The S in ESG should never be ignored

The concept of environment, social and governance (ESG) is given great importance these days. However, many analysts are only focused on the environment and governance aspect of ESG, but very few address the “S” or social aspect, especially concerning the treatment of migrant workers in contracting projects.

Given the scale of the upcoming giga-projects in the Gulf Cooperation Council, and Saudi Arabia in particular, it is important to examine how social responsibility toward migrant workers has been addressed and what still needs to be done.

The issue is relevant far wider than just migrant workers in the Gulf, as in recent years the concept of corporate social responsibility has been touted by many companies to redress failures over worsening climate change and widening social inequality by promising their shareholders that they will find solutions because they are genuinely committed to being “socially responsible.” But in reality, many companies do not take action to protect their bottom line profitability and management bonuses unless they are required to by the law. This is where the GCC countries have decided to act.

The GCC states have taken the initiative to introduce significant labor reforms in recent years.

Key labor reforms have focused on dismantling aspects of the so-called “kafala” or sponsorship system, to increase freedom of expatriate workers’ movement, ease of changing jobs, and tighter control over employment contract rights.

Now international contractors have to address questions in carrying out their projects, if they are truly to encompass the “S” in their ESG mandate. Among these are setting up procedures to ensure that migrant workers are not enticed to work abroad by scrupulous placement agencies on false contractual promises. Getting paid in full and on time has been one of the major problems faced by migrant workers. International contracts should now obligate such full and timely payment clauses in their subcontracting agreements with local contractors to reduce reputational risk. Other areas where international contractors have to comply with includes appropriate living conditions for workers, monitoring heat risk working conditions and the protection of workers, especially in the summer months when temperatures soar in many GCC countries.

Freedom of movement has been a contentious issue in GCC expatriate labor relations and rights, especially employers holding workers’ passports and issuance of exit and re-entry visas, or the failure to issue workers’ visas in a timely manner, causing them unnecessary stress and uncertainty.

Several GCC countries have now implemented laws to redress these issues, with Qatar removing the requirement for workers to obtain an exit permit in 2018. In 2020, Doha went further by abolishing the requirement for expat workers to obtain a so-called No Objection Certificate (NOC) from their employers if they wanted to change jobs before the end of their contracts. The Kingdom followed suit and in 2021, foreign workers can now change employers without the consent of their employer and can apply for their own exit and re-entry visas. The UAE abolished the NOC requirement in 2011 and does not require an exit visa.

The freedom of movement changes is to be welcomed for several reasons. Under the old system, workers were tied to their local sponsor and their economic activities. This might have worked well when the sponsor’s direct contracts with the government, or as subcontractors with other companies were proceeding on track and payments for project completion were made on time.

However, in times of economic downturn, or when project payments are delayed or projects cancelled, foreign workers became a large overhead cost burden, and in effect created pools of unemployed or underemployed workers in some sectors of the economy, while other sectors continued to bring in and sponsor additional migrant labor.

Freedom of movement will now ensure that workers in stagnant economic sectors and those unemployed can move to other economic sectors.

International contractors now have an obligation to ensure that workers have possession of their passports, procedures are in place for timely renewal of visas, and handling of resignations and a support mechanism for workers changing jobs.

It is important that workers are provided with mechanisms to communicate individual or collective concerns to their employers, as this is an important element of the “S” in the ESG. Again, several GCC countries have taken some initial steps in this direction, with Qatar establishing labor dispute resolution committees in 2018, and in 2019 permitted companies with more than 30 workers to form joint committees with management, and with workers electing their representatives. In the Kingdom, labor courts were introduced in 2018 to handle labor disputes and encourage company-led resolutions with workers.

In the final analysis, migrant labor reforms should not be driven by external pressure because of a spotlight being shown on the country when international events are undertaken, but rather by a belief that it is the right thing to do with positive economic, and social outcome to all parties, thus enhancing the “S’” in ESG commitment.

It is gratifying to know that the ongoing FII event has organized an important debate about how to "invest in humanity," which indicates Saudi Arabia's strong committment to ESG values.

• Dr. Mohamed Ramady is a former senior banker and professor of finance and economics, King Fahd University of Petroleum and Minerals, Dhahran.