As climate change accelerates, businesses in the Middle East and North Africa must do more to document and mitigate their carbon footprint to attract environmentally conscious investors.
Asset managers worldwide will nearly double their ESG-related (environmental, social and governance) assets under management to $33.9 trillion in 2026, PwC forecast in an October report.
“Investors need information to make assessments about the robustness, the long-term value creation of the companies they invest in - sustainability is clearly now a part of that,” Wilhelm Mohn, global head of corporate governance at Norges Bank Investment Management, told a webinar hosted by the International Sustainability Standards Board (ISSB). “We need (this) to be consistent, comparable and reliable.”
An October 2022 KPMG study found that 96% of the world’s 250 largest firms publish sustainability reports. Yet in the Middle East and Africa, only 56% of the region’s top 392 companies released such information in 2021, down from 59% a year earlier. That compares with 89% in Asia Pacific, 82% in Europe and 74% in the Americas.
Companies face a dilemma regarding which guidelines to follow. For example, at least seven organisations have published or are in midst of finalising sustainability reporting standards. These include the European Union, the G20, accounting body IFRS Foundation, and the GRI (Global Reporting Initiative).
Most Middle East companies filing sustainability reports use GRI guidelines, while IFRS launched ISSB in November 2021 to develop comprehensive, global standards for sustainability disclosures.
“We've been calling for better reporting on sustainability and engaging with companies on this for more than a decade and we believe that the ISSB standard will be a real game changer,” added Mohn.
The ISSB aims to issue its first two standards by the end of June and will be guided by new EU reporting rules as well as those of the GRI.
“There is a need to address the fact that business cannot be as usual and therefore accounting cannot be as usual,” ISSB chairman Emmanuel Faber Weber told a February conference. “We’ve built our business models very focused on efficiency. We have a blind spot for resilience.”
Climate change will alter the competitive position of all companies in the next 10-20 years, added Weber.
Sustainability reporting “serves as a competitive advantage, de-risking purchasing, procurement, and access to capital,” says a report by environmental non-profit Brightest. “Sustainability reporting lets companies showcase their efforts to reduce their carbon footprint, conserve resources, and achieve operational efficiencies.”
In January, the European Union’s Corporate Sustainability Reporting Directive (CSRD) came into force. This will require most companies operating within the 27-country bloc to publish significantly more detailed data on the environmental and social impact of their activities.
The EU estimates 50,000 businesses will now have to document their sustainability efforts, also claiming that by standardising reporting regulations it will lower associated costs in the long term. Deloitte estimates the new rules will cover 75 percent of Europe’s economy.
In a November statement, the EU said the requirements “would end greenwashing, strengthen the EU’s social market economy and lay the groundwork for sustainability reporting standards at a global level”.
Submissions under CSRD must also be independently audited and will replace the existing Non-Financial Reporting Directive (NFRD), which EU acknowledges were seen as “largely insufficient and unreliable”.
The new rules, which will be published in mid-2023, will include disclosures relating to pollution, climate change, water and marine resources, biodiversity and ecosystems, and resource use and the circular economy, according to a report by law firm White & Case.
Crucially, the new rules will make companies reveal their scope 1, 2 and 3 emissions; scope 1 are those from sources controlled or owned by the organisation, scope 2 relate to the organisation’s emissions arising from its energy consumption, while scope 3 cover emissions across its value chain, for example from third-party suppliers, distributors or users of its products and services.
“Financial and sustainability reporting will be on an equal footing and investors will have comparable and reliable data,” the EU says.
The EU’s biggest companies must start reporting under the new rules from January 2024. By 2028, mid-sized firms and small listed companies should also be compliant, as will sizeable non-EU companies operating within the region.
Interoperability of sustainability standards will be key so that multinationals active in Europe and United States, for example, do not have to report materially different information in different jurisdictions. Otherwise, the cost could prove onerous and will deter comprehensive environmental reporting.
“We want to enable companies to explain to investors how those sustainability-related impacts, risks and opportunities can affect their long-term performance and prospects,” Sue Lloyd, ISSB’s vice-chairwoman, told a January webinar.
(Writing by Matt Smith; editing by Seban Scaria firstname.lastname@example.org)