Sustainability & ESG
Sustainability and ESG
Climate change, pollution, natural resource depletion, social justice, human rights, biodiversity, gender and racial equality, shareholders rights. These are some of the issues currently facing our world, some of which threaten our survival and the future direction of our planet.
In 2015, the United Nations member states adopted the 2030 agenda for sustainable development, which has at its heart the seventeen Sustainable Development Goals, or SDGs. The SDGs have been developed based on decades of work, commencing with the Earth Summit in Rio de Janeiro in 1992.
Amongst other things, the SDGs call for action to:
- End poverty and hunger
- Provide better standards of education and healthcare
- Achieve gender equality
- Provide sustainable economic growth while promoting jobs and stronger economies
- Tackle climate change, pollution and other environmental factors that harm the environment and people's lives
- Preserve the health of the land, air and sea
Qatar is a signatory to the 2015 Paris Agreement and its commitments detailed in the Nationally Determined Contributions.
The four pillars of the Qatar National Vision 2030 are aimed at promoting sustainable development, to guide the transformation of Qatar into an advanced country, capable of sustaining its own development, whilst protecting the environment, and providing for a high standard of living for its people for generations to come.
To support the implementation of the QNV, the State of Qatar has unveiled the National Environment and Climate Change Strategy (QNE), the National Climate Change Action Plan 2030 (NCCAP), and the revised Nationally Determined Contribution (NDC). The QNE identifies greenhouse gas emissions and air quality, biodiversity, water, circular economy and waste management, and land use as key priority areas with corresponding goals and initiatives. The NCCAP consolidates Qatar’s climate actions, covering both mitigation and adaptation, under a cohesive framework. Furthermore, Qatar’s revised NDC sets a 25% emissions reduction by 2030 while emphasizing economic diversification with mitigation and adaptation co-benefits.
This threat of climate change raises the urgency of climate transition, and the key role of global financial markets to align investment with socially responsible objectives. Financial markets and climate transition focuses on the growing contribution financial markets play in progressing an orderly transition to low-carbon economies.
The OECD notes that in concert with the need to reach the objectives of the Paris Agreement and the SDGs, there has been a significant growth in investors’ use of ESG approaches, including the incorporation of climate transition factors. In turn, ESG investing has become a leading form of sustainable finance for long-term value and alignment with societal values.
Qatar Stock Exchange, as an economically significant entity within the capital markets environment of the State of Qatar, has a vital role to fulfil in realising the Qatar National Vision and promoting the global sustainability agenda.
In 2016, Qatar Stock Exchange became a signatory to the United Nations sponsored Sustainable Stock Exchange initiative. Why did we do this?
The SSE initiative is a UN Partnership Programme organised by UNCTAD, the UN Global Compact, UNEP FI and the PRI. The Sustainable Stock Exchanges initiative promotes corporate investment in sustainability by providing a platform that allows exchanges, in collaboration with investors, listed companies, regulators, legislators and international organisations to assess how they can enhance performance on ESG issues and encourage sustainable investment.
Because we provide the platform for listed companies to raise equity finance and for investors to allocate capital, we have a unique role to play in the empowerment of sustainable finance. We do this by providing guidance to our issuers on sustainability and the adoption of ESG principles for their own benefit and that of investors and the community at large. Being signatories to the SSE initiative, we are able to rely on support and best practice guidance from our peers across the globe and to learn from their experience in dealing with ESG issues.
Our aim is to ensure that matters of sustainability and ESG become and remain important considerations for both our issuers and our investors. As part of this matter and our commitment to the SSE, we issued guidance on ESG reporting in 2016 for the benefit of our listed companies and investors. We also launched a web platform which allows our listed companies to record their progress in adopting sustainability measures and our investors to view and use that information when making their own investment decisions. This can be viewed at the following address: QSE Sustainability Platform
So, what is ESG?
Environmental, Social, and Governance (ESG) are the three central factors that allow investors to measure the sustainability and societal impact of an investment in a company.
In the past, our principal concern as investors was whether a company in which we invested was able to provide us with a capital gain and dividends over time, without any reference to matters of sustainability or corporate responsibility. More recently, however, ESG criteria have become additional, increasingly important considerations for investors when evaluating companies in which they might want to invest.
So, what are these criteria, and why are they important?
Environmental criteria demonstrate how a company treats people, especially its own staff, and how it interacts with the communities it serves. Items of note will include the way a company treats its suppliers, does it contribute to the development of local communities, do the company’s working conditions show regard for the development and health and safety of its employees.
Social criteria demonstrate how a company treats people, especially its own staff, and how it interacts with the communities it serves. Items of note will include the way a company treats its suppliers, does it contribute to the development of local communities, do the company’s working conditions show regard for the development and health and safety of its employees.
Governance criteria demonstrate, among other things, how a company is governed, whether there are any conflicts of interest among its board members, how it treats its shareholders and the legality and nature of its operations.
These ESG criteria are formulated to help investors find companies with similar values to their own. Although there are unlikely to be any companies which will pass every test, it is essential that investors are provided with sufficient information for them to decide what is most important to them and to assist them in making their investment decisions.
ESG criteria used for corporate reporting purposes are designed to provide decision-useful information for investors, so criteria vary for investor type, industry materiality and issuer. However, standardisation has gone some way to defining common denominators which have been referenced by, for example, the Sustainable Stock Exchange initiative in producing guidelines metrics which QSE has built into our own guidance.
An ethical approach to investing used to focus on avoiding so-called “vice” stocks, companies involved in, for example, munitions, tobacco, alcohol, or gambling. More recently, this has also included companies that exploit natural resources, particularly those in mining and fossil fuel extraction. It was generally considered that this type of investment led to lower returns because it excluded many high-performance companies in those very sectors.
However, with ESG investing, those companies that demonstrate corporate responsibility by showing commitment to minimising any harmful impact on the environment or communities in which they operate are not necessarily excluded from consideration.
In many jurisdictions, the provision of non-financial data incorporating ESG metrics is now a mandatory requirement, and this is accelerating the adoption of ESG investment screening. Institutional investors now routinely screen companies based on ESG data and exclude those with low scores. ESG integration is defined by the UN Principles for Responsible Investment as: “The explicit and systematic inclusion of environmental, social and governance issues in investment analysis and investment decisions
Fund managers typically integrate ESG in three steps:
- Identify the most financially material issues.
- Analyse the likely impact of these factors on the company’s business.
- Incorporate information into the valuation analysis.
This ESG analysis forms part of a wider mix of traditional metrics to value the company and its prospects. ESG investing’s purpose is to integrate environmental, social and governance factors into the process, and then decide whether the investment is sound.
This clearly has a positive impact on those companies that score highly and may be included in one of the many sustainability indices.
Individual investors concerned about sustainability and wishing to carry out their own screening using ESG metrics are becoming better served by both companies and service providers. They are also able to directly invest in mutual funds and ETFs that track sustainability indices.
QSE has implemented a web platform that allows investors to view and assess the performance of QSE-listed companies. It can be found here: QSE Sustainability Platform.
For companies, demonstrating corporate responsibility has never been more important. As ESG investing becomes ever more prevalent, companies concerned about the value of their brand and how their customers and investors perceive them will need to become more transparent in matters of sustainability.
In many international jurisdictions, non-financial reporting is now mandated by regulators. Although not currently the case in Qatar, new regulations will be introduced in due course, mandating that all listed companies provide sustainability reports based on QSE guidance.
Companies should be aware that there are benefits that accrue when they adopt an effective sustainability strategy, including:
Improved Performance. Whilst long-term performance is still debated the inclusion of ESG considerations as an additional part of the investment process does see issuers with established sustainability strategies that manage business risks valued differently. Asset managers routinely increase cost of capital for issuers who have higher ESG-type risks or do not adequately disclose such risks
Improved Financial Indicators Evidence from MSCI™ suggests that companies with high ESG scores have a lower cost of capital and less volatile earnings than those with low or zero ESG scores
Improved Investability investors are more inclined to invest in companies with high ESG scores and a positive approach to sustainability
Preparedness. Companies adopting sustainability strategies now will be better prepared when regulator-mandated reporting is implemented
Whilst the QSE Guidelines are currently voluntary, globally, mandated ESG reporting is increasingly the norm, and in the region, the UAE already imposes mandatory reporting. Qatar and its listed companies can expect that in due course, reporting material ESG metrics and, in the future, sustainability reports will become mandatory.
The International Organization of Securities Commissions (IOSCO) has endorsed the International Sustainability Standards Board’s (ISSB) Standards following a comprehensive review. IOSCO is now calling on its capital markets authorities, which regulate more than 95% of the world’s securities markets, to consider how they can incorporate the ISSB Standards to deliver consistency and comparability of sustainability-related disclosures worldwide.
IOSCO’s endorsement suggests a trend toward ISSB Standards and is important in the context of emerging markets which make up 75% of IOSCO membership. In the meantime, QSE has published guidance for listed companies on sustainability and ESG reporting. This can be found here: QSE ESG Guidance. We will regularly update our guidance in line with international best practices.
We also provide a platform allowing each company to record and monitor their ESG performance against their peers. This can be found here: QSE Sustainability Platform. We will continue to maintain and update this platform for the benefit of listed companies and investors alike.
There is little doubt that ESG investing will continue to grow in importance and that regulators and investors will demand more information from companies to demonstrate their commitment to sustainable development. By enhancing the quality and reliability of that information, companies will benefit from improvements in their ESG ratings leading to potential inclusion in international sustainability indices. This will improve their visibility, aid customer retention and financial performance and attract more investors.
In addition to the support that we provide to our listed companies and investors, we at QSE are also committed to ensuring that we play our own part in Qatar’s sustainable development. We are doing this by reducing our impact on the environment, adopting best practice Corporate Governance and being socially responsible in all that we do. Below is a summary of some of our recently implemented initiatives.
Environment
- Controlling and reducing the use of single-use plastic, particularly bottles, with a view to eliminating them from our premises
- Reducing the use and waste of paper through process automation / digitization and centralized and controlled printing services
- Reducing power consumption through active control and shutdown of devices
- Reducing the use of water
- Introducing waste management and recycling
Social
- Promoting diversity in the workforce – currently, 20% of directors are female
- Maintaining a male/female pay ratio of 1:1
- Investing in staff development and talent management
- Actively engaging with the local investor community with regular on-line and physical education courses and seminars
- Supporting schools and universities with sponsorship of research competitions and providing apprenticeship programme
Governance
- Maintaining separation of CEO and Chairman’s roles
- Maintaining a majority of non-executive directors on the board, with varied skills
- Ensuring that all board committees have defined and published charter
- Ensuring 100% conformity with Corporate Governance guidelines prescribed by regulator