense negotiations was something far more significant than symbolic gesture - the summit catalysed regional momentum. A 2024 PwC survey found that four in five executives in the region now report having formal sustainability strategies in place, while leadership resistance to ESG initiatives has plummeted by almost half. 

The UAE's announcement of the ALTÉRRA climate investment fund, with its $30 billion commitment, sent a clear signal: The region isn't just talking about change, it's financing it.

Legal experts in the region say the Middle East is experiencing a seismic shift in ESG integration in corporate governance, dealmaking and financing, and regulatory policy while looking to address challenges such as a lack of sustainability-related talent and a lack of investor faith in financial returns from sustainability-linked projects. 

ESG in the Boardroom

The conversation in Middle Eastern boardrooms has shifted dramatically from "why" to "how" when it comes to ESG implementation. PwC survey data reveals a transformative trend: more than half of companies report their sustainability strategies are now fully embedded across their organisations, marking a decisive shift from previous years when leadership support was less established.

“There is no doubt that the global movement around ESG investing has entered the boardroom in the Middle East and is high on the agenda. Investors in the Middle East, like their counterparts around the world, are seeking opportunities that align with environmental and social responsibility goals.”

Alishia Sullivan, Morgan, Lewis & Bockius

This evolution is particularly noteworthy given that leadership hesitation has plummeted, with only 16 percent of respondents citing a lack of leadership buy-in – nearly half the previous rate. 

“There is no doubt that the global movement around ESG investing has entered the boardroom in the Middle East and is high on the agenda,” notes Alishia Sullivan, a Dubai-based partner at Morgan, Lewis & Bockius. “Investors in the Middle East, like their counterparts around the world, are seeking opportunities that align with environmental and social responsibility goals,” she says. 

Regional CEOs are increasingly positioning climate change as a major concern, with 15 percent identifying it as a critical issue compared to the global average of 12 percent. More significantly, 36 percent of regional leaders view climate change as a key driver for corporate change in the next three years, outpacing the global average of 30 percent.

These considerations are infiltrating deal-making decisions across the region, with sustainability metrics becoming crucial factors in valuations and due diligence processes. Sullivan explains that ESG factors are increasingly important in the procurement and due diligence process with organisations keeping a close eye on the supply chains and underlying assets of companies in which they invest. 

The surge in green finance options has been particularly notable, with 34 percent of companies now considering green loans and 33 percent looking at capital markets through instruments like green or blue bonds. 

The numbers in 2024 may not fully reflect this mindset shift. Total sustainable bond (green, social, sustainability, and sustainability-linked bonds) issuance in the Middle East reached $16.7 billion in the first nine months of 2024, down 18 percent from the same period a year earlier, although this followed a relatively high COP28 halo effect, an S&P Global report found. 

To take off, sustainable bond issuance in the Middle East could require acceleration in implementing net-zero policies, despite government initiatives and increasing alignment with sustainability strategies, or even regulatory requirements.

In the UAE, the financial sector has pledged to mobilise $272 billion in sustainable finance by 2030 as a key factor for issuances in the sector.

Sullivan is also seeing an increase in investment funds that are compliant with sharia investment principles due to the commonality of ESG investing and sharia-compliant investing. “Investors following ESG and sharia-complaint strategies typically seek companies that have transparent decision-making processes, robust risk management practices, and strict adherence to ethical standards,” she explains. 

The integration of ESG into corporate governance frameworks is becoming more sophisticated, with almost half of surveyed companies by PwC either having a chief sustainability officer or planning to appoint one within the next year. These roles are increasingly comprehensive, with 90 percent of respondents indicating that sustainability leadership positions involve both strategy setting and oversight of monitoring and reporting.

The scope of ESG integration is expanding beyond carbon reporting to include broader metrics such as biodiversity impact and water resource management. In Qatar, for instance, companies are placing particular emphasis on water as a critical resource, reflecting the region's unique environmental challenges.

Regulatory Landscape

The regulatory environment across the Middle East is rapidly evolving, with each major market developing its own framework while striving for regional harmony. The United Arab Emirates has emerged as a frontrunner, designating 2024 as its second consecutive "Year of Sustainability" and establishing the cross-jurisdictional Sustainable Finance Working Group (SFWG) to promote cohesive regulation.

The Abu Dhabi Global Market's implementation of its sustainable finance regulatory framework in July 2023 stands as one of the first comprehensive sustainable regulatory frameworks in the Middle East. This opt-in framework encompasses funds, discretionary managed portfolios, bonds, and sukuk, setting a new standard for ESG disclosure requirements in the UAE.

The UAE's commitment to sustainable finance is further evidenced by the Dubai Financial Services Authority's decision to waive all regulatory fees for sustainability-related debt securities listings throughout 2024, encouraging greater participation in green financial instruments.

The United Arab Emirates is also implementing ambitious national action plans like the UAE’s Net-Zero 2050 Strategy, and significant investments in renewable energy and green technology – for example, the Mohammed bin Rashid Al Maktoum Solar Park in Dubai and the Barakah Nuclear Energy Plant in Abu Dhabi.

Saudi Arabia has made significant strides in its regulatory approach, with the Capital Market Authority's ESG disclosure guidelines requiring listed companies to report on ESG-related information since 2019. The Saudi Stock Exchange (Tadawul) has further strengthened this commitment by launching an ESG index and partnering with the UN's Sustainable Stock Exchanges Initiative.

Saudi Arabia overtook the UAE as the largest issuer of sustainable sukuk in the first months of this year, compared to the same period in 2023, the S&P report found. 

In Oman, the regulatory landscape is evolving with the Muscat Stock Exchange's introduction of ESG disclosure guidelines for public joint stock companies. The transition from voluntary reporting in 2023 to mandatory reporting in 2024 signals a clear commitment to transparency and standardisation.

Challenges and Opportunities

While the progress is significant, the implementation of ESG strategies in the Middle East faces fundamental challenges, with organisations struggling to navigate the absence of region-specific guidelines and best practices. This absence of standardisation makes it difficult for companies to produce consistent, comparable ESG disclosures that meet stakeholder expectations and regulatory requirements.

The foundation of effective ESG reporting - robust data infrastructure - remains a significant hurdle. Middle Eastern companies struggle with limited access to standardised data, hindering accurate measurement and reporting of ESG performance. This challenge is compounded by the absence of unified metrics, creating a cycle where lack of standardisation impedes data collection, while insufficient data hampers the establishment of effective reporting frameworks.

The talent gap in sustainability expertise is a pressing concern, with nearly 80 percent of organisations identifying knowledge of sustainability reporting and regulatory requirements as critical competencies. The region is addressing this through various initiatives, including training programs and international partnerships to build local expertise.

The return on investment in sustainability initiatives remains a concern for some, with one in five executives expressing uncertainty about financial returns. However, consumer data shows 70 percent of respondents are willing to pay premiums for sustainable products. This growing market demand, coupled with regulatory pressure and climate imperatives, suggests the region's ESG transformation will continue to accelerate.

“As the Middle East grapples with climate change and resource scarcity, there's an increasing recognition of the need for sustainable development. ESG investing offers solutions that align with these long-term goals,” Sullivan says.