From Burden to Beacon: The ESG dilemma in the Middle East

From the glistening towers of Dubai to the majestic souks of Oman, a question echoes across the Arabian Peninsula: Will the rising tide of environmental, social, and governance (ESG) consciousness unlock a prosperous future for all, or will it inadvertently leave some communities stranded on the shores of change?

The potential for ESG to transform the region is undeniable. Implementing eco-friendly practices, reporting on progress, and training employees all chip away at business bottom lines. The temptation to pass these costs onto consumers is natural, raising the spectre of higher prices for everyday necessities. This could disproportionately impact low-income households, further straining their budgets in a challenging economic climate. Research suggests that by 2050, climate-related events could devour a staggering 3.3 percent of asset value for some sectors, a stark warning that resonates with the urgency highlighted at COP28.

Ignoring this delicate balance risks turning the beacon of hope into a burden for some. So, how can we ensure everyone walks across the green tightrope together?

Transparency as a guiding light: Businesses must ditch the tightrope act and shine a spotlight on their ESG initiatives and cost considerations. Open communication with stakeholders is key. Articulating the long-term benefits of these investments, such as energy-saving upgrades leading to lower future bills, can foster understanding and acceptance. Look at the UAE's ‘Integrated Emission Quantification Tool as a model. This first-of-its-kind initiative in the region aligns with the Paris Agreement, promoting transparency and paving the way for responsible growth.

Innovation to unlock affordability: Instead of clinging to the tightrope for balance, businesses can collaborate and share best practices. Imagine open-source platforms brimming with energy-saving blueprints or industry partnerships exploring sustainable sourcing options – these are not distant mirages, but potential lifelines for cost-effective ESG implementation. The UAE's commitment to renewable energy and sustainable water management, exemplified by the green projects championed by the Dubai Electricity and Water Authority (DEWA), are testaments to this collaborative spirit.

Beyond cost, towards opportunity: While cost concerns hang heavy like the desert air, businesses can see ESG as a springboard, not a burden. Investing in sustainability attracts socially conscious consumers and opens doors to new markets, ultimately boosting profitability. Remember, green isn't just a colour in the Gulf, it's a potential growth engine. Take Oman's Muscat Stock Exchange's recent ESG guidelines for listed companies – a clear signal that sustainability translates to success.

Governments as enablers: To truly secure everyone's footing on the green tightrope, governments must act as guiding hands. Incentives, subsidies, and infrastructure investments can ease the burden on businesses and consumers, making ESG a shared journey, not a solitary venture. Saudi Arabia's Green Riyadh project, transforming the city into a sustainable oasis, embodies this supportive approach.

Financial implications: ESG transition vs Low - carbon transition

While concerns about potential cost increases and asset depreciation amidst an ESG transition are valid, the impact on financial stability can be significantly mitigated through careful planning and collaboration. As highlighted by the OECD (2021), an orderly transition, characterised by assertive policies and efficient markets, can effectively manage changes in asset prices without major disruptions.

This scenario envisions depreciation and write-downs of obsolete assets, such as fossil fuel infrastructure, being offset by investments in cleaner and more efficient technologies. In a well-functioning financial system, these price adjustments would simply reflect changing market realities, not signal catastrophic losses. By channelling capital towards low-carbon or carbon-neutral solutions, such a transition could even stimulate sustainable growth.

However, the alternative – a disorderly transition triggered by sudden policy changes or technological advancements – could paint a far more volatile picture. Unforeseen events could lead to rapid price movements and increased uncertainty, impacting not just specific sectors but potentially causing broader market contagion.

Therefore, understanding the key factors influencing valuation dynamics in a low-carbon transition is crucial. By analysing these factors, we can better anticipate and manage potential risks associated with the transition, ensuring financial stability and promoting a smooth path towards a more sustainable future.

Envision a region where businesses collaborate, sharing resources and solutions for everyone's benefit. Imagine open-source platforms filled with energy-saving ideas and sustainable partnerships. ESG isn't just about boardrooms; it's about clean air and water for all, fostering community engagement, and creating a future where affordability and sustainability coexist. Navigating ESG complexities requires collective effort, transparency, collaboration, innovation, and proactive policy support to ensure broad benefits. As we enter 2024, the choice is clear: cling to outdated models or embrace a greener, equitable world. Let's act now, harnessing ESG to transform the Gulf into a beacon of global sustainability.

Source: Zawya Projects (The author is an ESG advisor, specialising in SDGs and economic diversification, and is a certified UNCTAD Youth Network coordinator. She also serves as Associate Director at Gulf Intelligence, driving impactful change in energy transition)