The Middle East has lagged behind as environmental, social and governance initiatives picked up rapidly in Europe, the US and more recently, Asia.
Speaking to Citywire, fund selectors featured in the 2019 Middle East Selector supplement have in fact revealed that ESG is ‘not a concern for investors in the region’.
Even then, Dubai-based Frontier Investment Management Partners is aiming to take on and change the region’s perception towards the sustainability tilt.
Already a signatory to the UN Principles of Responsible Investment, the manager is committed to bringing ESG factors to the forefront.
‘As an investor in the region, while our primary target is the corporates we invest in, we also believe there should be an effort to educate regional allocators as they are an integral part of the overall investment picture,’ Mohammed Ali Hussain, head of research told Citywire Middle East.
FIM provides a tailored approach by focusing on engagement with businesses, and educating them on the merits of incorporating ESG into investments.
Later this year, it plans to bring together asset allocators and corporates in Saudi Arabia to share best sustainability practices.
‘Our engagement approach relies on these long standing relationships as a platform to educate managements’ on the benefits of implementing sustainability initiatives as part of their overall strategy,’ Ali Hussain said.
Furthermore, while businesses having ESG credentials are a good starting point for FIM to work with, it is not the most important. The receptiveness of businesses to ESG ideas are often more helpful, he added.
A huge challenge that FIM has found in the region is a lack of awareness of the long-term benefits of adding a sustainable approach to investments. This is down to little exposure to a more sophisticated global investor base.
Case in point, Saudi Arabia, one of the wealthiest Middle Eastern economies, only recently opened up to foreign investors and completed inclusion into the MSCI Emerging Markets Index.
Local bourses including the Dubai Financial Market, Abu Dhabi Securities Exchange and Tadawul have also joined the UN Sustainable Stock Exchanges initiative.
Unlike other global markets, however, the Middle East has theoretically similar screening process to ESG.
Shariah-compliant strategies share links and overlaps with ESG strategies, with typical sector exclusions such as tobacco, gambling and adult entertainment. Even then, there are some key differences.
Shariah-compliant funds are prohibited from investing in businesses that derive income from alcohol and interest-driven businesses like conventional banks or even hotels and cinemas, Ali Hussain said.
‘At the same time, Shariah screens also have quantitative exclusion criteria such as excluding companies if they exceed a certain leverage threshold,’ he added, something ESG does not factor in.