Insights Report – ESG EVOLUTION Embracing Challenges, Maximizing Opportunities Navigating the New IFRS Sustainability Standards

ESG EVOLUTION

Embracing Challenges, Maximizing Opportunities

Navigating the New IFRS Sustainability Standards 

20 September 2024

Gain a stronger understanding of the current ESG landscape of new standards and its adoption in the region. The experts focussed on CSRD, IFRS, ISSB and current standards adopted in the region like GRI and the new IFRS Sustainability Standards.

Expert Speakers:

• Mohammad Junaid Essa, Head of Corporate Governance Section, Securities and Commodities Authority (SCA)
• Monaem Ben Lellahom, Group CEO, Sustainable Square Consultancy
• Daxita Rajcoomar, Chief Sustainability Officer, Africa, Middle East, Asia, Engie
• Aruna Narayanan, Founder and Chief Impact Enabler, Real Impact
• Piotr Konopka, Group VP, Global Decarbonisation & Energy Programmes, DP World.
• Rach ElGolli, Senior Advisor, Sustainable Square Consultancy

Daxita Rajcoomar: Navigating the Complexity of Today’s ESG Standards

The agenda we’ve laid out today aims to unpack the intricacies of Environmental, Social, and Governance (ESG) standards.

We recognize that climate change is an undeniable reality with significant implications from both an environmental and social standpoint. However, a pressing question arises: how are businesses integrating these impacts into their financial frameworks? To address this, the International Financial Reporting Standards (IFRS) has engaged with the European Systemic Risk Board (ESRB) to develop standards that reflect these concerns.

As we observe, major frameworks are beginning to converge and integrate with IFRS standards, including well-known initiatives like the Task Force on Climate-related Financial Disclosures (TCFD) and the Global Reporting Initiative (GRI). This alignment is crucial, as it ensures that despite the diversity of ESG standards, there will not be a disconnect among them.

Today, I also want to highlight the prominent role that European entities are playing in the advancement of ESG standards. The European landscape, particularly, is leading the charge in implementing mandatory policy frameworks, as evidenced by the Corporate Sustainability Reporting Directive (CSRD) and the upcoming Corporate Sustainability Due Diligence (CSDD) regulations.

Furthermore, it’s important to acknowledge that both GRI and the International Sustainability Standards Board (ISSB) have been pivotal in shaping these corporate social responsibility (CSR) standards.

In summary, while the complexities of ESG standards continue to evolve, the ongoing collaboration among key frameworks and the leadership exhibited by European regulators are essential in driving effective implementation and integration into business practices. 

Rach ElGolli: Navigating the Evolving Landscape of ESG Reporting –

The Role of the ISSB

The presentation highlights the dynamic evolution of Environmental, Social, and Governance (ESG) disclosures, with the International Sustainability Standards Board (ISSB) playing a pivotal role in shaping its future. While the recent surge in ESG reporting might suggest a new phenomenon, its roots stretch back to 1997 with the inception of the Global Reporting Initiative (GRI). The COVID-19 pandemic served as a significant catalyst, prompting a wave of ESG disclosures as companies confronted their broader societal and environmental impacts. However, this rapid growth has led to a fragmented landscape of frameworks and regulations, including GRI and various others alongside the ISSB. This proliferation has unfortunately overwhelmed businesses, often resulting in compliance-driven, low-quality disclosures that lack genuine insight into actual impact.

Efforts are underway to address this complexity and enhance the quality of ESG data. The ISSB, in conjunction with initiatives like the Corporate Sustainability Reporting Directive (CSRD), is actively working to reduce confusion and foster more meaningful reporting. A key focus area is climate-related disclosures. Recognizing the need for harmonization, an interoperability guidance document has been published, aiming to help companies navigate and align their reporting across different standards. This approach prioritizes education and clarity over introducing entirely new requirements. Ultimately, the goal is to streamline and consolidate the diverse ESG reporting standards while acknowledging the nuances of different regional contexts.

A significant shift is on the horizon. Beginning in 2024, approximately 12,000 companies will be mandated to report on environmental and sustainability issues under new International Financial Reporting Standards (IFRS) and ISSB standards. This scope will broaden in 2025 and 2026, encompassing even more businesses. These new standards aim to consolidate existing frameworks like the Task Force on Climate-related Financial Disclosures (TCFD), Climate Disclosure Standards Board (CDSB), Sustainability Accounting Standards Board (SASB), and integrated reporting. The emphasis is on investor-relevant data, empowering them to make informed decisions regarding climate and sustainability risks and opportunities. IFRS S1 provides a comprehensive framework covering governance, strategy, risk management, metrics, and targets, closely aligning with the TCFD recommendations. Complementing this, IFRS S2 specifically addresses climate-related risks, both physical and transitional.

Central to these new standards is the concept of materiality, which has evolved over time. Initially, the focus was on single materiality, considering stakeholder interests. This expanded to include impact materiality, assessing a company’s impact on the world, and financial materiality, examining how ESG issues affect the business financially. The concept of double materiality, particularly prominent in European standards, integrates both impact and financial perspectives. Currently, companies are actively preparing to meet these upcoming reporting obligations, signifying a significant move towards standardized and investor-focused ESG disclosures.

Globally, there’s a growing appetite for adopting these capital market standards, particularly from major economies like the UK and China. While the European Systemic Risk Board (ESRB) and IFRS do not mandate adoption, they offer support to jurisdictions choosing to integrate these standards into their frameworks. A strong incentive for companies to align with ESRB and IFRS standards is the prospect of improved reporting and easier access to international capital markets. The overarching ambition is to establish a uniform reporting framework, enabling investors to consistently evaluate companies across diverse geographical regions, fostering greater transparency and comparability in the ESG landscape.

To prepare for IASB reporting (or any new disclosure), understand requirements first, then assess your gaps and act before reporting. Don’t start with reporting and then try to catch up. Secure resources, establish a reporting framework aligned with your strategy, determine materiality, collect necessary data, generate the report, and continuously improve your process. 

Mohammad Junaid Essa: Advancing Sustainability Reporting in the UAE

In the UAE, we are committed to enhancing sustainability reporting among listed companies, aligning with the nation’s sustainability agenda. The UAE has introduced numerous initiatives aimed at reducing carbon emissions by 2050 and promoting comprehensive sustainability reporting. These initiatives are top priorities for the UAE government, especially highlighted during our hosting of COP 27 and COP 28, where we emerged as leaders in advancing reporting frameworks.

As we navigate this landscape, it is essential to recognize that our approach is not solely focused on local practices. We are actively learning from international jurisdictions to enhance our implementation strategies.

Reflecting on the early days of corporate governance in the UAE, I recall the significant challenges we faced in requesting listed companies to disclose information such as top management compensation. For instance, when we first asked companies to reveal the salaries of their executives, including the CEO and CFO, many were resistant. One CEO candidly expressed his concerns, citing personal safety issues related to his home country. This anecdote illustrates the delicate balance we must strike between transparency and individual privacy.

Despite these challenges, adhering to international standards and promoting transparency remains paramount. Financial disclosures are critical for investors, and we aim to comply with International Financial Reporting Standards (IFRS). In addition to financial reporting, we have emphasized the importance of non-financial disclosures over the past 15 years. All relevant information is accessible through the websites of listed companies and financial markets, including corporate governance and sustainability reports.

Implementing new reporting requirements can be daunting, but the long-term benefits are significant. By enhancing transparency, companies can attract institutional investors who value clarity and accountability. The public perception of a company improves when it openly shares vital information, not only to listed entities but also to potential stakeholders, who may seek integrated reports encompassing financial data, sustainability efforts, and corporate governance practices.

Investors use this information to assess a company’s health and decision-making. For example, if a company is struggling financially yet continues to pay its CEO a high salary, it raises questions about management’s effectiveness and accountability. Such discrepancies must be justified, reinforcing the need for transparent compensation practices.

Beyond my responsibilities at the SCA, I also represent our organization in the Sustainable Finance Working Group (SFG), which includes various financial regulators such as the Central Bank and the Ministry of Finance. This collaborative effort is crucial for developing sustainable finance initiatives that align with our national objectives.

The DFC and AGM are working diligently to establish a set of standards for the entities we regulate. Since 2001, we have issued a public statement on an annual basis, detailing our initiatives and plans for the future. These documents are accessible to the public and outline our actions and goals.

For instance, in 2020 and 2022, we announced the creation of three working streams: the Disclosure Working Stream, the Governance Working Stream, and the Taxonomy Working Stream. Each of these streams aims to develop standardized principles that can be adopted across the entire financial market, allowing each entity the flexibility to implement them in a manner that best suits their operations.

Ahead of COP28 in November 2023, we have also released principles concerning climate change risks, which have been endorsed by all governors and the chairpersons of various regulatory bodies during a significant event. Furthermore, in June 2024, we will announce our financial disclosure principles, alongside continued efforts in our Taxonomy Working Stream.

In addition to these initiatives, we are exploring other working streams that we hope to announce soon. A crucial area of focus for us is promoting gender equality in the workplace. We believe in empowering women within the companies we oversee and ensuring equal treatment for all employees, regardless of gender. As part of this commitment, the SCA has mandated that at least one woman be appointed to the board of directors of every listed company. Currently, women hold over 12% of board positions, and we anticipate that by the end of 2023, this number will exceed 83% across listed companies, with an aim to reach nearly 100% soon.

Additionally, listed companies are expected to adhere to the Global Reporting Initiative (GRI) standards. For instance, the ADX has required these companies to report on 31 indicators aligned with international standards, including those set by the World Federation of Exchanges (WFE). As part of our regulatory requirements, we mandate that listed companies disclose integrated reports, which must include financial statements, sustainability reports, and corporate governance reports.

These reports are essential for transparency and are accessible through the financial markets.

The corporate governance report follows a specified template that outlines minimum requirements for listed companies. While we set a baseline through the SCA Corporate Governance Code, it is also important that companies adhere to additional guidelines provided by the financial markets.

We are actively engaging with these markets to establish standards that allow for easy comparison by institutional investors and funds evaluating UAE practices against international benchmarks.

Furthermore, we are launching initiatives to support sustainability, including the Carbon Market Trading Initiative. The UAE Cabinet has announced a decision to create a Carbon Market Registry, overseen by the Ministry of Climate Change and Environment. The SCA will develop the necessary platforms for this trading, facilitating a market for carbon emissions. This initiative is particularly significant given the environmental challenges faced by the UAE, which has a high volume of industrial activity and international flights contributing to pollution. By providing carbon credits for purchase, we aim to assist companies in their journey toward becoming greener and more sustainable.

These platforms will assist companies in the UAE and globally in acquiring credits on an international scale. This could serve as an introduction to what’s being implemented in the SCA. A question that may arise is whether we will adopt the GRI or ISB standards. As I mentioned earlier, we are currently asking listed companies to comply with the requirements set forth by the financial markets, specifically the DFM and ADX, which are currently requesting the GRI. We are also exploring how to implement the ISB based on the approved guidelines, which include S1 and S2.

However, there is still some uncertainty. Many countries have committed to the implementation of the ESRB, and we are considering how to effectively integrate it into our market. I have learned a lot from you today, Russia, and I look forward to furthering discussions after this session or during the panel discussion. It would be valuable to share examples of what has been implemented within your company so that we can learn from one another.

Monaem Ben Lellahom: Organizations like Engie and DP World initiated their ESG, sustainability, and climate change initiatives several years ago. Engie has been a strong advocate for ESG and sustainability globally across various jurisdictions. Could you elaborate on Engie’s primary focus areas in implementing ESG and sustainability? Additionally, could you share the most significant challenges you’ve encountered in this journey, particularly when navigating diverse regulatory environments?

Daxita Rajcoomar: Our journey has presented significant challenges, especially given our global operations. To reiterate your point about operating in multiple jurisdictions, as a French organization, we are subject to EU taxonomies, directives like the CSRD, and upcoming regulations. This compliance is mandatory regardless of our operational location. Therefore, whether we operate in Singapore, South Africa, or the UAE, we must adhere to these EU standards. Furthermore, in countries like Singapore or the UAE, we also face mandatory local requirements, potentially leading to double reporting. The increasing prominence of IFRS and the growing adoption of European standards offer some relief, as we can then prioritize applying best practices, hoping for future integration and alignment that will streamline reporting and meet local requirements. Currently, managing reporting against diverse local standards is indeed an onerous task. Although not being a publicly listed company in some jurisdictions mitigates direct obligations, we still have a responsibility to our minority shareholder partners to provide data according to the highest available standards. Therefore, even where not strictly obligatory, we often act as advisors in the application of these standards. This provides a brief overview of the complex landscape we navigate across our various markets.

Monaem Ben Lellahom: DP World represents a completely different scenario. It is a local company that has achieved remarkable success, yet you have established a global presence in over 75 ports worldwide—it’s truly impressive. What challenges have you encountered along the way? What specific focus areas are you prioritizing in your global ESG and decarbonization agenda, and what hurdles have you faced in implementing these initiatives on a global scale?

Piotr Konopka: The challenges we’re addressing at DP World are indeed global in nature. However, before diving into the specifics, it’s essential to understand that effective ESG reporting begins with a clear strategy. When we initiated our decarbonization efforts about four years ago, we had only a basic accounting system and a few solar projects. Since then, we’ve developed a dedicated team and established a comprehensive strategy across all our roles and divisions, including ports and terminals, logistics, and marine services. We also integrated a supply chain component to address scope three emissions and are increasingly focusing on climate change resilience amid DP World’s rapid growth. The company has transformed significantly since I joined four years ago.

The foundational principles guiding our strategy include a strong commitment from DP World’s top management, ensuring we are aligned with the company’s long-term direction. Awareness is also crucial; I often find that about half of my role involves educating both our internal teams and external stakeholders about the importance of decarbonization and the pressing nature of climate change.

There are compelling business reasons for this shift, as customers are demanding it, investors

expect it, and regulations, especially in regions like Europe, are tightening. A robust decarbonization strategy is vital.

Another key principle is having a solid framework. Despite the rapid changes in the decarbonization landscape and our company’s evolution, our approach remains grounded in five key pillars: electrification of equipment, efficiency improvements, renewable energy adoption, low carbon fuels, and carbon compensation.

Lastly, partnerships play a crucial role. No single company can tackle the decarbonization challenge alone. This space fosters collaboration, even among competitors. We have established valuable strategic partnerships, such as our collaboration with the Maersk McKinney Moller Center for Zero Carbon Shipping to address shipping decarbonization, and locally with Masdar to expand renewable energy initiatives. We’ve also formed coalitions, including the Zero Emission Port Alliance with APMT and collaborations with organizations like the World Economic Forum.

Monaem Ben Lellahom: We see international organizations navigating local regulations and implementing their practices within those jurisdictions. Conversely, local organizations expanding globally face the challenge of complying with diverse international regulations. Interestingly, a point was raised about Putin, which ties into Mohammed’s earlier comment on the significant role of the ESG agenda in enhancing an organization’s equity story. That’s my current takeaway. Rachel, given your experience with numerous listed companies in the DFM and ADX regions, what’s your perspective on this? Mohammed mentioned the high compliance rate when regulations are introduced – around 99%. However, in your presentation, you highlighted the quality of the data.

Could you elaborate on the tension between achieving compliance quickly and ensuring the quality of the data? Are companies prioritizing compliance over the thoroughness and accuracy of their data, and what are the current data-related challenges for listed companies?

Rach ElGolli: I believe the primary challenge, especially for companies at the beginning of their ESG journey, is a lack of fundamental understanding of the purpose behind these efforts. They often engage because it is what other companies are doing or simply to meet regulatory requirements. We frequently see companies just checking boxes to fulfil disclosure obligations. However, with the new CSR and IASB standards, the focus is increasingly shifting to the core reasons why we’re doing this.

It’s fundamentally about risk management and identifying opportunities. It involves mitigating risks, adapting to climate change and its related risks, and ensuring the long-term viability of the business in the face of these global developments. The emphasis should be on what is truly material to a company and what impacts, risks, and opportunities can be quantified, particularly regarding climate-related risks and their financial implications. The IFRS standards specifically emphasize that these disclosures are for investors and need to be understood within a framework of financial risks and opportunities. Furthermore, particularly within the EU context, there’s a significant focus on impact. Therefore, companies need to be aware of their wider impact on the world. We’ve also observed increased engagement from asset managers in this area. Previously, we primarily interacted with marketing and CSR teams, as ESG was often viewed as a marketing tool or a “good to have” initiative, like superficial environmental actions. But this is changing. The focus is now shifting towards core business functions, including operations, finance departments, and risk management departments.

Monaem Ben Lellahom: The business case for ESG and sustainability is clearly significant and has demonstrable economic impact, particularly for large corporations. However, at the SME level, adoption faces challenges. Many SMEs are currently struggling financially and are focused on survival. Despite this, we are promoting sustainability and ESG practices within this sector. For instance, some SMEs, like potential IPO candidates such as Talabat and other delivery services, are aiming for public listing within the next two to three years. This necessitates incorporating ESG practices now. Given these circumstances, how do you see SMEs adopting these practices in the present environment?

Aruna Narayanan: I frequently work with small and medium enterprises (SMEs), many of which are owned by entrepreneurs. The rising focus on sustainability and Environmental, Social, and Governance (ESG) practices has sparked an interest among these business owners that can no longer be overlooked. In the past, their attitude was largely one of detachment—believing these issues were the concern of larger companies. However, in just the last year, I’ve noticed a significant shift. SMEs are now eager to engage in meaningful conversations about sustainability, recognizing that it’s time to elevate the discussion.

At the heart of this transformation lies a crucial question: Why are we doing what we do? Entrepreneurs are beginning to realize that having a clear sustainability roadmap can attract investors. They understand that without it, they risk losing out on funding. This realization, which was not as evident a couple of years ago, is now driving action.

Despite this growing interest, many SMEs face practical challenges. As they continue to scale and grow, most are owner-driven, and decision-making often rests on a single individual. They want to be involved in sustainability initiatives, but time constraints hinder their participation. Even though they may express a desire to engage, for many, ESG and sustainability still feel like expenses rather than investments. They grapple with whether to hire a large consulting firm or a single expert to guide them through the process. 

Monaem Ben Lellahom: Beyond just conversations, we’re seeing tangible initiatives emerge. Reports from SMEs like Talabat and Cafu illustrate that companies are increasingly adopting disclosure practices. 

Aruna Narayanan: Yes, that’s right. In many ways, the emergence of these reports feels like a “me too” phenomenon—where the act of reporting becomes a visible benchmark, especially as competitors begin to share their own disclosures. However, it’s crucial to understand that the report should not be the end goal. As Pietro mentioned, having a strategic approach is essential. The entire organization must be involved; sustainability can’t rest solely on one person’s enthusiasm for creating an attractive report. We often find ourselves advising companies to take a step back, prepare internally, and lay the necessary groundwork before rushing into public reporting.

This preparation involves engaging key departments—finance, operations, logistics—to ensure a holistic approach to sustainability. Building internal champions is vital, as data for reporting must come from across the organization. While reports can be beneficial, they can also mislead if not supported by a robust internal strategy. 

Monaem Ben Lellahom: I appreciate your point about not needing a large team for effective ESG and sustainability practices. For example, one major bank in town has a 25-person ESG team, yet Aramex—the first company to issue a sustainability report in the Dubai Financial Market in 2006—only requires one person to coordinate their efforts. Their former sustainability manager emphasized that every department head knows what to report, allowing them to institutionalize ESG practices across the organization efficiently.

The theme of our discussion is the transition to new reporting standards, highlighting the experiences of global and local companies alike, including listed firms and SMEs. I’m eager to explore the context of this transition and the new practices that are emerging.

Returning to Daxita, your operations span multiple jurisdictions globally, with a significant presence in Europe. Naturally, your activities are shaped by corporate social responsibility (CSR) initiatives, the Sustainable Development Goals (SDGs), and new regulations like the Carbon Border Adjustment Mechanism (CBAM). This is a substantial topic, particularly as local companies exporting steel, electricity, and fertilizers will also feel the effects of CBAM. How do you manage the transition to these new practices? You’ve historically engaged in GRI integrated reporting, but with the increasing regulatory pressures in Europe.

Daxita Rajcoomar: Yes, we have thoroughly reported on all relevant standards throughout the evolution of our practices over the past two decades. I frequently reference the Global Reporting Initiative (GRI) because, as Muhammad mentioned earlier, it serves as an excellent and universal foundation. GRI has enabled us to systematically quantify our information.

While the Corporate Sustainability Reporting Directive (CSRD) and the International Sustainability Standards Board (ISSB) are relatively new, they present opportunities for advancement. These new frameworks reflect a shift towards an investor-focused agenda and emphasize the concept of dual materiality—examining how we impact society and vice versa—which has gained significant traction over the last five years. This evolution is essential, and because we had a universal framework in place, we were not starting from scratch during this transition. For organizations already adhering to established standards, the transition is similarly streamlined.

Over the past 18 to 24 months, we conducted a gap analysis to compare our reporting against these new requirements. Initially, we believed we were performing well, only to discover we were meeting only 34% of specific sector requirements or 18% in social metrics. This was an enlightening experience, as it highlighted our complacency despite our adherence to recognized standards. The CSRD, in particular, is incredibly comprehensive, presenting challenges due to its extensive list of over a thousand Key Performance Indicators (KPIs), both qualitative and quantitative.

This complexity underscores the importance of aligning our strategy with our impact risks and opportunities (IROs) and the governance frameworks in place. The transition process involves identifying and addressing gaps while refining our strategy to align with EU language and the CSRD requirements.

Currently, our IROs are being examined from a centralized international perspective rather than a local one, which means I am not directly involved in the specific operational contexts of the countries where we function. However, the implementation of these frameworks is where the real challenges arise. Although the stress may not be visible, it certainly exists. Ultimately, we have moved past the stage of merely revising our strategy and are now focused on the practical application of dual materiality concerning material issues. 

Piotr Konopka: Staying Ahead of the Curve in Decarbonization

Recently, I encountered a compelling analogy from the aviation industry that resonates deeply with our approach to decarbonization at DP World. In pilot training, instructors describe pilots as being either “in front of the plane” or “behind the plane.” When a pilot is “in front of the plane,” it signifies complete control. The aircraft responds predictably to their inputs, operating exactly as expected. Conversely, a pilot who is “behind the plane” finds themselves reacting to the aircraft’s behaviour, constantly catching up and lacking full command.

This concept translates directly to the realm of decarbonization. We firmly believe in proactively staying “in front of the plane.” Our philosophy is that if we wait for regulations to be imposed, we risk being caught “behind the plane,” struggling to react and potentially facing significant challenges.

This proactive approach, I believe, is a crucial principle, perhaps even a sub-principle, guiding our decarbonization strategy.

Two key examples illustrate this philosophy in action. Firstly, consider our approach to Scope 3 emissions. As early as 2021 or 2022, we dedicated a year to thoroughly calculating our supply chain footprint and developing a comprehensive strategy encompassing all relevant categories. This initiative involved collaboration with Energy Impact. Significantly, just as we finalized this strategy, external stakeholders – standards bodies, customers, and others – began demanding this information. Had we waited for these requests, we would have faced at least a year’s delay in our ability to report effectively.

Secondly, our achievement earlier this year in securing Science Based Targets initiative (SBTi) validation further exemplifies our proactive stance. This validation required us to significantly enhance our near-term and long-term Scope 1, 2, and 3 targets. We are proud to be the first logistics company in the Middle East to achieve this recognition. However, our primary motivation wasn’t simply accolades. We recognized that reporting standards and the expectations of investors and customers regarding decarbonization would only become more rigorous. Adopting these ambitious targets early positions us strategically for the future.

Implementing these ambitious goals has necessitated organizational changes. We have established a dedicated sustainability team, currently comprising two professionals, solely focused on these crucial tasks. Their contributions have been invaluable. Furthermore, we are undergoing a significant shift in how we approach financial management by integrating ESG and decarbonization into our core finance and accounting systems. It is no longer sufficient to simply have a strategy and list ongoing projects. We now need to demonstrate how this strategy and its associated risks are integrated into our Profit and Loss statement and how green assets are reflected on our balance sheet. This represents a fundamental transformation in how we conceptualize the financial dimensions of our operations.

In essence, by consistently striving to be “in front of the plane,” DP World aims to not just navigate the evolving landscape of decarbonization but to actively shape it, ensuring we remain in control of our trajectory towards a sustainable future.

Monaem Ben Lellahom: I believe that without properly addressing both double materiality and financial materiality, we risk overlooking significant non-financial risks that heavily impact our balance sheets. Let’s take Russia as an example. When discussing materiality practices in the Middle East, particularly in the UAE, I wonder: Is materiality more like the pilot in the front of the plane, or is it lagging behind? What insights can we gather regarding the implementation of materiality? Are we merely content with including a section on materiality in our reports, while relying on indirect data?

Rach ElGolli: From my perspective, most organizations are currently lagging behind. This is especially true for companies without global operations that are required to implement double materiality, which they must begin doing next year. The majority of companies still struggle to grasp the concept of materiality. To be candid, there is widespread confusion surrounding it. Although standard setters provide guidelines, they fall short of offering concrete methods for implementation.

Materiality is inherently context-specific; two companies in the same industry may face different material issues. Even if they address similar topics, what is deemed material can vary based on each company’s unique context, operational scope, and the specifics of their assessments. This complexity involves numerous assumptions and the need to develop tailored methodologies, making the process quite particular to each organization.

Ultimately, while materiality can seem overwhelming, its main objective is to clarify and streamline the various topics and disclosures companies must manage. The idea is to prioritize what is truly material and de-emphasize less critical matters. Focusing on material issues allows organizations to streamline their efforts and conduct reassessments as needed. Currently, I would say that single materiality remains the predominant approach in the region, but with the introduction of new Corporate Social Responsibility (CSR) frameworks, we are beginning to see a gradual shift towards double materiality. This shift largely depends on a company’s readiness to undertake the process of evaluating double or financial materiality. Notably, there is an increasing interest in exploring double materiality among organizations.

Monaem Ben Lellahom: Engie operates across multiple jurisdictions, where corporate social responsibility (CSR) embraces double materiality, the Global Reporting Initiative (GRI) focuses on impact materiality, and the International Sustainability Board (ISB) addresses financial materiality. How do you implement materiality across various jurisdictions while adhering to specific standards and navigating this diverse array of frameworks? 

Daxita Rajcoomar: To clarify, we haven’t managed to implement everything comprehensively. However, it’s essential to provide context regarding my challenges in dealing with local jurisdictions. As a global organization, we have identified 17 material issues that affect us universally. Yet, these issues may not resonate the same way in every locale, such as the UAE, Saudi Arabia, Singapore, or various regions in Africa.

Currently, I am re-engaging in the double materiality assessment within specific jurisdictions where the context is consistent. While there may be some overlap, I am not reinventing the wheel; rather, I am building upon what has already been established in our organization. My approach involves taking the existing 17 material issues and reprioritizing them to align with the interests of our stakeholders in these countries.

For instance, climate change consistently emerges as a top concern, but in some jurisdictions, aspects like governance or social indicators may take precedence over issues like air pollution. This is the work I am undertaking primarily in my Asia, Middle East, and Africa portfolio. My goal is to ensure that when we produce our impactful reports, we are effectively communicating in the language of local stakeholders and investors. While there is some duplication in effort, I am not starting from scratch.

Monaem Ben Lellahom: Aruna, how do you envision the implementation of these practices within the SME sector, particularly in the UAE?

Aruna Narayanan: In the context of the SME sector, I believe that the concept of transition may not be particularly relevant at this stage, as many SMEs are just beginning their sustainability journeys. My hope is that by the time they are ready to report in accordance with various standards, these frameworks will be well established, allowing them to avoid unnecessary iterations. While there is a sense of urgency, I also see value in taking the time to let things stabilize.

If we look at the developments from 2020 to the present, we can observe a rapid influx of new initiatives and standards merging into consolidated frameworks. For many SMEs, it might actually be advantageous to hold off on immediate reporting and instead focus on key areas, such as aligning their practices with the Sustainable Development Goals (SDGs). Starting with a simple, comprehensible report can be more effective than trying to conform to a complex GRI standard simply because others have done so. Most SMEs in this context are not mandated to report as they are typically not publicly listed or under pressure from activist investors. They are in a preparatory phase, which gives them the freedom to learn and develop their understanding of sustainability.

It’s important to recognize that materiality is not a one-time assessment. Global dynamics are shifting rapidly, meaning what is considered material can change significantly over time. For instance, we recently discussed how flooding in Dubai, previously deemed a minimal concern from a climate risk perspective, has suddenly risen in significance due to recent events.

I am optimistic that the transition for many of these SMEs will be relatively swift. As they establish their foundational practices, many standards will be more defined, and larger organizations that serve as role models, such as NGOs or DP World, will have paved the way. Furthermore, as highlighted by Pietro, there is now a greater emphasis on scope three emissions, particularly in procurement processes. This is crucial for SMEs, as it directly relates to their suppliers and vendors. 

Message to Finance Teams on Sustainable Finance and Reporting

Piotr Konopka: To the finance teams engaged in sustainable finance or sustainability reporting, my primary advice is to educate yourselves about the purpose behind these initiatives. When sustainability-related tasks land on the desks of finance professionals, a common response may be to question, “Why are we doing this?” It’s crucial for them to grasp the significance of sustainability, from understanding the complexities of climate change to recognizing its implications for various aspects of the organization. This includes how sustainability affects customer acquisition and retention, emerging regulations, and investor demands. While finance professionals may find it easier to relate to the latter, many may struggle to adapt to new reporting requirements without a fundamental grasp of these issues.

Furthermore, it is essential to familiarize yourselves with key terminology, such as scope one, scope two, and scope three emissions, and to understand how these elements interconnect. Without this knowledge, comprehending the impact on financial statements becomes challenging, particularly from a decarbonization standpoint. I will leave the discussion of other Environmental, Social, and Governance (ESG) factors to others.

Daxita Rajcoomar: In our organization, we are actively integrating sustainable finance principles at all levels, from financial accountants handling payments to our CFO. A significant advantage for us has been a top-down directive, ensuring that there is no resistance to this shift. We have successfully onboarded our group CFO and emphasized the need to incorporate sustainability language into financial discussions. Ultimately, this integration supports both sustainability and financial performance.

While there is recognition of the need for accountability in this area, we often encounter challenges related to its application. I have participated in numerous sessions to clarify these concepts, emphasizing that financial teams are not solely responsible for this transition. It requires a collaborative effort across various departments—such as procurement and human resources—to ensure a unified approach to integrating sustainability into our financial processes.

One notable example of this collaboration is our response to the Corporate Sustainability Reporting Directive (CSRD). As we considered tools to collect relevant information, we decided to move away from outdated sustainability tools and instead leverage our existing financial systems. By embedding sustainability responsibilities into these financial processes, we have engaged the community and made sustainability part of their routine tasks. Although some pushback remains, I see a gradual acceptance as we frame the conversation around financial perspectives.

Mohammad Junaid Essa: As a listed company, I also recommend that finance teams engage with regulators to understand the minimum compliance requirements for sustainability reporting. This approach allows you to meet essential standards while planning for any additional implementations that may arise in the future. It’s prudent to start with the core elements mandated by regulators before expanding into other areas of sustainability.

Monaem Ben Lellahom The Investor Revelation: ESG as the New Financial Language

Let me close by sharing a telling anecdote that underscores a critical shift in the investment landscape. Last year, HSBC organized an investor roadshow in London. Many managers and CFOs, primarily from the Middle East, traveled to present their companies to potential investors. These individuals, accustomed to meticulously preparing financial presentations, had undoubtedly spent countless hours memorizing figures and honing their financial narratives. They arrived in London ready to discuss balance sheets and profitability.

However, they were met with an unexpected demand: “Show me your ESG data. Then I will discuss financials with you.” This request, repeated across meetings, came as a significant shock. These seasoned managers, while familiar with the term ESG (Environmental, Social, and Governance), admitted upon their return that they lacked the in-depth knowledge and preparedness to effectively address these inquiries. They were caught off guard, realizing the growing importance investors placed on non-financial metrics. This experience highlighted a crucial gap: while these companies understood the concept of ESG, they weren’t equipped to articulate their performance and strategies in this area.

This anecdote illustrates the central point: investors in Europe and globally, the very audience to whom listed companies in the UAE and elsewhere are pitching, are no longer satisfied with the bare minimum. They demand alignment with international standards and expect companies to be abreast of evolving regulations, including those related to Corporate Social Responsibility (CSR), the International Sustainability Standards Board (ISSB), and the Global Reporting Initiative (GRI). While these frameworks, and others like them, should be implemented contextually and in alignment with local laws, regulations, and stakeholder needs – including considerations like Shariah compliance – their significance cannot be ignored. The focus has shifted towards creating value for all stakeholders, not just shareholders.

The business case for embracing ESG and sustainability is increasingly evident. Fueled by global weather events and a heightened awareness of interconnected risks, the pressure to comply with these international standards is mounting. This isn’t simply about achieving a superficial badge of honour or claiming leadership in sustainability initiatives. Instead, it’s a pragmatic response to mitigate both financial and non-financial risks.

In conclusion, adopting a global language and aligning with international standards regarding ESG is no longer just a commendable practice; it is a strategic imperative. It enhances a company’s profile, making it more attractive to investors in the public markets and more appealing for international partnerships in ventures and private equity. By prioritizing ESG, companies are not only navigating the evolving regulatory landscape but also unlocking new avenues for investment and growth in an increasingly interconnected world.