Environmental, Social and Governance – To invest or not to invest…

2nd March 2021
Katherine Bruce
Senior Consultant, Corporate Sustainability Advisory

Until recently sustainable investing inevitably meant sacrificing returns. But the evidence is mounting that proves this is no longer the case…

Hosted by WSP’s Katherine Bruce, this episode explores Environmental, Social, and Governance (ESG) risks and engages industry insights from First Abu Dhabi Bank’s Head of Corporate Sustainability, Belinda Scott, and MLW Consultancy’s Michele Wong.

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WSP Middle East · Environmental, Social and Governance – To invest or not to invest
Not able to listen? Take a look at the complete transcript below.

Katherine Bruce: Welcome to WSP’s anticipate podcast. I’m your host, Katherine Bruce, Senior Consultant for Corporate Sustainability Advisory at WSP Middle East. The environmental social and governance movement, known as ESG, has been gaining traction for quite some time now. ESG really gets to the core of why you’re in business, the impact you have on the world, and what you communicate and disclose. The impact of COVID-19 has really highlighted how interconnected systems are and how damaging an external shock can have on the economy. As a result, we have started to see more companies apply a sustainability lens, transform their business practices, and better manage ESG risks. In this episode, we’ll be exploring the role of ESG in the Middle East and from within the banking investment community. It’s a privilege to be joined today by two prominent experts in the ESG field. Michele Wong, Managing Director, MLW consultancy, and Belinda Scott, Vice President and Head of Corporate Sustainability at First Abu Dhabi Bank (FAB).

Ladies, welcome to both, and thank you again for joining this discussion. To get started, I’d like to ask you both what are the biggest ESG risks on the horizon? Michele, let’s begin with you.

Michele Wong: Thank you so much, Catherine, for having me. And thank you, WSP for hosting this podcast on this very important topic. I think there are multiple ESG risks out there right now that are trending. But the one that’s very prominent to me, that I’m seeing in multiple industries across industries is supply chain risks. A lot of companies are now looking into how they procure products and services and their production line in their supply chain. Looking at the ethics and environmental risks. This is one of the things that I’ve seen trending globally. I’m not sure if maybe Belinda agrees?

Belinda Scott: Thank you, Michele, thank you for inviting me, Katherine, I’m very pleased to be here. ESG risks really from the position that I’m coming from, I’m looking at things like extreme weather, I think that we’re seeing generally, extreme weather is becoming increasingly a risk globally. And we’ve had extreme weather in the region. And we had Cyclone gonu several years ago. We have hotter summers and, and significant rainfall that actually causes flooding and damage in the region. Climate is definitely a key risk not only, as a global risk, but here within the region. So much so that the Ministry of climate change, has a national committee to work on the risks and how climate will impact the whole of society. It’s not just environmental, also how it will impact the financial stability of financial systems across the world. I think that there are risks arising through digital inequality globally. And I think that could potentially cause a lot of problems in the future countries that have the ability to take advantage of implementing digitalization within government and within the private sector and the countries that don’t have access to that. So I think that there are issues there. And I think that COVID has thrown up the risk of managing diseases, we still have global issues around malaria and other issues, and then all of the fallout of all of them and how they impact the society and environment, the social and the environmental and the economic well being of the world, the systems and how far-reaching those risks can be. So that they’re my top concerns, I think in terms of risks.

Increasingly, employees are looking for responsible organizations to work for. I think that that will change things going forward.

Katherine Bruce: Thanks, ladies, that was really interesting. It’s very prominent as well that climate change will have an impact on the supply chain and also your discussion around digitalization as a risk and potential opportunity. I think the pandemic has really also highlighted the importance of human capital, and the social aspects of ESG, like employee wellbeing, be interesting to see if the JRI or SASB standards, uplift themselves also consider these aspects as they’re traditionally reporting against or health and safety as part of human capital. And so, going into the Middle East in particular, do you think there are any specific ESG risks that are really relevant for the region? We’re going to open that to either of you.

Belinda Scott: I think that we use a lot of expatriate workers simply because the local populations are quite small, and also to bring in expertise and knowledge that we don’t yet have because we’re still quite a young economy now. I would say that with the issues around health and wellbeing, it’s really sort of made us think, how do we bring in how do we continue to bring in talent that’s needed to drive the roles that contribute to the economy? And then there’s a pandemic? And does that affect the ability to attract and retain talent? And I think also, one of the other things that we see coming through definitely, in the work that I’m doing and the discussions I’ve had with my colleagues in the talent attraction and retention space is that increasingly, employees are looking for responsible organizations to work for. So I think that that will change things going forward.

Katherine Bruce: Yeah, I definitely agree. Belinda, employee wellbeing has ranked quite high in a lot of material topics across different organizations. I think in previous years, people saw ESG and corporate social responsibility as a motto for sustainable business practices. But as we start to approach the government’s different targets for net-zero by 2050. Michele, do you think CSR is enough? And what are you doing to help organizations go about embedding more CSR and ESG practices into their organization?

Michele Wong: Yeah, that’s a really great question. And I think a lot of companies, especially in this region, focus a lot on the E and the s, the environment in the social and there’s less of a focus on governance. But I found when I’m speaking to a lot of companies in the Middle East, and even actually globally, a lot of people forget when we’re talking about corporate responsibility or sustainability practices, that there’s a large part of that includes integrity, practices, ethics, anti-corruption, compliance. I think the governments in the GCC have largely focused on these topics. And they’ve started embedding a lot of new policy and, a lot of new laws. The challenge here is education, and also trickling it down to the private sector and on an individual level for people to understand the needs for this and how it affects risk, ESG risk, and how risk puts companies at risk, for the large part, in terms of assisting companies today and how they can integrate corporate responsibility practices into their business. A lot of the time I like to showcase international standards and frameworks, some really great frameworks that have been that you’ve mentioned already, including JRI, and SASB the certified benefit corporation certification. There’s the task force for climate-related financial disclosure and the carbon Disclosure Project. I know this is;t banking and investment-related but sustainable fashion is a very, large topic in the sustainability industry right now. And they have a new Higg index to help with supply chain risks. I think one of the things also in the Middle East is a lot of people still believe that CSR is just a charitable activity. I know a lot of the major companies and international companies know otherwise. But a lot of the smaller companies are especially SMEs and family, businesses still don’t fully grasp the extent of what it means to be to incorporate sustainability and corporate responsibility into their business. I think, as an industry as a whole, including this consultancy hub, and the industry as well as those in the sustainability field, there needs to be more of a way to tackle and kind of expose ourselves to those who don’t really have access to this knowledge. And they’re not having these conversations with their own circles and their own business circles.

The government and the financial sector can actually create huge change, by taking a better approach to managing some of the key things that are going to impact us all in one way or another and to find solutions through financing and engaging with people and providing access to our services and to knowledge.

Katherine Bruce: I definitely agree there, Michele, you brought up some good points, and also the fact that frameworks are really driving some support for organizations to utilise as a way to disclose information and share information to a wider audience in a way that’s comparable from organization to organization. You also mentioned there the Task Force on climate related financial disclosures. FAB is actually one of the first financial institutions in the Middle East that’s been committed to implementing the recommendations of TCFD. They also in 2017, issued the first green bond in the Middle East and they’re the only financial institution in the UAE to report against the equator principles, and was also awarded the best bank in the Middle East for corporate sustainability. Some really great achievements there, Belinda. It’s really great to hear that FAB is driving the sustainability agenda in the region. Could you tell us a little bit more about the other initiatives that you’re involved in? And how FAB embedding ESG into your operations?

Belinda Scott: We’ve been on a journey for some time and I think that we’ve got to the point where we realise that actually we need to work out the direction that we’re going. So we’ve separated CSR and corporate sustainability and they have two quite distinctive areas of focus. I can’t talk so much for the CSR team, but in my area, we look at sustainable finance, and we’re working closely with corporate and investment banking team to look at more opportunity around the state finance, linked to the SDGs renewable energy. We’re trying to understand where the opportunities are around social maxing out, our team in the UK are quite involved in financing social housing, and we also finance social housing in the UAE. But it goes beyond initiatives and it’s more fundamental than that. We’re working on a sustainability strategy and roadmap. It’s a long-term commitment to develop this, and to make sure that all areas of the bank understand what their contribution and what their role is. Also, we have the ESG risk team that’s within risk that will develop the ESG risk framework that will be implemented across the bank. It’s a journey. And I know that everybody says, ‘Oh, it’s a journey’, because you never get to a point where you say, oh, I’ve done it, and you step back. It’s being aware of all those, like you said at the beginning that the global ESG risks and how they are relevant in the region and they want me to do and I think that the key thing is that government is leading in this area, they’ve set the direction of travel on what those expectations are. And also, they’ve set the expectation of what they expect from the private sector, especially in terms of how they can contribute to the UAE’s SDGs. So therefore, it gives you that sort of momentum. And now with the UAE sustainable financial framework that’s recently come out, again, it sort of sets those expectations. So I think that there is significant movement, not only within the UAE but we see in Bahrain and also in Saudi Arabia as well, that this is the direction of travel and therefore there’s lots of opportunities. But we also need to make sure that we’re at this time really embedding risk frameworks within our organizations.

Katherine Bruce: Thank you so much Belinda, you definitely touched upon some really interesting topics there, particularly around regulatory developments and sort of mounting pressures from investors and governments to support and influence companies to consider ESG factors in their organisation. And it’s good to see that FAB has quite a well thought out sustainable framework and policies and perhaps maybe consultants need to play that bigger role in encouraging investors to look more into ESG issues as part of their or wider duty to clients. But one of the sort of big challenges in this is, what do we really define as ESG? How do we avoid sustainable development, goal washing SDGs, just being thrown into as a buzzword and greenwashing and marketing exercises from taking hold? Michele, have you seen that in organizations you’ve worked with? And how do you manage to add more clarity to what ESG really means than avoiding just ticking boxes?

Michele Wong: I think the first thing to kind of just identify is a lot of people who are in the marketing field, their intentions are good. And it’s really important to kind of take that approach in and kind of identifying what their intention is and goals and objectives for how they’re marketing, and then kind of just identify and kind of showcase how harmful certain marketing practices can be from an environmental and social perspective. I think the large part is the lack of education, or awareness of ESG practices and I think the more that people understand how integrated and how much can be focused on in terms of looking at purpose related projects, and how it can impact the beneficiaries that they’re trying to assist. It can help with greenwashing or avoid greenwashing and SDG washing. I think a large part is a lot of major companies are not ready to take certain goals are or tackle certain goals, but they want to be part of the conversation. And I think that’s also a really good indication that that people want to be part of social impact, and they want to incorporate it in their business in some way. However, I think just avoiding that talking about it and not actually doing it in the back end needs to be largely addressed across all business industries.

Katherine Bruce: Thanks, Michele. I’m just going back into more social responsible investing in an investment horizon in general. So, I mean, socially responsible investing really started back in the 1970s. Investors use screening methods to exclude investments, and so guns, tobacco, gambling and other vices. And investing in these companies was seen as supporting, quote unquote, morally bad or social, socially responsible businesses. So ESG investing is paying off. But ESG investing is really that step further, where environmental, social, and governance factors play a fundamental role in the investing process. And as well, we recognize that companies that do integrate ESG standards are more likely to outperform, outperform their peers in the long run. What do you think it will take, Belinda, for ESG investing to become more mainstream?

Belinda Scott: First of all, it has to be driven to a certain degree by demand, investors have a huge impact and influence on where things are being changed. If you’ve got investors, or you’ve got clients that want to finance things that have a social impact, they are increasingly going to have to look at you know, okay, we’re going to finance this through an SDG or how they’re going to do that. But also the banks themselves, the financial institutions have a role to play to educate their customers for a bank is you know, ESG is about business, it’s about how we are going to be sustainable long-term, that we’re not going to end up with a loan book or a portfolio of stranded assets. I think that that one of the things that will drive some of this is actually transition, because I think transition now is one of the key areas to transition finance, transition risks, and how we all need to understand the issues around that and how we come and help companies because they may go out of business in the future if they don’t understand what the risks are. I mean that’s the whole thing about oil, and there’s the whole thing about coal and all of this, but also the impacts because of the impact that they have. It’s about understanding what the business case is, what the actual inherent risks are, if you continue to invest or to finance things with very high social risk, and what can you do to move it towards something that is less risky. So we need as an organisation to develop the products, the tools, the knowledge, so that we can work with our customers to guide them. And also, it’s education, but it’s also for the regulators as well. So it’s a multi pronged attack, I think attack isn’t the right word, but the world isn’t the same as it used to be, and you can’t ignore all of these things. I think that we are beginning to understand that everything is interconnected, and therefore, you know, we need to get an understanding of how health financing does play a big role. And I think that that the government and the financial sector can actually create huge change, taking a more, I would say, not responsible, but a better approach to managing some of the key things that are coming up that are going to impact us all in one way or another and to find solutions through financing and engaging with people and providing access to our services and to knowledge.

Katherine Bruce: No problem. I definitely agree that finance plays a huge role in improving ESG issues across the world. And as a bank, Belinda, what’s your opinion on divestment versus engaging? So for example, taking a big incumbent carbon polluter? Do you think as an organisation, you should be divesting from such investments or actually engaging with these organisations to help improve their ESG issues?

Belinda Scott: It’s really interesting as this was actually raised when I attended a green investment principles Belt and Road session on transition finance last week. There was talk about how financial services have a big role to play in, you know, helping companies that are big producers of if it’s an oil, coal or whatever it is to understand those risks and then have those difficult conversations with them. But I guess the starting point for the big organisations is to look at, you know, what they’re financing and, and what the percentage of the, their, their financing is going into different sectors. I think that investors are asking these questions now, I think that SASB has got something around, you know, looking at these different things, how much of your loan is going there or to oil? How much is going into other big pollution polluting industries? and, understanding where those risks are, and then say, what is it that we’re going to do to manage that. It’s definitely something that we’re looking at through the ESG framework?

Katherine Bruce: Yeah, it’s not really a black and white in terms of divestment versus engagement. So it can be approached on a case by case basis and I think both of them have different pros and cons, in their own sense. Michele, as a consultancy, what is your opinion about this? And for example, have you ever worked with a client who is fundamentally unsustainable? And would you avoid them? Or do you support them and engage with them to improve their sustainability practices?

Michele Wong: I think the definition term of being unsustainable is subjective. I think in many ways, you know, just by living, we are leaving behind a carbon footprint, it just depends on the choices that we make, as individuals and as organisations. For me choosing to work with the client isn’t how unsustainable they are, it’s how willing they are to learn and to kind of gain access to a new opportunity for their business to transition their business. And it depends on like, how open minded the executive management is, or the founder or the board, that would be more of how I would choose my clients. I mean, for me, it would be a lot harder to work with a very, a more sustainable company with a very close-minded leadership team, versus an open-minded leadership team and a very unsustainable company, because there’s more opportunity there to kind of help the company progress.

Katherine Bruce: Yeah. And do you see that the sustainability drive is coming from that top down approach more? Or do you see it more as a bottom up approach, or does both work?

Michele Wong: I think it’s both. And it also depends on the industry, the company, the organization, how large the company is, as well, how old it is, and what kind of old practices there are, sometimes you have a new CEO or a new board member that completely shifts the strategic path of that company, it just takes one small kind of trigger for a company to kind of look at something different. Sometimes it’s because their customers are asking for it and their stakeholders are asking for it or it’s required by regulation. An example of this is Expo 2020; anybody who would like to be a supplier or a vendor for Expo, they require a sustainability framework. So a lot of smaller companies all of a sudden realize that they need this framework, and they don’t know what it is. So they they’re just struggling to kind of develop that. So they have another motivation for it. So it just I think motivations come from all shapes and sizes and I think there’s a lot of opportunity in this region to kind of grow the sustainability industry and the focus area and kind of grow social impact in a more holistic way.

Katherine Bruce: Thanks, Michele. I just wanted to touch upon the impact that millennials are having – I think it’s fair to say that millennial investors are approaching their financial decisions in a different way to previous generations. So rather than a sort of standard stock and bond portfolio, many millennials when they’re choosing their investment strategies, tend to consider external factors such as ESG impacts and the ESG performance of specific companies. I just wanted to close with the question. Do you think today’s socially responsible generation will mark a paradigm shift? Belinda, would you like to answer that?

Belinda Scott: Yeah, I think they will. I think that that they aren’t afraid to walk away from things that they don’t support or agree with the power that they hold is really significant. I think they will hold the world generally, but they will also hold the companies that they invest in or do business with or are employed by to account they will create a shift in the way that business is done.

Michele Wong: I recently read an article where they said 88% of consumers want brands to help them make a difference and I think this is largely driven by the millennial generation but also it’s starting because of easier access to services and goods, easier access to information. It’s allowing consumers to empower themselves with the knowledge, I had to make decisions on what kind of products and services that they use. When it comes to investments as well, we’re starting to see more, just even on a personal level, there’s more options for us to invest in something more sustainable or ESG focused. Even one of my own financial advisors came to me recently and said, Oh, we need to rejig a portfolio and have more ESG investments in there because of Joe Biden’s new policy and, you know, policies that are being incorporated in the EU, it’s already mainstream. It’s just there needs to be more people aware of the options that are out there. And I think it is starting to ripple across the industry.

Belinda Scott: Thanks Michele, I agree with you. I think that’s absolutely right. If I look at the young people now there’s a sense of inclusion. To be honest, it’s not perhaps as evident in this region. But if you think about it, they’ve been through the financial crisis, they see that, you know, there’s climate risk, you know, the whole environmental degradation, inequality and disruption from industrial transformation. And they’re not able to have the education that they need at the moment because of COVID. So there’s nothing to study in different ways. And really, they’re not putting the university experiences that they would have had, it would have been two years ago. So you know, there’s so much that they use, even coming to the generation after millennials, I think that it goes back again to what I said is that you know that the challenges that they’re facing isn’t actually being looked at with the depth that it needs to be because I think that it really could be at least a very short term threat, but we need to make sure that there’s adequate pathways for opportunities for them, so that they don’t lose faith in the economic and political institutions across the world, but also, the employers of the future, the retailers, the establishment, even, is meeting their needs and aligning again with their principles. I think that it is a very tough time for them, and that they could impact businesses quite significantly.

Katherine Bruce: Both really interesting comments that you have shared there. I think it’s very important now that organisations consider their ESG impacts as well for retaining and attracting talent. And the younger generation is no longer just looking for a salary and a job title, or they’re looking to enter an organisation that is really at the forefront of improving sustainability in the region and having that as a core part of their strategy. So I think on that note, that brings us to the end of today’s podcast. Michele, and Belinda, thank you so much for your time, and the insights you’ve provided are really paint a fascinating picture of the future of ESG and sustainable investing in the Middle East. I think progressive transformation towards cleaner, greener environmental initiatives may seem more conceivable now in comparison to recent decades. And it’s clear that we need a firmer pledge from companies in our region to reduce emissions, disclose financial risks related to climate change, intensify the actions and investments needed for a sustainable and low carbon future.

So, signing off, my name is Katherine Bruce and I really enjoyed speaking with Michele and Belinda today. On behalf of WSP, thank you so much for your time.