62645 IFC Advisory Services in the Middle East and North Africa Sustainable Investment in the Middle East and North Africa Region Report In partnership with: Italy, Ireland, Luxembourg, Netherlands, Norway, and the United States IFC, a member of the World Bank Group, creates opportunity for people to escape poverty and improve their lives. We foster sustainable economic growth in developing countries by supporting private sector development, mobilizing private capital, and providing advisory and risk mitigation services to businesses and governments. This report was commissioned by IFC through The conclusions and judgments contained in this report should not be attributed to, and do not necessarily represent the views of, IFC or its Board of Directors or the World Bank or its Executive Directors, or the countries they represent. 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Contents Acknowledgements .......................................................................................................................................................................... 6 Executive Summary ........................................................................................................................................................................... 8 1. Introduction ..................................................................................................................................................................................... 15 Objectives ............................................................................................................................................................................... 15 Scope ......................................................................................................................................................................................... 15 Report Structure ................................................................................................................................................................. 15 2. Regional Overview.................................................................................................................................................................... 17 Region’s Material ESG Issues................................................................................................................................... 17 Region’s Economic Fundamentals......................................................................................................................... 17 Water Scarcity .................................................................................................................................................................... 19 Building a Competitive, Diverse, Employed and Respected Labor Force ................................. 20 Economic Sectors Breakdown ................................................................................................................................ 21 FDI and Outward Investment .................................................................................................................................... 24 MENA Securities Markets .......................................................................................................................................... 27 3. Market Preparedness for SI ............................................................................................................................................ 29 Investment and ESG Regulations and Country Performance .................................................................. 30 Investment Laws and Regulations .................................................................................................................................... 32 Corporate Governance Laws and Regulations and Country Performance .................................. 37 Environmental Laws and Regulations and Country Performance ........................................................ 43 Social-Related Laws and Regulations and Country Performance ........................................................51 ESG Disclosure.................................................................................................................................................................................. 61 Sustainability Reporting and Non-Financial Information Disclosure .................................................. 61 Adoption of International Voluntary SI Frameworks by Asset Managers/Owners .................. 65 ESG Disclosure Analysis ......................................................................................................................................................... 67 Supporting Infrastructure........................................................................................................................................................... 69 Responsible Competitiveness Research ................................................................................................................... 69 Analysis and Summary of Key Observations ...........................................................................................................71 4. Market Interest in SI ................................................................................................................................................................. 73 Shari’ah-Compliant Investing ................................................................................................................................................. 75 Sovereign Wealth Funds ............................................................................................................................................................ 76 Private Equity ....................................................................................................................................................................................... 86 Foreign Investment ......................................................................................................................................................................... 93 Analysis and Summary of Key Observations .......................................................................................................... 95 5. Challenges and Opportunities for Development of the Sustainable Investment Market in MENA ...............................................................................................................................................................................................98 Key Challenges and Opportunities ................................................................................................................................ 101 Recommendations ....................................................................................................................................................................... 102 6. Appendices ............................................................................................................................................................................................ Appendix 1: Explanation of the Methodology ....................................................................................................... 107 Appendix 2: In-depth review of 11 key markets ...................................................................................................110 Appendix 3: Regional Supporting Infrastructure................................................................................................ 144 Appendix 4: Exchange Rates Used .............................................................................................................................. 150 Appendix 5: Explanation of Terms and Abbreviations ...................................................................................151 IGNISI BLA CORE ESED EA CONULLA FEUGAIT, QUIPISIM XX Preface For the past five years, IFC’s Sustainable Investing Team has delivered technical and financial support for projects that aim to mobilize sustainable capital flows into emerging markets. The goal is to increase the volume of investment that uses ESG analysis as a standard practice in investment decisions. IFC’s approach is twofold: sustainable investing (SI), IFC works to (a) promote the business case for SI by drawing on lessons from IFC’s own portfolio, (b) establish frameworks to identify and assess new SI opportunities, and (c) develop new To support fund managers investing in sustainable companies, IFC works (a) with private equity funds in IFC’s portfolio to assist them in establishing ESG analytical processes, and (b) with capital market actors to improve the environment for the market to IFC is committed to continue its work in partnership with key market actors to improve the enabling environment and address 6 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Acknowledgements IFC would like to acknowledge our donors partners: Italy, Ireland, Luxemborg, Netherlands, Norway, and IFC prepared this reports under the supervision of IFC Advisory Services Middle East and North Africa (MENA) the Arab region providing strategic sustainability advisory services, developing national competitiveness Regional Country Organization Organizations Engaged Egypt EFG Hermes Egypt Egyptian Institute of Directors Egypt Egyptian Corporate Responsibility Center, Ministry of Investment Jordan Amman Stock Exchange Jordan Jordan Securities Commission Jordan Jordan Investment Board Jordan Association of Banks Jordan Social Security Investment Fund Morocco American Chamber of Commerce in Morocco Oman Oman Arab Bank Saudi Arabia Dhahran Chamber of Commerce-Saudi Arabia Saudi Arabia Islamic Development Bank Morocco American Chamber of Commerce in Morocco UAE, Abu Dhabi National Bank of Abu Dhabi UAE, Dubai Abraaj Capital UAE, Dubai Hawkamah, the Institute for Corporate Governance 7 International Organization Organizations Engaged UN PRI – Emerging Markets Program UNEP FI Goldman Sachs Sustain Calvert S&P World Economic Forum University of Oxford Urban Green Initiative for Responsible Investment, Harvard 8 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Executive Summary Objectives and Scope To determine the current state of development of SI in MENA by measuring the market on a To establish the feasibility of interventions such as sustainability indices, ratings and regulations to stimulate the market and make recommendations for the appropriate For the purposes of this report, SI is taken to mean investment techniques that integrate ESG value Regional Context and Key ESG Issues The MENA region produces more than $1,500 billion per annum in Gross Domestic Product (GDP), or approximately three percent of global GDP1, and accounts for 6 percent of the global population with300 million people2 population is below the age of 30 and roughly 27 percent is below the age of 15, the contribution of women to economic and social development and opportunities for women in the workplace, and climate change, while governance issues center around ongoing governance reform and the push Assessment This assessment is based on an analysis of “Market Preparedness” and current “Market 1 2 9 Overall opportunity for SI in MENA markets Market Interest Score Market Market Interest (%) without GDP* Country Prepared-ness Score Shari’ah- ($billions) Compliant Score (%) (%) Investments (%) Bahrain 28.124 42.67 3.3 0.01 Egypt 469.663 37.1 2.30 1.71 Jordan 33.658 40.06 1.90 1.25 Kuwait 135.429 39.34 0.40 0.06 Lebanon 54.874 34.67 0.60 0.13 Morocco 145.969 37.41 0.70 0.70 Oman 74.431 51.56 14.30 0.05 Qatar 102.147 43.34 0.40 0.00 Saudi 592.586 38.67 2.90 0.03 Arabia Tunisia 86.086 41.09 1.50 1.50 UAE 179.321 47.83 2.50 1.70 *Based on PPP Source: Research and analysis conducted for this report Market Preparedness The Market Preparedness assessment covers two main components: investment, ESG regulations MENA countries have made important strides, although many areas are still in the very early established new requirements, but this has not yet extended to the environmental and social sustainable development is now being incorporated into some national strategic plans, it is at Addressing such implementation gaps will be important to bolster MENA’s sustainability With regard to ESG disclosure: The number of corporate ESG reporters and the number of signatories to existing international the Arab Sustainability Leadership Group and Abu Dhabi Sustainability Group—which seek to introduce sustainability practices in the region and require participants to produce a standalone 10 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Overall, the markets are mainly tightly clustered, suggesting that some countries are at similar points of development and that it may be pos- sible to undertake regional or sub-regional efforts to enhance Market Preparedness for SI. 345 6 7 Market Interest The Market Interest component of the study attempts to quantify the percentage of total assets international comparative context are as follows (ranked by percentage of total AUM): Total AUMs Related to Market % of Total AUM Sustainability 1 EU3 $3,700 trillion 16.97% 2 Brazil4 $70 billion 12.00% 3 USA5 $2,700 trillion 11.02% 4 MENA $54.25 billion 2.13% 5 China6 $4.12 billion 1.00% MENA without Shari’ah- 6 $17.1 billion 0.67% compliant investments 7 India7 $1.1 billion 0.67% Source: Research and analysis conducted for this report 3 Eurosif: 2008 European SRI study 5 Social Investment Forum 2007 11 Approximately 2.13 percent of MENA AUMs incorporate SI. This is a conservative estimate based solely on disclosed data, and excludes publicly committed investments which cannot including Shari’ah-compliant investment Shari’ah-compliant investment funds are similar to “negative-screen” SI funds and their current scale of awareness and uptake represent a potential mass platform for creating greater awareness of SI. Elsewhere in the world, negative-screen funds typically precede positively screened SI funds that then adopt increasingly aggressive criteria for environmental, social and pattern, their commitment to Islamic ideals and general interest in betterment of society has the SI uptake by market investors in MENA is likely to take some time, although it will likely advance within dramatically compacted timelines in comparison to Europe and North America. In addition to the currently low percentage of MENA SI AUM versus total AUM, there is presently a lack of interest in investing in securities due to heavy market losses in Nevertheless, the take-up of SI in the region will be dramatically accelerated compared to the timeline in North America and Europe, with expectations of high levels of SI AUM within 3-5 Private equity SI initiatives will have a disproportionate impact on Market Interest management by portfolio companies, and emerging clean technology investment opportunities Sovereign wealth funds represent the greatest MENA SI opportunity national agendas, including emerging theme-based investments in sustainability and clean 12 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Some foreign-based guidelines Equator Principles, and other international guidelines will provide some support for the adoption of SI 13 Recommendations The following table summarizes the above observations, their associated challenges and opportunities, and the corresponding recommendations for accelerating the creation of an SI Key Observations Challenge / Recommended Action Opportunity MENA SI levels are low, but not Create awareness Encourage membership in sustainability of the case for networks such as the Arab Sustainability sustainability for Leadership Group and the Abu Dhabi The current scale of Shari’ah- Sustainability Group, and foster SI sub- compliant funds represents business and committees within such networks. a potential mass platform for government. Launch region-wide training on the increasing awareness of SI. business case for institutional investors. Private equity SI initiatives will Accelerate integration of sustainability have a disproportionate impact on into national competitiveness strategies. Market Interest. Launch an SI magazine/newsletter. SI uptake in MENA is likely to take some time. Foreign SI investment in MENA is Ensure availability of Promote widespread Sustainability at very low levels, primarily due to corporate ESG data in Reporting: lack of disclosure. the marketplace for use Incentivize disclosure through the launch of Sustainability by investors. Indices at a regional and/ or national level, as may be relevant based on market size, market interest, level and maturity of public sustainability disclosure and regulatory environment. Incentivize disclosure using awards. Securities markets have initiated Align securities Expand governance reform and markets reforms to criteria on securities markets to but this has not yet extended national sustainability include management and disclosure of to the environmental and social environmental and social elements of elements of ESG. interests and disclosure ESG. interests. Some foreign-based guidelines Reduce hesitation of Leverage international agreements and (such as GRI, UN Global potential early adopters tools to accelerate speed and ease of Compact, UNPRI, and others) by utilizing well- take-up. will provide some support for the adoption of SI. established international leadership companies and governments guidelines. from using these guidelines. There is a growing recognition of a Mobilize rapid and Concentrate initial disclosure need for action on some pressing broad disclosure and requirements on high priority regional sustainability issues. action on high priority issues (e.g. water) sustainability issues. initiatives on high priority sustainability issues. 14 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 The MENA market, particularly Create infrastructure Promote investment and that supports entrepreneurship in service areas critical and is heavily weighted in less sustainability in to a more sustainable economy (e.g. sustainable industry. recycling). practice. SWFs represent the greatest Increase the percentage Encourage institutional fund managers MENA SI opportunity. of SI AUM. to integrate sustainability into their screening criteria strictly from a risk/ opportunity management perspective, regardless of any public commitment to sustainability. Over time, promote sustainability- screening as an advantage, and/or launch sustainability-screened funds. Encourage SWF portfolio companies to adopt sustainability management and reporting and engage their SWFs. 15 Objectives To determine the current state of development of SI in MENA by measuring the market against To establish the feasibility of interventions such as sustainability indices, ratings and regulations to stimulate the market and make recommendations for the appropriate The sources of information include desk research and interviews over the phone and in person with Scope The document provides an overall assessment of the SI market in the Middle East and North techniques considered in this report include, but are not limited to, negative screening, positive The assessment is based on an analysis of Market Preparedness and current Market Interest level of interest and take-up of SI in the MENA region, the report looks not only at individual and institutional investments into public markets, but also at investment practices of private equity The assessment draws on available information from 11 key markets in the MENA region— analysis, the 11 markets are sometimes clustered as follows: Gulf Co-Operation Council (GCC): Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and UAE North Africa: Egypt, Morocco and Tunisia Report Structure Following this introductory chapter, Chapter 2 provides a review of MENA fundamentals, including Chapters 3 and 4 framework (see next page) for assessing SI-readiness as follows: Chapter 3: Market Preparedness for SI Regulatory environment for SI—the current laws and regulations covering investment, Country performance—country-by-country environmental, social, and governance analysis, allowing for some comparison of progress on ESG-relevant laws and regulations vis-à-vis 16 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 ESG Disclosure—existing sustainability reporting by companies, and commitments to ESG indexes, sustainability research organizations, relevant networks and associations, and civil society organizations in the MENA region are also reviewed as part of a qualitative assessment of Chapter 4: Market Interest in SI Analysis of current SI activity by different investment methods in the region, including Chapter 5 The Appendices Market Preparedness Investment and ESG Regulations ESG Disclosure and country Performance Governance Environment Social Investment Regulations Regulations Regulations Sustainability International Regulations and and and Reporting Performance Performance Performance Agreements Actual and Potential Market for Sustainable Investment Market Interest Total Assets Currently Invested in SI Shari'ah Sovereign wealth Private Equity Foreign Investment Compliant Funds Funds 17 Region’s Material ESG Issues This chapter provides an overview of MENA fundamentals through information on the economic Environment Social Governance ESG Material Issues Issues Issues Issues Water Scarcity A Competitive, Diverse, Employed, and Respected Workforce Sustainability SWF Transparency and Contribution to the Global Economy Corporate Governance and Disclosure Region’s Economic Fundamentals Current Economic Realities GDP Growth Combined, MENA produces over $1,500 billion per annum in Gross Domestic Product (GDP), or 8 report (see below) show economic growth, for many, growth over the past two decades has been disappointing9 to growth10 include poor infrastructure (outside the Gulf States), poor deployment of human capital, are expected to grow at a slower rate than they did between 2000 and 2009, with UAE slowing will continue to have a bearing on the development of the region, alongside emerging challenges 8 9 10 ibid 18 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 MENA GDP Growth Country GDP 2009 GDP Projected Population Population Projected GDP/ (estimated) Growth GDP (Total), 2009 Growth Population Capita Growth (estimated) 2000-2009 Growth 2009 $ Bn 2000-2009 (estimated) 2009-2015 Mn CAGR % 2009-2015 (PPP) CAGR % $ CAGR % CAGR % (PPP) Bahrain 28 8.8 6.3 1.0 5.0 2.0 27,068 Kuwait 135 8.0 6.2 3.5 5.3 2.0 38,304 Oman 74 8.0 6.0 3.0 2.4 3.1 25,110 Qatar 102 13.2 11.1 1.2 8.1 11.5 83,841 Saudi 593 5.9 6.0 25.5 2.7 1.8 23,221 Arabia UAE 179 8.7 5.4 4.9 5.6 2.5 36,537 Jordan 34 8.9 6.7 6.0 2.4 2.3 5,620 Lebanon 55 7.8 6.3 3.9 0.9 1.3 14,226 Egypt 467 7.4 7.5 76.7 2.2 2.0 6,123 Morocco 146 7.5 6.3 31.7 1.2 0.9 4,604 Tunisia 86 7.3 6.9 10.4 1.0 1.0 8,254 Other Developing Economies Brazil 2013 5.6 6.0 191.5 1.3 0.7 10,514 China 8765 12.6 11.5 1334.7 0.6 0.5 6,567 India 3526 9.8 10.0 1199.1 1.6 1.4 2,941 Source: IMF World Economic Outlook Database, April 2010 19 Material ESG Issue — Water Scarcity Water Scarcity available water per capita was measured at 977 cubic meters in 2001, well below the United Nations 11 By 2023, available water is expected to decrease to 460 cubic 12 in the region are expected to invest more than $400 billion in infrastructure investments (including 13 MENA investors increasingly will need to consider water intensity and dependency metrics as factors in business operational risk, particularly for industries that rely heavily on water, such as Increasing Population The MENA region accounts for 6 percent of the global population (300 million people)14, roughly the same as that of the European Union Two-thirds are below the age of 30, while roughly 27 percent are below the age of 15, a proportion that is one of the highest in the world MENA ‘Youth Bulge’ 40% 38% 37% 35% 33% 30% 29% 29% 26% 25% 25% 23% 20% 19% 15% 10% 7% 6% 7% 5% 5% 3% 2% 3% 2% 1% 2% 1% 0% co n a n a an t an E ar t yp ai bi no si ai EU oc at rd m ni hr ra w Eg ba Q or Tu O Ku Jo Ba iA Le M ud Sa % of Population Ages < 15 % of Population Ages < 65 *Order of countries is from largest in population to lowest Source: Population Reference Bureau, World Population Datasheet, 2009 11 12 The 2008 Report of Arab Forum for Environment and Development: Arab Environmental Future Challenge 13 14 20 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 15 The following graph shows the breakdown of unemployment rates by MENA countries in our relates to labor-abundant countries versus labor importing states (typically represented by the 16 Thus Kuwait, Qatar and UAE, for example, have low unemployment rates relative to non- Unemployment Rates in MENA Countries 16% 15.0% 15.0% 14.7% 14% 12.9% 11.7% 12% 9.4% 9.2% 9.1% 10% 8.7% 8% 6% 4% 3.1% 2.2% 2% 0.5% 0% *Number for 2005 **Number for 2004 ***Number for 2007 Source: Adapted from CIA World Factbook Material ESG Issue — Building a Competitive, Diverse, Employed and Respected Labor Force Building a Competitive, Diverse, Employed and Respected Labor Force are recognizing this need and opportunity, devoting an average of 5 percent of their GDP to Contribution of women to economic and social development: The 2005 Arab Human Development 17 Despite legal guarantees for women’s rights to political and economic participation, traditional gender roles often continue to limit women’s employment and 15 16 Report by the Centre for International Private Enterprise, ‘Middle East and North African Reform’ 17 21 women, their economic participation and career advancement opportunities have yet to match the 18 Labor conditions: In many MENA countries, particularly the GCC, an extremely high percentage workers has often come under criticism with respect to work conditions, pay, living conditions, and serious issue that will continue to feature prominently as a highly visible ESG consideration Economic Sectors Breakdown Sector Breakdown Oil and gas fuel much of the economic growth of the MENA region, through the GCC oil-producing economies The GCC generates more than 60 percent of the total GDP for the MENA region Kuwait, Oman, Qatar, Saudi Arabia, and the UAE are 5 of the top 15 oil exporting countries in the world The GCC has more than 37 percent of the world’s proven oil reserves and 23 percent of the world’s proven natural gas reserves 19 In the relatively natural-resources poor Levant region, tourism and banking services dominate due to strong laissez-faire commercial traditions Together, the economies of Lebanon and account for approximately 4 percentof the total GDP for the MENA region The North African countries—Morocco, Tunisia, and Egypt—relative to other countries in the sample, are the most economies (through strong trade and tourism linkages with Europe and the OECD According the Bank, these countries are also the most integrated into the rest of the global economy and, consequently, have felt the impact of the economic crisis most acutely, especially because they were not cushioned by the rebound in oil prices at the start of 2009 (a situation by the GCC oil-producing countries 20 Together, North Africa accounts for more than 21 percent of the total GDP for the MENA region 18 19 20 22 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 MENA Sector Breakdown 80% 72% 70% 60% 55% 51% 50% 44% 40% 35% 30% 23% 20% 15% 10% 4% 1% 0% Levant North Africa GCC Agriculture Industry Services Source: CIA World Fact Book 21 Qatar, along with others, is exploring the potential of “hydroponics”—soil-free agriculture and 22 Climate Change 23 The region Material ESG is particularly vulnerable given already scarce water resources, high levels of aridity, and the Issue — Climate Change already facing heavy pressures, and these are expected to intensify as regional temperatures predicted that with a 3-degree Celsius rise in temperature, maize yields in North Africa could 24 Relevant climate change legislation is beginning to evolve and will likely continue at an climate change targets while assigning responsibility for climate change performance 21 Centre, Background Paper on Agriculture and Biotechnology in MENA, 2004 22 23 The 2008 Report of Arab Forum for Environment and Development: Arab Environmental Future Challenge 24 UN FAO—29th FAO Regional Conference for the Near East, background paper, March 2008 23 Moves to Diversify In MENA, many countries have made investments to diversify their economies and have undertaken 25 in the MENA region include, but are not limited to: Regional cooperation to enhance complementary economies with regard to labor markets and countries also are investing heavily in educational infrastructure with the aim of shifting towards Additionally, the Saudi authorities are building six new economic cities in different regions of the 27 Economic City, the largest of Saudi Arabia’s economic cities Material Diversification Toward Sustainability ESG Issue — Diversification Toward should consider whether it also will be competitive in a low-carbon, low-water, low-waste, Sustainability outside the petroleum industry are the most important, with the proviso that the targeted This is also an important measure and signal for global SI investors and for the broader Sachs Sustain, for example, places a large emphasis on industry type when deciding where high prevalence of “dirty” industry in the MENA region currently makes it far less interesting petroleum industry and the rate at which they do so will affect future interest from mainstream challenge associated with this goal is the region’s limited current investment in research been established to directly support the transition to knowledge-based economies, but to do so with a special emphasis on knowledge and innovation as they relate to environmentally 25 26 Middle East Economic Survey, 9 April 2007 27 24 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Masdar City (Abu Dhabi):An emerging global clean-technology cluster located in what aims This $22 billion Free Zone, located about 17 km from downtown Abu Dhabi, will eventually be home to companies, researchers and academics from across the globe, creating an international hub for companies and organizations focused on renewable energy and Dubai: Enpark: The Energy and Environment Park is a Free Zone spanning more than 8 million technology companies to operate and a fully-integrated knowledge community that includes programs, services, partnerships and amenities to support the success of environment Source: www masdar ae; www enpark ae FDI and Outward Investment The State of FDI report’s sample slow by an average of more than 17 percent,28 MENA countries generally are attracting more world FDI, fueled by intraregional foreign investment from the oil-rich countries 29 transfer and diffusion of technology,30 a situation which, if not addressed, will do little to solve the 28 29 30 25 Inward FDI Flows, 2006-2009 2006 2007 2008 2009 % change Country ($ Millions) ($ Millions) ($ Millions) ($ Millions) 2008-2009 Bahrain 2915 1756 1794 257 -86% Kuwait 122 116 -51 145 145% Oman 1597 3332 2359 2211 -6% Qatar 3500 4700 4107 8722 112% Saudi Arabia 17140 22821 38151 35514 -7% UAE 12806 14187 13700 4003 -71% Jordan 3544 2622 2829 2385 -16% Lebanon 3132 3376 4333 4804 11% Egypt 10043 11578 9495 6712 -29% Morocco 2450 2803 2487 1331 -46% Tunisia 3308 1616 2758 1688 -39% Other Developing Economies Brazil 18822 34585 45058 25949 -42% China 72715 83521 108312 95000 -12% India 20328 25001 40418 34613 -14% There are differences between MENA economies with respect to attractiveness for foreign The reasons attributed to Kuwait’s lack of attractiveness include bureaucracy, stringent regulations, 31 These obstacles must be overcome if Encouraging more FDI An important regional development of late is the establishment of Special Economic Zones (SEZs The Bank Group estimates that more than sixty Special Economic Zoneshave been established in GCC countries to attract foreign investors and companies 32 Outside the GCC, new SEZs are also being set up The effect of SEZs on SI is to gauge In purely economic terms, 31 Arab Times “Kuwait registers FDI growth in 2009, bucks negative trend,” September, 2010 32 Zones (QIZ), and Special Economic Zones (SEZ) 26 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 for the most part, SEZs have been shown to attract investment and foreign exchange, catalyze employment, and boost development of new technologies and infrastructure In some cases, however, they have led to displacement of indigenous peoples, or resulted in land-use changes with a negative net effect on the environment These zones have also been used to attract investment in clean technologies The success of the latter will likely have a bearing on the overall regional market for SI Outward Investment strategically important assets (including high tech, real estate, and aerospace) to sponsoring 33 The Market Interest Material ESG Sovereign Wealth Fund Transparency and Contribution to the Issue — Sovereign Global Economy Wealth Fund Transparency and Contribution to the implications and heightened potential for meddling in corporate governance for political Global Economy 34 The Financial Times reported that the 35 ESG transparency from the companies in which they are investing, several of which already Stabilization of the banking systems: Despite limited exposure to the subprime sector, Advancement of local development: There is a window of opportunity, as well as newly developed and sophisticated national economic agendas, to advance local economies and bridge the development gap as the rest of the world suffers through a recession, particularly as global capital markets currently offer poor or risky investment portfolio companies as a means of demonstrating their contribution to national sustainable 33 on Foreign Relations, Rachel Ziemba, RGE Monitor, December 2007 34 35 27 MENA Securities Markets MENA Securities Markets Number of Listed Stock Market Capitalization ($ Companies millions) Market Stock Market Capitalization % 2003 2004 2010 2003 2004 2010 Change, 2004-2010 Bahrain—Bahrain Stock Exchange 44 45 49 9,702 13,513 22,069 63% Kuwait—Kuwait Stock Exchange 108 125 239 59,528 73,581 118,107 61% Oman—Muscat Securities Market 141 123 125 7,246 9,318 17,603 89% Qatar—Doha Securities Market 28 30 42 26,702 40,435 110,092 172% Saudi Arabia—Saudi Stock Market 70 73 146 157,306 306,256 337,191 10% UAE—Dubai Financial Market; Abu Dhabi 43 53 147 44,647 90,581 130,353 44% Securities Market Jordan—Amman Stock Exchange 161 192 275 10,963 18,383 29,270 59% Lebanon—Beirut Stock Exchange 14 16 26 1,503 2,331 14,594 526% Egypt—Cairo Stock Exchange Market 967 792 220 27,847 38,077 75,212 98% Morocco—Casablanca Stock Exchange 52 53 73 13,050 25,175 60,468 140% Tunisia—Tunis Stock Exchange 45 44 55 2,440 2,574 10,828 321% Source: Zawya.com, September 2010 and OECD - Ownership Structures in MENA Countries: Listed Companies, State-Owned, Family Enterprises and Some Policy Implications, 2004 Private Sector Make-up An important MENA consideration when examining the securities markets is not which companies are included, but which ones are excluded, vis-à-vis their impact on the national economies Many of the largest companies in Bahrain, Lebanon, Egypt, Kuwait, Morocco, Oman, Saudi Arabia, and the UAE, are not listed on the stock exchanges at all The dominance of state-owned enterprises (SOEs), family-owned enterprises (FOEs), and private small and medium sized enterprises (SMEs) distinguish the business environment of MENA from that of many markets This structure requires corporate governance principles, as well as models and disclosure systems that include, but extend beyond, securities markets 28 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Material ESG Issue — Corporate Governance and Disclosure Corporate Governance and Disclosure transparency and disclosure issues in the MENA region are mostly focused on governance, there is growing awareness among listed companies that the next phase of transparency will Corporate governance has not seen the same volume of gains as State Owned Enterprises growing appreciation of environmental and social issues within national sustainable same time, many FOEs are taking their own initiative to enhance corporate governance— some in preparation for initial public offerings (IPOs), some to assist in transitioning the business from one generation of family to the next, and some because they believe in Despite these advancements, ESG reporting by publicly listed companies, SOEs, and FOEs in MENA is still in its infancy and for the most part absent, even as sustainability awareness These regional economic fundamentals, combined with the highlighted material environmental, social and governance (ESG) issues, form the backdrop to our examination of SI activity and 29 Individual profiles amount of corporate ESG disclosure in the region, this chapter evaluates the degree to which the for the 11 markets assessed in this report are provided The regulatory environment is assessed through a high level review of existing investment in the Appendix. laws, corporate governance regulations, environmental regulations, and laws governing social the operating environment as it relates to ESG conditions, while also allowing for some comparison ESG disclosure practices in the region are then assessed by reviewing the degree of corporate sustainability reporting and corporate commitment to the UN Global Compact, as well as the extent to which MENA asset owners and managers have committed to internationally voluntary standards among countries and sub-regions, what emerges is a region that is making progress in areas of investment and ESG regulations, but with national ESG performance at best only beginning to Market Preparedness Framework Market Preparedness Investment and ESG Regulations ESG Disclosure and country Performance Governance Environment Social Investment Regulations Regulations Regulations Sustainability International Regulations and and and Reporting Performance Performance Performance Agreements 30 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Investment and ESG Regulations and Country Performance various regulatory dimensions were assessed to determine the level of support they provide for SI (a) Investment Laws and Regulations (b) Corporate Governance Laws and Regulations (c) Environmental Laws and Regulations (d) Social Laws and Regulations Following the assessment of each country’s investment and ESG regulations, each of the above areas also was assessed from the perspective of country performance (with the exception of example, for the assessment of environmental laws and regulations in the region, two indices Stringency of Environmental Regulations, and Enforcement of Environmental Regulations. In order to measure national environmental performance, the Environmental Performance Index score for Market Preparedness, of which the four regulatory subcomponents (Investment, Environment, Indices Used in the Quantitative Assessment of the MENA Investment and ESG Regulations Dimensions of Regulatory Indices Used for Measuring Laws and Regulations Environment Business Indicator Index Investment Laws and Regulations Source: eStandards Forum 2009 Extent of Director Liability Index Source: World Bank, Doing Business - Investor Protection Index 2009 Corporate Governance Extent of Disclosure Index Laws and Regulations Source: World Bank, Doing Business - Investor Protection Index 2009 Strength of Auditing and Accounting Standards Source: WEF Global Competitiveness Report 2010-2011 Stringency of Environmental Regulations Environmental Source: WEF Travel and Tourism Competitiveness Report, 2009 Laws and Regulations Enforcement of Environmental Regulations Source: WEF Travel and Tourism Competitiveness Report, 2009 Source: International Labor Organization, 2010 Gender Empowerment Measures Social Laws and Regulations Source: UNDP Human Development Indices, 2009 Rigidity of Employment Source: World Bank, Doing Business, 2010 31 Indices Used in the Quantitative Assessment of the MENA National ESG Performance Dimensions of Regulatory Indices Used for Measuring ESG Performance Environment Source: WEF Global Competitiveness Report 2010-2011 Corporate Ethical Behavior of Firms Governance Laws and Regulations Source: WEF Global Competitiveness Report 2010-2011 Corruption Perception Index (CPI) Source: Transparency International, CPI 2009 Environmental Laws Environmental Performance Index and Regulations Source: Global Environmental Index 2010 Global Gender Gap Index Source: WEF Global Gender Gap Report, 2009 Hiring and Firing Practices Social Laws and Regulations Source: WEF Global Competitiveness Report 2010-2011 Human Rights Country Ranking Source: Country Indicators for Foreign Policy (CIFP), 2007 Overall, in recent years the MENA region has witnessed significant progress in government engagement in international efforts relating to corporate governance, the environment and social issues such as labor. Growing interest by MENA countries in ESG issues has contributed to some countries in the region publishing multi-decade visions in which sustainable development is integrated as a guiding principle into na- tional-level strategic plans. Examples include Qatar, Bahrain, and Abu Dhabi. In general, ESG regulatory strategies are pursued nationally with limited evident regional coordination to date. As such, strategies remain relatively inconsistent across the region. 32 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 The following subsections attempt to address the four subcomponents of the regulatory environment and national ESG performance in more detail, and provide the quantitative analysis for each Investment Laws and Regulations Investment Regulations in the MENA Region The assessment of investment laws and regulations is based on the eStandards Forum (www. countries has been increasing steadily over the last few years36 37 estandardsforum. , org) Index of of these reforms, all countries in the sample, with the exception of Lebanon, are either at standard, the Financial or have initiated reforms to comply with international investment standards, as measured by the Standards Forum, which assesses the investment laws and regulations of The Number of Regulatory Rrforms Has Increased Recently each country based in MENA Countries on their compliance (Average number of regulatory reforms per country, as measured by the Doing Business report) with international 3 best practices. The 2.5 eStandards Forum 2 provides country 1.5 rankings using 1 12 key business 0.5 indicators. 0 Source: World Bank MENA Development Report, 2009 Despite recent improvements the region’s business environment through regulatory reforms, there 38 showed that 72 percent of companies in the region viewed corruption and anti-fraud regulations and laws to be Lebanon complained that regulations are inconsistently interpreted, and as such, the country has been 36 37 38 th 33 Large Proportions of Investors Complain That the Regulations are Interpreted Inconsistently and Unpredictably 70% 67% 66% 60% 60% 58% 50% 42% 41% 40% 30% 22% 20% 10% 0% Lebanon West Bank Morocco Algeria Jordan yamen Saudi and Gaza Republic Arabia % of respondents disagreeing with ‘interpretations of regulations are consistent and predictable’ Source: World Bank enterprise surveys, various years Investment Incentives in the MENA Region In addition to investment regulations, investment incentives are also provided throughout the region, example: Bahrain offers the exemption of minimum capital requirements for foreign invested Egypt provides guarantees against nationalization expropriation and price controls—both as Morocco offers a 20 percent investment allowance and capital gains exclusion from 25 to 100 39 39 Stocktaking 34 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 UAE—Regional Leader The UAE government welcomes foreign investment and provides tax incentives and low tax contained—the UAE is ranked 30th out of 180 countries in Transparency International’s Impact of Existing Investment Regulations on SI The region’s investment regulatory environment has improved over the years through increased The impact of investment regulations on SI depends upon several variables, including the ease of investment, clear regulatory frameworks, type of investment incentives provided, level of foreign this is best illustrated where governments are providing preferential electricity consumption rates example in cases where foreign investment is encouraged, the transfer of knowledge regarding best Overall it is difficult to draw a clear correlation between investment regulations and SI, yet the analysis attempts to quantify this relation using the business indicator index, an index provided by the eStan- dards Forum that assesses the investment laws and regulations of each country based on their compliance with international best prac- tices. This index demonstrates that the GCC countries, with the excep- tion of Saudi Arabia, exhibit the highest scores as relates to investment regulation 35 Business Indicator Index Scores—Country Comparison, 2009 Country Business Business Ranking Compliance Indicator Index Indicator (out of 81 Level Score (out of 12) Index countries Score assessed) UAE 9.9 82.5% 37 At Standard Bahrain 9.7 80.4% 41 At Standard Oman 9.4 78.3% 43 At Standard Qatar 8.7 72.1% 50 In Progress Jordan 8.5 70.8% 52 In Progress Kuwait 8.4 70.0% 55 In Progress Egypt 8.2 67.9% 56 In Progress Brazil 7.5 62.5% 64 In Progress Morocco 7.4 61.7% 65 In Progress Tunisia 7.4 61.7% 65 In Progress Saudi 6.9 57.5% 70 In Progress Arabia Lebanon 5.6 46.4% 81 Below Standard China 5.3 44.2% 82 Below Standard India 5.2 43.3% 83 Below Standard Source: eStandards Forum—Business Indicator Index, 2009 36 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Market Preparedness – Investment Regulations Market Preparedness Investment and ESG Regulations ESG Disclosure and country Performance Governance Environment Social Investment Regulations Regulations Regulations Sustainability International Regulations and and and Reporting Performance Performance Performance Agreements Investment Regulations Score in MENA 90% 83% 80% 78% 80% 72% 71% 70% 68% 70% 62% 62% 62% 58% 60% 46% 44% 44% 50% 40% 30% 20% 10% 0% 37 Corporate Governance Laws and Regulations and Country Performance Corporate Governance Regulations in the MENA Region In recent years, regulatory bodies and companies in MENA region countries have made substantial Bahrain announced the launch of its Code of Governance, which is expected to take effect from 40 List of Existing Corporate Governance Codes in the MENA region Country Code Code Type Authority Corporate Governance Code of For Listed Ministry of Industry Bahrain Kingdom of Bahrain Companies and Commerce Code for Corporate Governance For Listed Egyptian Institute of for Private Companies in Egypt Companies Directors Egypt Code for Corporate Governance For State Egyptian Institute of for State Owned Enterprises in Owned Directors Egypt Enterprises For Listed Jordan Securities Jordan Code for Listed Companies Companies Commission Lebanese Corporate Governance Code for Lebanon For SMEs Transparency Small and Medium Enterprises Association (LTA) Corporate Governance Saudi For Listed Capital Market Regulations in the Kingdom of Arabia Companies Authority Saudi Arabia Guide de Bonnes Pratiques de Code for Listed L’Institut Arabe des Tunisia Gouvernance des Entreprises Companies Chefs d’Entreprises Tunisiennes Emirates Securities Corporate Governance Code for For Joint-Stock & Commodities Joint-Stock Companies Companies Authority (ESCA) United Arab Abu Dhabi Governance Code For For Listed Abu Dhabi Emirates Listed Companies Companies Securities Market Abu Dhabi Governance Rules for Listed Abu Dhabi Listed Companies Companies Securities Market Source: Global Corporate Governance Forum (GCGF), 2008, Corporate Governance: Better Companies, Better Stories: European Corporate Governance Institute, http://www.ecgi.org/. 40 Compliance Insider May, 2010, Corporate Governance in the Middle East: A Changing Landscape 38 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 governments are striving to meet international governance standards, existing rules are not Three indices were used to measure the region’s governance regulations: the ‘Director Liability Doing Business Index, and the ‘Strength of Auditing and Accounting Standards Index’ from the Director Liability Index, Saudi Arabia sits at the top with a score of eight (out of 10), with Kuwait 12th globally, while Morocco, the lowest ranking country from the MENA region, ranks 100th out As the results show in the table below, it is clear that scores on various indices measuring corporate score in the region of one in the Director Liability Index, but amongst the highest scores in the Overall, Saudi Arabia, Kuwait and Oman rank 1st, 2nd and 3rd in terms of corporate governance laws and regulations in the region. Corporate Governance Laws and Regulations by Country Director Extent of Strength of Corporate Liability Disclosure Auditing and Governance Country Score Score Accounting Regulations (out of 10) (out of 10) Standards Score Saudi Arabia 8 9 5.36 82.2% Kuwait 7 7 4.75 69.3% Oman 5 8 5.29 68.5% Bahrain 4 8 5.65 66.9% Brazil 7 6 4.76 66.0% Qatar 6 5 5.85 64.5% United Arab 7 4 5.36 62.2% Emirates 39 Corporate Governance Laws and Regulations by Country Director Extent of Strength of Corporate Liability Disclosure Auditing and Governance Country Score Score Accounting Regulations (out of 10) (out of 10) Standards Score India 4 7 5.13 61.1% Egypt 3 8 4.83 59.7% China 1 10 4.79 59.5% Tunisia 5 5 4.98 57.0% Jordan 4 5 5.31 55.3% Lebanon 1 9 4.57 55.1% Morocco 2 6 4.16 46.5% Director Liability Index Source: World Bank, Doing Business, Investor Protection Index, 2009 Extent of Disclosure Index Source: World Bank, Doing Business, Investor Protection Index, 2009 Strength of Auditing and Accounting Standards Source: WEF Global Competitiveness Report 2010-2011 Country performance Corporate Governance Performance in the MENA Region in corporate governance is of Corporate Boards Index and the Ethical Behavior of Firms Index—both drawn from the measured using three indices: The Efficacy of Corporate Boards which measures the amount of supervision exerted by investors and boards of directors in corporate th Index and the , Bahrain ranks 24th and Saudi Arabia ranks 26th th Ethical Behavior of globally, Firms Index, both of which are provided The UAE and Oman hold the highest scores in the Middle East for the Ethical Behavior of Firms by the World Index which measures the corporate ethics of companies in one country relative to other countries nd Economic Forum, , with Oman following suit with a rank of 23rd and Transparency Behavior in the region at 123rd International’s Corruption Perception Index. Qatar and the UAE seem to have minimal perceived corruption in their respective public-sectors, Source: (1) WEF Global Competitiveness Report 2010-2011 (2)http://www. transparency.org/policy_ research/surveys_indices/ cpi/2009/cpi_2009_table 40 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Country Performance in Governance Related Indices Corporate Ethical Corruption Governance Country Behavior of Perception Corporate Boards Performance Firms Index 2009 Score United Arab 4.80 5.41 6.50 70.3% Emirates Oman 4.95 5.40 5.50 67.6% Bahrain 5.00 5.33 5.10 66.2% Qatar 3.39 5.23 7.00 64.4% Saudi 5.00 5.16 4.30 62.7% Arabia Tunisia 4.91 5.18 4.20 62.0% Jordan 4.42 4.53 5.00 59.3% Kuwait 4.09 4.43 4.10 54.2% China 4.40 4.18 3.60 52.9% India 4.47 3.86 3.40 51.0% Morocco 4.62 3.77 3.30 50.9% Brazil 4.55 3.55 3.70 50.9% Egypt 4.42 4.13 2.80 50.0% Lebanon 4.27 3.17 2.50 43.8% Ethical Behavior of Firms Source: WEF Global Competitiveness Report 2010-2011 Corruption Perception Index Source: Transparency International http www transparency org policy research surveys indices cpi 2009 cpi 2009 table 41 Impact of Existing Governance Regulations and Country Performance on SI Corporate governance plays a vital role in supporting economic development as it: growth, (3) Enhances the operational performance, 41 good governance increasingly is being seen as a means to improve the performance and stability practices, clarifying management and board responsibilities, and monitoring director performance, 42 The disparity between country scoring in Corporate Governance Regulations and the scoring is still on a development path in regards to its governance rules with some countries like Oman and Saudi Arabia being in advanced stages, while other countries in North Africa and the Levant such as all countries in the GCC plus Tunisia rank higher than Brazil in Corporate Governance Regulations 41 42 42 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Corporate Governance Regulations and Performance – by Country Corporate Corporate Weighted Corporate Governance Governance Governance Country Regulations Performance Regulations and Score Score Performance Score Saudi Arabia 82.2% 62.7% 72% Oman 68.5% 67.6% 68% Bahrain 66.9% 66.2% 67% UAE 62.2% 70.3% 66% Qatar 64.5% 64.4% 64% Kuwait 69.3% 54.2% 62% Tunisia 57.0% 62.0% 60% Brazil 66.0% 50.9% 58% Jordan 55.3% 59.3% 57% China 59.5% 52.9% 56% India 61.1% 51.0% 56% Egypt 59.7% 50.0% 55% Lebanon 55.1% 43.8% 49% Morocco 46.5% 50.9% 49% Source: Research and analysis conducted for this report Market Preparedness – Governance Regulations and Performance Market Preparedness Investment and ESG Regulations ESG Disclosure and country Performance Governance Environment Social Investment Regulations Regulations Regulations Sustainability International Regulations and and and Reporting Agreements Performance Performance Performance 43 Corporate Governance Regulations and Performance Scores in MENA 80% 72% 69% 68% 70% 67% 66% 62% 60% 58% 57% 60% 56% 56% 55% 49% 49% 50% 40% 30% 20% 10% 0% Environmental Laws and Regulations and Country Performance The assessment of Environmental Regulations in MENA environmental laws According to the Arab Forum for Environment and Development (AFED),43 MENA legislation is based on country on environment is an integrated legislative system which aims to ensure environmental protection scores on two indices: The Stringency of Environmental Regulations Index and the Enforcement Various cabinet portfolios for the environment have been established in the MENA region, as of Environmental Regulations Index both provided by the World Economic Forum’s Travel and Tourism Competitiveness Report 2009. 43 Source: Arab Environment: Future Challenges 2008, AFED 44 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 List of Environmental Cabinets/Agencies/Departments in the MENA region Country Institution Ministry of Housing, Municipalities and Environment Bahrain Department of Environmental Affairs Ministry of State for Environmental Affairs Egypt Egyptian Environmental Affairs Agency Jordan Ministry of Environment Kuwait Environment Public Authority Lebanon Ministry of Environment Oman Ministry of Environment and Climate Affairs Morocco Departement du L’environnement Qatar Ministry of Environment Saudi Arabia Presidency of Meteorology and Environment Tunisia Ministry of Environment and Sustainable Development Ministry of Environment UAE Environment Agency Abu Dhabi Environment Department Dubai Environmental legislation in the MENA region is generally based on mandating assessment of legislation conditionally and explicitly indicates that this assessment should examine all negative According to the AFED report, most MENA laws on environment include provisions ensuring protection of water sources against pollution and regulating water consumption patterns to life and biodiversity, and protection of marine environments against pollution caused by maritime MENA environmental legislation, as a whole, is observed to not yet recognize and incorporate the practicality of economic policy instruments and their effectiveness in ensuring environmental mandated compliance with environment protection systems and measurements as a prerequisite for loans from lending agencies must include an obligation that the borrower commit to environmental 45 Environmental protection laws in the MENA region Country Law pertaining to environmental protection Bahrain Law No. 21/1996 on Environment Protection in Bahrain. Egypt Law No. 4/1994 on Environment Protection in Egypt. Jordan Law No. 52/2006 on Environment Protection in Jordan. Kuwait Environment Protection in Kuwait. Law No. 444/2002 on 29/7/2002 on Environment Protection Lebanon in Lebanon. Law No. 11-3 relating to Environment Protection and Reclamation issued by Royal Decree no. 50-3-1 on 15 Morocco Rabei Awal 1424 Hij corresponding to 12 May 2003 in Morocco. Oman Law No. 114/2001 on Environment Protection in Oman. Qatar Law No. 30/ 2002 on Environment Management in Qatar. Republican Decree no.34 on 28/7/1422 Hij on the Saudi Arabia Environment System in Saudi Arabia. Law No. 91/1988 on Establishment of a National Agency for Tunisia 115/1992 and 14/2001 and further laws pertinent to different components of the environment. In addition to passing. Law No. 24/1999 on Environment Protection and UAE Development in the United Arab Emirates. Source: Publically available information including news releases, and regulatory bodies’ websites. In addition to the country laws pertaining to environmental protection in MENA, many MENA of the Kyoto Protocol to the Framework Convention on Climate Change by Kuwait and Egypt in 2005, the signing of the Stockholm Convention on Persistent Organic Pollutants by Tunisia and 46 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Number of Signed International Environmental Treaties (out of 25) 20 21 22 20 19 19 20 18 18 17 18 16 16 16 13 14 12 10 8 6 4 2 0 Source: WEF Travel and Tourism Competitiveness Report 2009 Overall, environmental regulations in the MENA region are developing Overall, environmental regulations in the MENA region are rate, and, and changing at an and changing at an accelerateddeveloping although a few common features are shared, the regulations are mostly fragmented throughout accelerated rate, and, although a few common features are is also observed in relation to the the region. This fragmentationshared, the regulations are mostly fragmented according to one survey, country range stringency of these regulations; througof regulation stringency scores between 44 for Saudi Arabia, 44 for Saudi Arabia, in terms of regulation stringency range betweento 71 for Tunisia with to 71 for Tunisia with highhigh score representing best practices.44 the the score representing best practices.44 Generally, environmental regulations in the MENA region are characterized by lax enforcement in both the Stringency of Environmental Regulations Index and the Level of Enforcement of Environmental Regulations, with respective global rankings of 19th and 16th the exception of Egypt, Kuwait and Morocco, all MENA countries score above the global means 44 47 Level of Stringency and Enforcement of Environmental Regulations in the MENA Region Level of Stringency of Environmental Enforcement of Country Environmental Regulations Environmental Regulations Score Regulations Oman 5.3 5.2 75.0% Qatar 5.1 5.1 72.9% Tunisia 4.9 4.9 70.0% UAE 4.8 4.8 68.6% Brazil 4.5 4.0 60.7% Jordan 4.2 4.1 59.3% Lebanon* 4.2 4.1 59.3% Saudi Arabia 4.0 4.1 57.9% Bahrain 4.2 3.9 57.9% India 4.2 3.8 57.1% Global Mean 4.0 3.8 55.7% China 3.7 3.7 52.9% Morocco 3.3 3.3 47.1% Kuwait 3.1 3.0 43.6% Egypt 3.1 2.7 41.4% *No data was available for Lebanon, as such, averaged regional scores were substituted Source: WEF Travel and Tourism Competitiveness Report 2009 Environmental Performance in MENA The global Environmental Performance Index (EPI) indicates that all countries in the sample, with North Africa’s stronger performance relative to other MENA countries is counterintuitive when observing the country scoring in the stringency and enforcement of environmental regulations indexes, which found that North African countries, with the exception of Tunisia, were among the to others in the region are the country’s low burden of environmental disease and low levels of 45 45 48 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Environmental Performance Index Scores – Country Comparison, 2010 2010 Environmental Global Rank Income Group Country Performance Index (out of 163) Average Score (out of 100) Oman 65.6 52 56.2 Qatar 63.4 62 65.7 Tunisia 62.0 68 58.7 UAE 60.6 74 65.7 Brazil 57.9 90 65.7 China 56.1 97 58.7 India 55.3 99 64.8 Jordan 54.1 104 - Lebanon 51.1 113 67.1 Saudi Arabia 49.0 121 58.7 Bahrain 48.9 122 67.1 Morocco 48.3 123 56.2 Kuwait 45.9 131 64.8 Egypt 42.0 145 67.1 Source: Environmental Performance Index, 2010 Impact of Existing Environmental Laws and Country Performance on SI Regulations that aim to protect the local environment of a country represent strong drivers to environmental regulation on investment is dependent upon the stringency and the enforcement might correlate positive environmental performance with an increased amount of business activity 49 Environmental Regulations and Performance – by Country Weighted Environmental Environmental Environmental Country Regulations Performance Regulations and Score Score Performance Score Oman 75.0% 65.6% 70.3% Qatar 72.9% 63.4% 68.2% Tunisia 70.0% 62.0% 66.0% UAE 68.6% 60.6% 64.6% Brazil 60.7% 57.9% 59.3% Jordan 59.3% 54.1% 56.7% India 57.1% 55.3% 56.2% Lebanon 59.3% 51.1% 55.2% China 52.9% 56.1% 54.5% Saudi Arabia 57.9% 49.0% 53.5% Bahrain 57.9% 48.9% 53.4% Morocco 47.1% 48.3% 47.7% Kuwait 43.6% 45.9% 44.8% Egypt 41.4% 42.0% 41.7% Source: Research and analysis conducted for this report 50 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Market Preparedness – Environmental Regulations and Performance Market Preparedness Investment and ESG Regulations ESG Disclosure and country Performance Governance Environment Social Investment Regulations Regulations Regulations Sustainability International Regulations and and and Reporting Agreements Performance Performance Performance Environmental Regulations and Performance Score in MENA 80% 70% 68% 70% 67% 65% 59% 57% 60% 56% 55% 55% 54% 53% 48% 50% 45% 42% 40% 30% 20% 10% 0% 51 The assessments Social-Related Laws and Regulations and Country Performance of social laws and regulations in Social Regulations in MENA MENA are based on the country scores on indices related to Gender Equality Despite the similarity in some legislative frameworks, the MENA region represents a blend and Labor Rights. of countries ranging in size, social and political structure, economic realities, and regulatory Gender Equality Regulations in MENA One such issue where regulations vary greatly from one MENA country to another is gender the MENA region, the biggest steps were taken in the areas of employment, education, and political In the UNDP 2009 Human Development Report, the UAE and Bahrain ranked highest in the region for gender empowerment, coming in at 25th and 46th and Saudi Arabia ranked lowest in the MENA region, and are among the lowest-ranking countries 52 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Gender Empowerment by Country in MENA Global Rank in GEMs Gender Empowerment Country (out of 109 ranked countries of Measures (GEM) a total 192) United Arab 69.1% 25 Emirates Bahrain 60.5% 46 China 53.3% 72 Brazil 50.4% 82 Oman 45.3% 87 Qatar 44.5% 88 Jordan* 44.3% - Kuwait* 44.3% - Lebanon* 44.3% - Tunisia* 44.3% - Morocco 31.8% 104 Saudi Arabia 29.9% 106 Egypt 28.7% 107 India** N/A N/A *No data was available for Jordan, Kuwait, Lebanon and Tunisia; as such, averaged regional scores were substituted **No data was available for India Source: UN Data Website Available at: http://data.un.org/DocumentData.aspx?q=gender+empowerment&id=182 Labor Regulations in MENA To determine the level of labor-related regulations in the region, two indices were used: the International 53 The labor conventions chosen pertain to the elimination of forced labor, allowing collective conventions are shown in the table below: of Basic Worker’s Convention Index Conventions C29 – Forced Labor Convention C87 – Freedom of Association and Protection of to Organize Convention C98 – Right to Organize and Collective Bargaining Convention C100 – Equal Remuneration Convention C105 – Abolition of Forced Labor C111 – Discrimination (Employment and Occupation) Convention C138 – Minimum Age Convention C182 – Worst Forms of Child Labor Convention Source: International Labor Organization Website 46 A second measure of labor regulations in the MENA region is the Rigidity of Employment Index measure: Kuwait ranks in the top 10 countries in the world for providing easy hiring, employment, 46 54 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Labor Laws and Regulations by Country in the MENA Region Rigidity of Labor Country Worker’s Convention Employment Regulations (out of 8) (out of 100) Score Kuwait 7 0 94% Egypt 8 27 87% United Arab 6 7 84% Emirates Jordan 7 24 82% Lebanon 7 25 81% Tunisia 8 40 80% Saudi Arabia 5 13 75% Qatar 5 13 75% Brazil 7 46 71% Bahrain 4 10 70% Oman 4 13 69% Morocco 7 60 64% China 4 31 60% India 4 30 60% Source of Rigidity of Employment Index: World Bank Doing Business 2010 Report standards, The League of Arab States signed the Arab Charter for Human Rights in 2004, and efforts to secure memberships in international human rights organizations have been undertaken overall score of 77 percent, followed by Kuwait and Bahrain with scores of 69 percent and 65 55 Social Regulations Score by Country in MENA Gender Equality Labor Regulations Social Country Regulations Score Score Regulations Score United Arab 69.1% 84% 77% Emirates Kuwait* 44.3% 94% 69% Bahrain 60.5% 70% 65% Jordan* 44.3% 82% 63% Lebanon* 44.3% 81% 63% Tunisia* 44.3% 80% 62% Brazil 50.4% 71% 61% Qatar 44.5% 75% 60% India N/A 60% 60% Egypt 28.7% 87% 58% Oman 45.3% 69% 57% China 53.3% 60% 57% Saudi Arabia 29.9% 75% 52% Morocco 31.8% 64% 48% Gender Equality Regulations Source: Gender Empowerment Measures, UNDP *Gender Equality Regulations Scores were unavailable for Jordan, Kuwait, Lebanon and Tunisia; as such, a regional average was used as a substitute 56 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Social Performance in MENA In terms of social performance, Qatar, UAE and Oman seem to perform at the highest levels, with Social Performance Score by Country in MENA Gender Hiring and Human Rights Social Country Gap Index Firing Practices Rankings Performance (out of 1) Index (out of 7) (out of 10) Score Qatar 0.59 4.85 6.68 53.8% India 0.62 3.69 5.33 53.6% United Arab 0.62 4.70 6.85 53.5% Emirates Oman 0.59 4.37 6.16 53.4% Brazil 0.67 2.80 4.67 53.4% Kuwait 0.64 3.97 6.33 52.3% Lebanon 0.60 4.19 6.85 50.6% Tunisia 0.62 4.20 7.05 50.6% Morocco 0.59 3.95 6.69 49.6% Bahrain 0.61 3.49 6.61 48.4% Jordan 0.62 3.52 6.70 48.4% China 0.69 4.07 8.39 47.8% Saudi 0.57 4.60 7.90 47.7% Arabia Egypt 0.59 3.86 7.47 46.3% Gender Gap Index Source: WEF 2009 The Global Gender Gap Report Hiring and Firing Practices Index Source: WEF Global Competitiveness Report 2010-2011 Human Rights Index Source: Carleton University Country Indicators for Foreign Policy, 2007 Impact of Existing Social Regulations and Country Performance on SI The social development of a country and the process of safeguarding citizens’ rights by law are the building blocks for fostering socially responsible behavior in the business environment, and environment, both to support sustainable businesses and promote the integration of sustainability equality, and labor standards, as well as efforts to gauge the effect these measures have on the overall social performance of MENA countries, are potential accelerating factors for the take-up 57 The UAE, Kuwait, and Bahrain lead the region in overall social regulation and social performance Social Regulations and Performance Scores—Country Comparison Weighted Social Social Social Regulation and Country Regulations Performance Performance Score Score Score United Arab Emirates 76.6% 53.5% 65% Kuwait 69.0% 52.3% 61% Bahrain 65.3% 48.4% 57% Brazil 60.6% 53.4% 57% Qatar 59.6% 53.8% 57% Lebanon 62.8% 50.6% 57% Jordan 63.0% 48.4% 56% Tunisia 62.1% 50.6% 56% India 55.9% 53.6% 55% Oman 56.9% 53.4% 55% China 56.4% 47.8% 52.1% Egypt 57.6% 46.3% 52% Saudi Arabia 52.3% 47.7% 50% Morocco 47.8% 49.6% 49% Source: Research and analysis conducted for this report 58 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Market Preparedness – Social Regulations and Performance Market Preparedness Investment and ESG Regulations ESG Disclosure and country Performance Governance Environment Social Investment Regulations Regulations Regulations Sustainability International Regulations and and and Reporting Performance Performance Performance Agreements Social Regulations and Performance Scores in MENA 70% 65% 65% 61% 57% 57% 57% 57% 56% 56% 60% 55% 55% 55% 52% 52% 50% 49% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 59 Overall Analysis of MENA Investment, ESG-Related Regulations and Country Performance Overall, investment and ESG-related regulations in MENA have made important strides in recent years, although many areas are still in the very early stages of development. Research also suggests that country performance has not yet appreciably responded to the regulatory stimulus or other stimuli that may be present in the markets. On the whole, country-level ESG performance is lagging what is mandated in ESG regulations. Weighted Weighted Weighted Weighted Total Average for Average for Average for Average “Investment “Investment “Corporate “Environmental for “Social and ESG Laws and Governance Regulations and Regulations Regulatory Country Regulations” Regulations Performance” and Environment Score and Score Performance” + Country Performance” Score Performance” Score Scores United Arab 83% 66% 65% 65% 70% Emirates Oman 78% 68% 70% 55% 68% Qatar 72% 64% 68% 57% 65% Bahrain 80% 67% 53% 57% 64% Tunisia 62% 60% 66% 56% 61% Jordan 71% 57% 57% 56% 60% Kuwait 70% 62% 45% 61% 59% Brazil 63% 58% 59% 57% 59% Saudi Arabia 58% 72% 54% 50% 58% Egypt 68% 55% 42% 52% 54% India 43% 56% 56% 55% 53% Lebanon 46% 49% 55% 57% 52% Morocco 62% 49% 48% 49% 52% China 44% 56% 55% 52% 52% Source: Research and analysis conducted for this report 60 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Market Preparedness – Investment and ESG Regulations and Country Performance Market Preparedness Investment and ESG Regulations ESG Disclosure and country Performance Governance Environment Social Investment Regulations Regulations Regulations Sustainability International Regulations and and and Reporting Agreements Performance Performance Performance CInvestment and ESG Regulatory Environment + Country Performance Scores 75% 70% 68% 70% 65% 64% 65% 61% 60% 59% 59% 58% 60% 54% 53% 52% 52% 52% 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 61 ESG Disclosure In addition to reviewing ESG regulations and country performance, the second main element of the quantitative assessment of MENA SI Market Preparedness is a review of: of the UN Principles for Responsible Investment (PRI), the UN Environmental Sustainability Reporting and Non-Financial Information Disclosure Disclosure of ESG performance is essential to SI activity, in that it is the primary source SI investors but investors and stakeholders in general: according to a survey conducted 47 69 percent of 137 institutional investors in charge of some of the A survey conducted by Hawkamah in 200848 on disclosure practices in banks and listed with disclosure of corporate governance-related information, as well as charters and by- The Hawkamah survey also assessed the barriers preventing the adoption of good barriers included: lack of economic incentive, fear of unfair competition, security issues, A few international efforts, such as the Global Reporting Initiative and the UN’s Global uptake of these international ESG disclosure mechanisms in the region is still limited, as 47 48 62 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 The GRI is an The Global Reporting Initiative international standard for sustainability reporting, whereby an organization publicly the UAE) published sustainability reports in accordance with the GRI guidelines, compared to communicates its ESG performance. GRI seeks to make sustainability reporting GRI Sustainability Reports in MENA by all organizations Countries 2007 2008 2009 as routine as, and comparable to, UAE 2 2 6 financial reporting. Saudi Arabia 0 1 2 Source: http:// Egypt 0 1 1 globalreporting.org Jordan 1 1 1 Regional Total: 3 5 10 Other Developing Economies Brazil 34 69 67 China 8 16 52 India 6 20 20 Source: Number of published reports – GRI report list, Globalreporting.org The Corporate Register The Corporate Register is a primary reference point for Corporate In order to expand the review of companies in the region that are reporting on ESG issues, the Responsibility (CR) reports and resources worldwide, provided entirely online. The site contains more than 28,000 reports from nearly 7,000 different companies from around the world. Source: www. corporateregister.com 63 United Nations Global Compact There are 148 active signatories to the UN Global Compact from the MENA region, eight of which below, especially considering that more than 80 percent of the participating MENA companies are Participating Companies in UN Global Compact Country Number of Participants Tunisia 34 UAE 33 Egypt 32 Jordan 23 Morocco 12 Kuwait 5 Qatar 4 Lebanon 4 Oman 1 Regional Total: 148 Other Developing Economies Brazil 186 China 102 India 96 Source: unglobalcompact.org Egyptian Corporate Responsibility Index (S&P EGX ESG Index) The Egyptian Institute of Directors (EIoD), in close consultation with Standard & Poor’s and Evaluation for this index was based on data that companies make available to the public, whether on their websites, annual reports, press releases, or the information available at the The base of general information covered governance issues including ownership structures, cross-ownership, shareholder rights, protection of minority shareholders, board composition and 64 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 protection of employees and customers and membership in international initiatives such as Once data was collected, ESG scores for the top 100 companies were calculated and 30 interest from companies that want to learn how to improve their scoring through enhanced Source: http://www.mi.gov.eg/en/EconomicIndicators/Pages/esgindex.aspx As evidenced by these assessments, the level of transparency and disclosure in relation to ESG the speed at which they grow will depend on a combination of government and securities market pressure through increased disclosure requirements, investor pressure for increased transparency, Market Preparedness – Sustainability Reporting Market Preparedness Investment and ESG Regulations ESG Disclosure and country Performance Governance Environment Social Investment Regulations Regulations Regulations Sustainability International Regulations and and and Reporting Agreements Performance Performance Performance 65 Adoption of International Voluntary SI Frameworks by Asset Managers/Owners There are a number of voluntary SI frameworks designed for use by the banking and investment industries, such as the UN Environment Programme Finance Initiative, UN Principles for The UNEP FI was United Nations Environment Programme Finance Initiative launched in 1991 when a small group of commercial banks, including Deutsche Bank, HSBC Holdings, Natwest, Royal Bank of two (1 percent) are from the region. Canada, and Westpac, joined forces with Signatories to the UNEP Finance Initiative UNEP to catalyze the banking industry’s Countries Number of Participants awareness of the environmental agenda. Morocco 1 Oman 1 Source: http://unepfi.org Regional Total: 2 Other Developing Economies In early 2005 the Brazil 3 UN Secretary- China 4 General invited a group of the world’s India 2 largest institutional investors to join a Source: UNEP Finance initiative process to develop the Principles for United Nations Principles for Responsible Investment Responsible Investment (PRI). Individuals representing 20 institutional investors from 12 countries There are currently 805 signatories globally to the UNPRI, including 210 asset managers, 437 agreed to participate in the Investor Group and accept ownership of the Principles. Source: http://unpri.org 66 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 UN PRI Signatories Asset Investment Professional Service Country Total Managers Managers Partner UAE 1 0 1 2 Other Developing Economies Brazil 17 18 9 44 India 0 1 3 4 Source: UN PRI The Equator Principles The Equator Principles were developed by private sector banks— led by Citigroup, ABN AMRO, Barclays and WestLB—and Equator Principles Signatories were launched in June 2003. The banks Countries Number of Participants chose to model the Egypt 1 Equator Principles on the environmental Morocco 1 standards of the World Oman 1 Bank and the social policies of IFC. Total: 3 Source: www.equator-principles.com Source: equator-principles. com Market Preparedness – International Agreements Market Preparedness Investment and ESG Regulations ESG Disclosure and country Performance Governance Environment Social Investment Regulations Regulations Regulations Sustainability International Regulations and and and Reporting Agreements Performance Performance Performance 67 ESG Disclosure Analysis Despite the very low number of corporate ESG reporters, and the low number of signatories to Analytical Inputs into “Market Preparedness for SI” Model—ESG Disclosure Weighted Weighted Average for Average for Countries / Total ESG “Sustainability “Voluntary Regions Disclosure Score Reporting” Frameworks” Score Score Oman 1.7% 35.7% 18.7% Morocco 1.1% 15.4% 8.2% Saudi Arabia 0% 0% 5.3% Egypt 3.3% 3.5% 3.4% UAE 6.9% 0.1% 3.5% Tunisia 2.5% 0% 1.3% Kuwait 0% 0% 0% Lebanon 0% 0% 0% Jordan 0.4% 0% 0.2% Bahrain 0% 0% 0% Qatar 0% 0% 0% Source: Research and analysis conducted for this report 68 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Market Preparedness – ESG Disclosure Market Preparedness Investment and ESG Regulations ESG Disclosure and country Performance Governance Environment Social Investment Regulations Regulations Regulations Sustainability International Regulations and and and Reporting Performance Performance Performance Agreements ESG Disclosure Score 20% 18.70% 18% 16% 14% 12% 10% 8.20% 8% 5.30% 6% 3.50% 3.40% 4% 2% 1.30% 0.20% 0% 0% 0% 0% 0% 69 Supporting Infrastructure In recent years, a number of SI-related networks, associations, research institutions, initiatives, and Infrastructure: Non-Financial Information Disclosure Scope Global Reporting Initiative (GRI) Global United Nations Global Compact (UNGC) Global Shari’ah and SI Indices Scope Dow Jones Islamic Market Sustainability Index (companies must be components of both the Dow Jones Islamic Global Market Index and the Dow Jones Sustainability World Index) Dow Jones Islamic Market MENA (DJIM MENA) Index MENA Dow Jones Islamic Market GCC (DJIM GCC) Index GCC The Egyptian Corporate Responsibility (S&P/EGX ESG) Index Egypt SI-related National Rankings Scope The Arab Responsible Competitiveness Index (ARCI) MENA The Saudi Responsible Competitiveness Index (Saudi RCI) Saudi Arabia Responsible Competitiveness Research Responsible Competitiveness comprises the leadership policies and practices that build sustainable provide a systematic assessment of regional progress toward sustainable economies and recommendations, outlining how the Arab region can convert societies’ existing and emerging environmental and social concerns into the trade and economic competitiveness policies of 70 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Responsible Competitiveness in Saudi Arabia 2009 report: The Saudi Arabian General Investment Authority (SAGIA), working closely with a range of experts, has embarked on a coordinated program that is working to build responsible competitiveness in start-up 49 Independent Research Institutions Scope Hawkamah Institute for Corporate Governance MENA The Centre for International Private Enterprise (CIPE) MENA The Egyptian Institute of Directors (EIoD) MENA Institut Arabe des Chefs d’Entreprise (IACE) MENA Al Urdun Al Jadid Research Center (UJRC) MENA Arab Forum for Environment and Development (AFED) MENA Sustainability Excellence MENA Networks and Associations Scope The Arab Sustainability Leadership Group (ASLG) MENA The Abu Dhabi Sustainability Group (ADSG) UAE The Egyptian Junior Business Association (EJB) Egypt Development Finance Institutions Scope IFC Global 49 71 Analysis and Summary of Key Observations The elements summarized in this chapter correspond to the “Market Preparedness” component of SI Framework Market Preparedness Investment and ESG Regulations ESG Disclosure and country Performance Governance Environment Social Investment Regulations Regulations Regulations Sustainability International Regulations and and and Reporting Agreements Performance Performance Performance Actual and Potential Market for Sustainable Investment Market Interest Total Assets Currently Invested in SI Shari'ah Sovereign wealth Private Equity Foreign Investment Compliant Funds Funds The analysis indicates that Oman has the highest Market Preparedness score of the markets in the at similar points of development and that it may be possible to undertake regional or sub-regional 72 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Total Market Preparedness for MENA Countries Country Total Market Preparedness for SI Score (out of 100%) Oman 51.6 Saudi Arabia 38.7 Kuwait 39.3 UAE 47.8 Morocco 37.4 Egypt 37.1 Bahrain 42.7 Qatar 43.3 Tunisia 41.2 Jordan 40.1 Lebanon 34.7 Source: Research and analysis conducted for this report Further analysis and summary of key observations relating to MENA Market Preparedness for SI yields the following: region is becoming easier, and there is regional comprehension about the importance of better this time for the environmental and social elements of ESG, could be the next step in this International guidelines for disclosure of ESG information are starting to be adopted by Sustainability Leadership Group and Abu Dhabi Sustainability Group—both of which seek to introduce sustainability practices in the region and require participants to produce standalone sustainable development is now being incorporated into some national strategic plans, it is at Addressing these gaps will be important to bolster MENA’s sustainability credentials and market support to, and use of, regional sustainability networks, research institutions, associations, and Recommendations arising from these observations, in combination with the observations from 73 Market Interest in SI is assessed by an analysis of current SI activity by different investment Market Interest Framework Market Interest Total Assets Currently Invested in SI Shari'ah Sovereign wealth Private Equity Foreign Investment Compliant Funds Funds The total estimated percentage of assets under management (AUM) in MENA that fall under Shari’ah compliant investments are not included in the MENA SI There is varying but growing SI activity and awareness across all four of the investment methods 5051525354 Total AUMs Related to Marketa % of Total AUM Sustainability 1 EU50 $3,700 trillion 16.97% 2 Brazil51 $70 billion 12.00% 3 USA52 $2,700 trillion 11.02% 4 MENA $54.25 billion 2.13% 5 China53 $4.12 billion 1.00% MENA without Shari’ah- 6 $17.1 billion 0.67% compliant investments 7 India54 $1.1 billion 0.67% Source: Research and analysis conducted for this report 50 Eurosif: 2008 European SRI study 51 52 Social Investment Forum 2007 53 54 74 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Of these opportunities, the most widely practiced SI activity in the region is Shari’ah-compliant widely adopted in terms of the number of engaged investors, and is prevalent across the MENA Shari’ah compliant investors may not necessarily take an interest in broader SI, their commitment to Islamic ideals and general interest in betterment of society has the potential to translate into perspective and explicitly incorporate sustainable development into those strategies, many of the to expand international investments, they have encountered some concerns in target markets about management by portfolio companies, and emerging clean technology investment opportunities in which managed 20 percent of the region’s PE funds in 2008,55 has taken a leadership role through the development of its Ethical Framework for Investments and other SI-related activity and governance 55 75 Shari’ah-Compliant Investing Market Interest – Shari’ah Compliant Funds Market Interest Total Assets Currently Invested in SI Shari'ah Sovereign wealth Private Equity Foreign Investment Compliant Funds Funds the most widely known and understood funds in the market, and the most widely adopted in terms 56 which accounted for 70 percent of region’s total AUM, growth rates indicate Shari’ah-compliant funds show promise as an up-and- platform for advancing investor interest in sustainability and SI that extends beyond negative screens to assess the environmental, social, governance, and broader economic performance of investors will be interested in further exploring SI as they learn of the similarities with Shari’ah- Bearing in mind such sensitivities, there are potential pathways for building upon Shari’ah- Incorporating greater ESG considerations into the rules of existing Shari’ah-compliant DinarStandard and Dar Al Istithmar issued in 2010, this trend is already emerging: 55 percent Using awareness of Shari’ah-compliant investing as a pathway for creating interest in separate 56 76 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Sovereign Wealth Funds Market Interest – Sovereign Wealth Funds Market Interest Total Assets Currently Invested in SI Shari'ah Sovereign wealth Private Equity Foreign Investment Compliant Funds Funds 57 state-owned investment funds 58 The Abu Dhabi Investment Authority (ADIA) is the 59 Number and Value of Sovereign Wealth Funds by Region 45% 41% 40% 34% 35% 29% 30% 28% 25% 20% 19% 15% 12% 10% 9% 10% 7% 5% 5% 2% 2% 2% 0% 0% Asia MENA Latin Europe North Africa Astralasia America & America Caribbean Proportion of SWFs Proportion of Aggregate AUM Source: Preqin Special Report: Sovereign Wealth Funds, May, 2010 57 58 Global Investment House, 2010, MENA Private Equity Report 59 77 World’s Ten Highest Value Sovereign Wealth Funds (USD Billions AUM) Rank Country Sovereign Wealth Fund (SWF) Value 1 United Arab Abu Dhabi Investment Authority 627 Emirates 2 Norway Government Pension Fund – Global 443 3 Saudi Arabia SAMA Foreign Holdings 415 4 China SAFE Investment Company 347.1 5 China China Investment Corporation 332.4 6 Singapore Government of Singapore Investment 247.5 Corporation 7 China (Hong Hong Kong Monetary Authority Investment 227.6 Kong) Portfolio 8 Kuwait Kuwait Investment Authority 202.8 9 China National Social Security Fund 146.5 10 Russia National Welfare Fund 142.5 Source: Sovereign Wealth Fund Institute, 2010 Regional Sovereign Wealth Funds Value Country SWF ($ Bn) Abu Dhabi Investment Authority 627 Investment Corporation of Dubai 19.6 Mubadala Development Company 24 United Arab Emirates Investment Authority Not disclosed Emirates Abu Dhabi Investment Council Not disclosed International Petroleum Investment Company 14 Ras Al Khaimah Investment Authority 1.2 78 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Regional Sovereign Wealth Funds Value Country SWF ($ Bn) SAMA Foreign Holdings 415 Saudi Arabia Public Investment Fund 5.3 Kuwait Kuwait Investment Authority 202.8 Qatar Qatar Investment Authority 65 Bahrain Mumtalakat Holding Company 9.1 State General Reserve Fund 8.2 Oman Oman Investment Fund Not disclosed Sub-Total 1391.2 Total Regional SWF AUM Estimates* 1544.2 Source: Sovereign Wealth Fund Institute, 2010 *Global Investment House, 2010, MENA Private Equity. For identifying SI, either of the following criteria was accepted: Increasing amounts of thematic investment in sectors relating to sustainability, including Trends in governance, risk management, and transparency/disclosure by regional SWFs Kuwait Investment Authority, Qatar Investment Authority, and Bahrain’s Future Generations 79 reports incorporate previously undisclosed information and included a basic report by ADIA, and 60 These disclosures also set the stage for inclusion disclosures could include current environmental, social and governance screening, as well as MENA SWF Transparency Ratings Transparency Rating Country SWF (1=low; 10=high) Abu Dhabi Investment Authority 3 Investment Corporation of Dubai 4 Mubadala Development Company 10 United Arab Emirates Investment Authority n/a Emirates Abu Dhabi Investment Council 2 International Petroleum Investment n/a Company Ras Al Khaimah Investment Authority 3 SAMA Foreign Holdings 2 Saudi Arabia Public Investment Fund 3 Kuwait Kuwait Investment Authority 6 Qatar Qatar Investment Authority 5 Bahrain Mumtalakat Holding Company 8 State General Reserve Fund 1 Oman Oman Investment Fund n/a Source: Sovereign Wealth Fund Institute 2010 60 80 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Alignment with national sustainable development strategies cases, these plans are economic strategies, but more recently these are being expanded into broader strategies that incorporate environmental or social elements such as low-carbon competitiveness, as national strategies increasingly incorporate ESG issues, so too do the investments undertaken environmental and social gains for their societies may choose to enhance their ESG screening to serve interest, such as Bahrain’s Mumtalakat Holding Company, which claims to support the integration of corporate responsibility into its core business (though the extent to which this may impact Additionally, the Qatar Investment Authority claims that it takes ethical considerations seriously when selecting investment opportunities (although, again, Thematic investments in sustainability Further to the evolution of national strategies toward sustainable development, several MENA percent stake Mubadala acquired in General Electric (GE) due to interest in GE’s Ecomagination calculation of the percentage of AUM that classify as SI, accounts for only the AUM disclosed 81 least $710million in other clean technology via its stake in Azaliyah, a water services company made were Mubadala’s investments, and an International Petroleum Investment Company (IPIC) invested in a company called EDP (formerly known as “Electricidade de Portugal”) as per the Conservative Estimate of Current MENA SWF Sustainable Investments Based on Sustainability-Oriented Sectors Sustainability-Oriented Sector Value Country SWF Focus ($ Bn) Renewable energy sector 1.69 UAE Mubadala Other clean technology * 0.71 Healthcare 0.18 Total Conservative SI Estimate 2.58 Billion *Azaliyah, a wastewater management company 49% owned by Mubadala Source: Mubadala Annual Report. As noted, the current SI as calculated in this report does not take into account the commitments Estimate of Additionally Committed Sustainability-Themed Investments by SWFs Portfolio Company / Country SWF Value ($ Bn) Sustainable Fund UAE Mubadala Masdar 15 Bahrain Mumtalakat Edamah 2.65 Qatar Investment Cleantech Joint Fund with Qatar 0.237 Authority Carbon Trust Total Estimated Additionally Committed SI 17.89 Billion* Source: Publicly available information and news releases 82 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 sustainability of their respective sectors, and (2) the availability of sustainability reporting for the Of the 140 publicly listed companies reviewed, 22 met the above criteria,61 and 17 of those were within Mubadala’s portfolio, including six healthcare companies, four education companies and Case Study MASDAR, The Abu Dhabi Future Energy Company Masdar (the Abu Dhabi Future Energy Company) is a multi-faceted company advancing the development, commercialization and deployment of renewable energy solutions and Masdar consists of three business units and one investment arm: Masdar City is a clean technology cluster being developed on the outskirts of Abu Dhabi venture capital investment vehicles focused on building portfolios of direct investments In addition, Masdar is associated with the Masdar Institute of Science and Technology, MASDAR Clean Tech Fund the capital into two separate areas: $60 million is earmarked for leading funds focusing on cutting-edge clean technology, while the remaining $190 million is reserved for direct MASDAR-GE Cooperation Other Clean Tech Ventures forms of renewable energy and clean tech, including but not limited to: 61 83 Two photovoltaic (PV) panel manufacturing plants in Erfurt, Germany, constructed at a of British Petroleum, PLC, to develop an integrated natural gas-fed, hydrogen-fuelled 84 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Many of the region’sSWFs have a significant percentage of ESG issues results in reduced risk and accelerated innovation within portfolio companies, they their holdings as majority stakes with long-term In addition to the four Mubadala portfolio companies adopting public sustainability reporting, investment horizons, offering greater ability to influence investments. For Conservative Estimate of Current MENA SWF Sustainable Investments Based example, Abu Dhabi’s on Sustainability Reporting by Portfolio Companies Mubadala has at least a 50 percent Country SWF Sustainability Reporting by Value* stake in 36 of 69 Portfolio Companies ($ Bn) disclosed portfolio Dolphin Energy (51%) 2.41 companies, while Mumtalakat Holding Aldar Properties (18.9%) 0.86 Company in Bahrain Mubadala AMD (19.3%) 0.18 has a majority stake UAE in 42.9 percent of its PSN Emirates (51%) Unknown disclosed investment portfolio. Investment Corporation HSBC Middle East Finance Unknown of Dubai (20%) For the purposes IPIC EDP (4%) 2.22 of this study, SWF Total Conservative SI Estimate 5.66 Billion portfolio companies who practiced *The SWF’s ownership stake of the portfolio company was considered, not the entire value of the portfolio company sustainability Source: Publicly available information in annual reports reporting were considered as SI for the SWF, regardless of the sector or activity of that portfolio company. The relevant value of portfolio companies issuing sustainability reports was included in the 85 SUMMARY: Conservative estimate of current total MENA SWF sustainable investments Criteria Used for Identifying SI Total SI Estimate Sustainability-oriented industry 2.6 Bn Sustainability reporting by portfolio companies 5.66 Bn Total SWFs’ AUM under SI 8.25 Bn Total % of SI by SWFs 0.54% Source: Research and analysis conducted for this report 86 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Private Equity Market Interest – Private Equity Market Interest Total Assets Currently Invested in SI Shari'ah Sovereign wealth Private Equity Foreign Investment Compliant Funds Funds Private equity is playing a notable role in advancing sustainability and SI in the region, particularly 62 although this includes 63 64 study, SI among MENA PE was assessed by reviewing the disclosed practices and portfolios of three years65 62 63 64 65 87 The 14 Largest PE Firms in MENA Global Top 300 PE Private Equity Firm Country Firm ranking* Abraaj Capital UAE 50 Investcorp Bahrain 57 Arcapita Bahrain 76 Citadel Capital Egypt 92 Global Investment House Kuwait 148 SwiCorp Saudi Arabia 205 EFG-Hermes Private Equity Egypt 284 Abu Dhabi Investment Company UAE - Amwal AlKhaleej Saudi Arabia - Foursan Jordan - ADCB-MCQ UAE - Gulf Capital UAE - EMP Bahrain - Boubyan Kuwait - *Source: Private Equity International Magazine’s Proprietary Rankings of the largest 300 PE Firms in the World, 2010 Clean technology-designated funds or investments (to include PE cleantech funds, other than From an SI perspective, the most important aspect of PE investment is the extent to which 88 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 predominantly meant as a tool for portfolio company oversight and guidance, it also was designed Estimated PE AUMs that Involve Independent Integration of ESG Issues into Investment Screening PE Funds Total Independent Firm Fund Raised ($ Projected Sustainability Fund Size ($ Screen Millions)66 Millions) Employed Ethical Abraaj Framework for All Abraaj funds 6,600 6,600 Capital Investments (EFI) Total MENA PE SI using in-house ESG screens 6.6 Bn *Only ASAS was counted as independent sustainability screened fund for Abraaj capital, as it was the only fund that indicated making a screening process. Source: Abraaj Capital Annual Report such as OPIC that have ESG policies an example, in 2010, $250 million, and will invest in sectors driven by consumer demand such as consumer goods, retail, 66 66 89 Estimated PE AUMs that use Partner-Driven ESG Screens in Investment Screening Sustainability Screen Employed Funds Total Projected PE Firm Fund Raised ($ Fund Size Millions)67 ($ Mn) World OPIC Bank / IFC Partnered Partnered Abraaj Riyada Enterprise Development Growth Capital 150 500 Capital Fund Citadel Capital Joint Investment Fund 500 500 Citadel Meitito* 20 260 Capital 120 263 Citadel Cap Fund 25 500 EFG EFG-Hermes 120 120 Hermes SwiCorp Swicorp Intaj Capital LP 200 250 Foursan Foursan Capital Partners I 100 200 Group Catalyst Catalyst PE Fund I Limited 50 100 Argan Argan Infrastructure Fund 269.8 269.8 Belton Belton Midcap Fund - Egypt 25 200 Sphinx Sphinx Turnaround Fund 20 100 Capital Capital North Africa Private Equity Fund 6.7 53.9 Invest Tuninvest Maghreb Private Equity Fund II 160.15 160.15 Accelerator Accelerator Technology and Innovation Capital Technology 25 75 Partners Holdings KIPCO KIPCO Opportunity Fund 150 1000 Total MENA PE SI using partner-driven ESG screens 1.94 Bn *Meitito is a wastewater treatment company Funds Raised and Total Projected Fund Size Source: Publically available information, including funds’ websites. Numbers used represent IFC Partner Source: IFC Website 67 OPIC Partner Source: OPIC Website 90 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 value gains may lead to the adoption of sustainability management across a growing number of As awareness of sustainability trends grow in the MENA region, so too should widespread that are already pressing in the short-term, such as water management or energy infrastructure issues such as low-carbon competitiveness and the transition to renewable energy are also on the PE Cleantech Investments in the MENA Region Funds Raised Fund Manager Fund $ Millions EFG-Hermes InfraMed 303 Masdar Venture Capital Masdar Clean Tech Fund 250 Masdar Venture Capital DB Masdar Clean Tech Fund 265 Catalyst Private Equity Fund I Catalyst Private Equity 50 Limited Total Private Equity Cleantech Investments Found 868 Source: Publicly available information including funds’ websites, news releases, etc. 91 public securities markets 68 69 70 Although survey results may not match actual performance, these investments in the public market are likely to be direct and not through any form of sustainability- Overall Calculation of Percentage of PE AUMs Qualifying as SI To calculate the current total PE SI AUMs, the SI AUMs for each of these four areas of PE SI activity If Shari’ah-compliant investments are excluded from the SI calculations, the amount of PE SI will 68 69 70 71 92 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Total Conservative PE SI in the MENA Region Total SI Dimensions of PE Number Projected Funds Raised of Funds Funds Size ($ Millions) ($ Millions) Independent Sustainability Screen 7 6,600 6,600 Employe Sustainability Screen Employed by Partnered World Bank/IFC and OPIC 16 4,551.90 1,942 Projects Clean Technology Designated Funds 4 2,139.50 868 Shari’ah Compliant Funds 2 350 350 Total SI invested in MENA* 9,560 Total SI invested in MENA via PE accounting for SWF 7,714 investments % of PE Investments that are SI 43.26% * Catalyst fund and Abraaj Capital Fund Riyada were deducted for not double counting since catalyst is cleantech and IFC partnered fund and Abraaj Capital Fund, Riyada is independent screened and also OPIC partnered fund. Source: Research and analysis conducted for this report 93 Foreign Investment Market Interest – Foreign Investment Market Interest Total Assets Currently Invested in SI Shari'ah Sovereign wealth Private Equity Foreign Investment Compliant Funds Funds 72 Total IFC Investments in MENA (Totaling $ 1.19 Bn) 500 449.5 450 400 Value in USD Mn 350 300 259.1 250 200 156.02 150 82 79 100 66.1 51.17 50 25.15 14.5 2 2 0 72 94 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 country or sector, depending on the extent to which those companies also may communicate 73 Another example is the Netherlands-based ABP Stitchting 74 Foreign SWF Investments in MENA 157.9 160 140 120 Value in USD Mn 100 80 54.6 60 41.72 40 32 20 8 1 0 Egypt Morocco* UAE** Total Value of Investments Number of Investments Currently, there is more than $2 trillion dollars in sustainability-screened funds invested in global funds to be channelled into the MENA region, the funds have a limited interest due to a) minimal transparency in the region in terms of sustainability performance disclosure by companies, b) a lack of interest and development of sustainability practices in the region, and c) national economies still immediate surge of sustainability-screened foreign investment in securities markets seems unlikely 73 74 95 Analysis and Summary of Key Observations The MENA SI activities summarized in this chapter correspond to the “Market Interest” component SI Framework Market Preparedness Investment and ESG Regulations ESG Disclosure and country Performance Governance Environment Social Investment Regulations Regulations Regulations Sustainability International Regulations and and and Reporting Performance Performance Performance Agreements Actual and Potential Market for Sustainable Investment Market Interest Total Assets Currently Invested in SI Shari'ah Sovereign wealth Private Equity Foreign Investment Compliant Funds Funds a conservative estimate based solely on disclosed data, and even excludes publicly committed If Shari’ah-compliant investments are excluded from the SI calculation, the percentage of MENA AUMs which incorporate SI will be 96 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Summary of Sustainable Investments in MENA by Country % of Total SI without % of Total SI Country Regional Shari’ah Compliant Regional ($ Billions) SI Investments ($ Billions) SI Saudi 23.012 42.4 0.213 1.24 Arabia UAE 20.495 37.8 14.113 82.4 Oman 4.014 7.4 0.014 0.08 Egypt 2.015 3.7 1.523 8.89 Kuwait 1.403 2.6 0.203 1.19 Bahrain 1.202 2.2 0.002 0.01 Qatar 0.757 1.4 0.002 0.01 Jordan 0.601 1.1 0.400 2.34 Morocco 0.434 0.8 0.434 2.53 Tunisia 0.195 0.4 0.195 1.14 Lebanon 0.125 0.2 0.025 0.15 Source: Research and analysis conducted for this report An analysis and summary of key observations relating to these MENA SI activities yields the following: including Shari’ah-compliant investment Shari’ah-compliant investment funds are similar to “negative-screen” SI funds in that their current scale of awareness and uptake represents a mass platform for creating greater awareness of SI. Elsewhere in the world, negative-screen funds typically precede positively- screened SI funds that subsequently adopt aggressive criteria for environmental, social and pattern, their commitment to Islamic ideals and general interest in betterment of society has the SI uptake in MENA is likely to take some time, although at dramatically compacted timelines when compared to Europe and North America. In addition to the currently low percentage of MENA SI AUM versus total AUM, there are other factors in the market that will affect 97 for take-up of SI in the region will be accelerated compared to the timeline in North America PE SI initiatives will have a disproportionate impact on Market Interest, even as MENA and reporting by portfolio companies, key PE stakeholders (including some of the region’s SWFs represent the greatest MENA SI opportunity on sustainability (including emerging theme-based investments in sustainability and clean markets will be less than the general increase in demand for SI across the MENA business Some foreign-based guidelines Principles, and other international guidelines as outlined elsewhere in this report will provide some support for the adoption of SI in that they offer a means of piloting SI-screening with The recommendations arising from these observations, in combination with the observations from 98 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 for Development of the Sustain- able Investment Market in MENA This report explores two key axes for assessing the challenges and opportunities for the development of the SI market in MENA: The state of Market Preparedness and the level of Market Interest as Based on the application of the analysis framework, the scores on a market-by-market basis break down as follows: Market Interest Market GDP* Market Interest Score without Country Preparedness ($ Billions) Score (%) Shari’ah-Compliant Score (%) Investments (%) Bahrain 28.124 42.67 3.3 0.01 Egypt 469.663 37.1 2.30 1.71 Jordan 33.658 40.06 1.90 1.25 Kuwait 135.429 39.34 0.40 0.06 Lebanon 54.874 34.67 0.60 0.13 Morocco 145.969 37.41 0.70 0.70 Oman 74.431 51.56 14.30 0.05 Qatar 102.147 43.34 0.40 0.00 Saudi 592.586 38.67 2.90 0.03 Arabia Tunisia 86.086 41.09 1.50 1.50 UAE 179.321 47.83 2.50 1.70 *Based on PPP Source: Research and analysis conducted for this report 99 Combining the Market Preparedness and Market Interest scores results in the following table Regional Analysis (Bubble size corresponding to PPP adjusted GDP in Billion International Dollar) Bahrain Kuwait Oman Qatar Saudi Arabia UAE Jordan Lebanon Egypt Morocco Tunisia Market Interest -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% Market Interest engagement with regional stakeholders consistently emphasizes that the starting point for catalyzing and investing, which is not generally associated with sustainability, there is limited awareness of investments is as follows: 100 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Regional Analysis without Shari’ah Compliant Investments included as SI (Bubble size corresponding to PPP adjusted GDP in Billion International Dollar) Bahrain Kuwait Oman Qatar Saudi Arabia UAE Jordan Lebanon Egypt Morocco Tunisia Market Interest -0.02% 0.00% 0.02% 0.04% 0.06% 0.08% 0.10% 0.12% 0.14% 0.16% Market Interest Nevertheless, the broad take-up of Shari’ah-compliant banking and investing represents a potential for both the private sector and the public sector in the region which, if appreciated, would be the limited SI activity by Shari’ah investors outside of Shari’ah considerations, there are important As Market Interest in SI accelerates in the forms of the adoption of sustainability management, reporting, and SI by market leaders, the path will be cleared for the development or enhancement of relevant government policies, regulations, incentives, institutions, tools and awards to support the by leadership companies, but such government interventions are most likely to be implemented only The combination of enhanced awareness, leadership of important regional stakeholders, and ensuing advancements in the regulatory environment is likely to result in a robust SI market within 101 Key Challenges and Opportunities SUMMARY: The following table represents an abbreviated summary of the key observations captured in the Key Observations Challenge / Opportunity Create awareness of the case for sustainability for business Shari’ah-compliant investment funds are similar to “negative-screen” SI funds and their current scale of awareness and uptake represent a potential mass Private equity SI initiatives will have a disproportionate SI uptake in MENA is likely to take some time, although at dramatically compacted timelines Foreign SI investment in MENA is at very low levels, Ensure availability of corporate ESG data in the marketplace Align securities markets reform reforms and requirements, but this has not yet extended to national sustainability interests and disclosure Some foreign-based guidelines (such as GRI, UN Increase comfort and reduce Global Compact, UNPRI, and others) will provide hesitation of potential early adopters by utilizing well- established international There is a growing recognition of a need for action on Mobilize rapid and broad some pressing sustainability issues, even if the broader disclosure and action on high The MENA market structure, particularly GCC, has Create infrastructure that supports sustainability in Increase the percentage of 102 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Recommendations SUMMARY: Challenge / Opportunity Recommended Action Market Preparedness Create awareness of the case for sustainability for business Ensure availability of corporate Promote widespread Sustainability Reporting: ESG data in the marketplace for Incentivize disclosure through the launch of Sustainability Indices at a market interest, level and maturity of public sustainability disclosure and Align securities markets reform Expand governance reform and criteria on securities markets to include management to national sustainability interests and disclosure Increase comfort and reduce hesitation of potential early adopters by utilizing well- established international Mobilize rapid and broad disclosure and action on high Create infrastructure that Promote investment and entrepreneurship in service areas critical to a more sustainable supports sustainability in Market Interest Increase the percentage of Encourage institutional fund managers to integrate sustainability into their screening 103 Recommendations—Details Each of the above recommendations can be elaborated upon as follows: Market Preparedness convert into public sustainability commitments. Recommended Actions: – Encourage corporate and government membership in learning and experience-sharing forums that simultaneously require commitments, such as the Arab Sustainability This sub-committee also can seek to engage international stakeholders with longer-term – Launch region-wide training on institutional investor business-case for sustainability screening, undertaken independently or in collaboration with above networks such as the – Encourage each MENA government to conduct review and enhance integration of – Launch an SI Magazine that captures leadership practices and commitments, and reports Measure: Increased number and intensity of sustainability commitments by business and investors. Recommended Actions: Promote and incentivize widespread sustainability reporting through the launch of – Sustainability indices based on public sustainability performance disclosure require sustainability reporting by publicly-listed companies who wish to participate in and securities market tends to catalyze widespread sustainability reporting without actually and reputation-related competitiveness is often most prevalent at the national level (and can even indirectly promote sustainability reporting of large non-listed family-owned the consistency of methodology, these can be aggregated into a regional Index to generate Promote and incentivize widespread sustainability reporting through the creation of prestigious 104 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 – that regional-level as well as national-level awards be developed, with appropriate high- Measure interests. Recommended Actions: Expand governance reform and criteria on securities markets to include management and – Many securities markets across the MENA region have demonstrated considerable progress in enhancing governance criteria and disclosure requirements for publicly listed can be complemented by reasonable additional reforms that need not place unmanageable governance element by enhancing the focus on the environmental and social dimensions of ESG, essentially adopting a range of guidance on sustainability management and national level sustainability forums and networks so as to promote the widest possible Measure: Percentage of securities markets requiring established basket of ESG disclosure well-established international guidelines. Recommended Actions: Leverage international guidelines and tools to accelerate speed and ease of take-up of – There are numerous international guidelines and tools that provide a sound level of – The efforts of leadership companies and governments adopting these guidelines should be 105 Measure: Number of regional signatories or adopters of GRI, Equator Principles, CDP, CDP Challenge: Mobilize rapid and broad disclosure and action on high-priority sustainability issues. Recommended Actions: – may be most easily encouraged by placing emphasis on those sustainability issues scope and complexity of sustainability management, may serve as a manageable bridge to – that aim to tackle the highest priority regional sustainability issues in a manner that could by national governments or business associations—or they could be led by regional tools can be adopted to facilitate the process (such as CDP for GHG emissions and CDP Measure: Number and percentage of publicly-listed companies, private companies, and other Recommended Actions: Promote investment and entrepreneurialism in service areas critical to a more sustainable – This recommendation derives from the combined regional challenges of a lack of supporting infrastructure for a sustainability-oriented economy (such as recycling facilities, green investment opportunities to address these market gaps, which increase SI opportunities and services come online, governments can reinforce the use of such services and infrastructure through legislative requirements, which, in turn, would promote further industry oriented industries exist, governments could use long-term legislation to create market attractiveness for potential sustainability-related investments Measure: 106 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Market Interest Recommended Actions: Encourage institutional fund managers to integrate sustainability into their screening criteria – The emphasis of this recommendation is that institutional fund managers and fund marketers need not be sold on the marketability of sustainability-screened investing before of sustainability management, performance, and reporting in the marketplace, regardless programs targeting institutional investors and the participation of key companies in regional leadership networks and sub-committees both aim to provide learning platforms – sustainability-screened investment funds, they may over time promote their sustainability- market awareness evolve further, these institutions may wish to begin launching explicit – Measure: Percentage of regional AUM using sustainability screens, including measured 107 Appendix 1-Explanation of the Methodology The methodologies used for the research and analysis of this report’s main sections are summarized MARKET PREPAREDNESS ESG and Investment Regulations and Country Performance The assessment of ESG and investment regulatory frameworks in each market allowed for some report were: Investment laws and regulations: – The eStandards Forum75 index, which assesses the investment laws and regulations of Governance laws and regulations: – Director Liability Index and the Extent of Disclosure Index, two component indices of 76 – Corporate governance country performance: – – – Environmental laws and regulations: – – Environmental country performance: – 77 Social laws and regulations: – Gender Empowerment Measures index from the UNDP Human Development Report, – – Doing Business Social country performance: – 75 76 77 108 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 – – Human Rights Ranking by Carleton University’s Country Indicators for Foreign Policy ESG Disclosure The assessment of ESG disclosure was based on two factors: Register:78 The score for this factor was generated by assessing the total number of publicly Voluntary international agreements: The score for this factor was an averaged ratio of the following: – Total assets of signatories to the Equator Principles (EPs) in each country to the total assets – Total assets of banks that are signatories to the UNEP Finance Initiative (UNEP FI) in each – Total assets under management (AUM) managed by signatories to the UN PRI to the total 78 109 Weight Allocations Across the Market Preparedness Dimension Market Preparedness Investment and ESG Regulations ESG Disclosure and country Performance (66.7%) (33.3%) Governance Environment Social International Investment Regulations Regulations Regulations Sustainability Agreements Regulations and and and Reporting (50%) (25%) Performance Performance Performance (50%) (25%) (25%) (25%) MARKET INTEREST Assets currently invested using forms of SI Market Interest was assessed based on the percentage of total assets under management estimated based sovereign wealth funds, MENA investment funds (which includes, but is not limited to, covered all AUM within these four categories in all 11 markets studied, to the extent possible based Weight Allocations Across The Market Interest Dimension Market Interest % of Total Assets Currently Invested in SI (100%) Shari'ah Private Equity Foreign Investment Compliant Funds Funds 110 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Appendix 2-In-depth review of 11 key markets 111 Bahrain 112 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Bahrain 113 Bahrain 114 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Egypt 115 Egypt 116 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Egypt 117 Jordan 118 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Jordan 119 Jordan 120 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Kuwait 121 Kuwait 122 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Kuwait 123 Lebanon 124 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Lebanon 125 Lebanon 126 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Morocco 127 Morocco 128 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Morocco 129 Oman 130 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Oman 131 Oman 132 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Qatar 133 Qatar 134 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Qatar 135 Saudi Arabia 136 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Saudi Arabia 137 Saudi Arabia 138 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Tunisia 139 Tunisia 140 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Tunisia 141 United Arab Emirates 142 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 United Arab Emirates 143 United Arab Emirates 144 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Appendix 3 - Regional Supporting Infrastructure Supporting Infrastructure Despite the modest size of SI in the MENA region at the moment, and the relatively immature infrastructure to support SI overall, it is crucial to identify the supporting infrastructure that might Non-Financial Information Disclosure Global Reporting Initiative (GRI) Global Reporting Initiative (GRI) is a network-based organization that has pioneered the provides information on all the sustainability reports published by organizations, and it is considered 79 The United Nations Global Compact is an initiative developed by the UN to promote the adoption the UNGC is self-perpetuating, since businesses that participate in it commit to aligning their 80 Sustainability Indices – Regional Level Dow Jones Islamic Market Index (DJIM) 79 80 145 81 (2) Dow Jones Islamic Market GCC Index82 83 Sustainability Indices – National Level The Egyptian Corporate Responsibility Index (The S&P/EGX ESG Index) – Egypt84 the region to track the performance of companies listed on the Egyptian Stock Exchange that excel & Poor’s (S&P), the world’s leading index provider, the index comprises a unique and innovative The index also helps create a sustainable competitive business environment by enhancing the quality and level of disclosure to investors while promoting a culture of social responsibility among to disclose governance, social, and environmental practices, and to increase competitive advantage The Saudi Responsible Competitiveness Index (Saudi RCI) – Saudi Arabia The Saudi Responsible Competitiveness Index is a multi-year initiative by the Saudi Arabian program is to help companies in the Kingdom of Saudi Arabia allocate new areas of value creation, and provide support for the Saudi General Investment Authority’s aim to achieve its goal in making The Saudi RCI assesses the social, environmental, and economic performance of companies using a companies are rewarded with the prestigious King Khalid Responsible Competitiveness Award 81 82 83 84 146 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Independent Research Institutions – Regional Level 85 Hawkamah was created to bridge the governance gap by assisting countries and businesses in Hawkamah provides analysis, research, and technical assistance by commissioning regional IIF/ Hawkamah Report on Corporate Governance of GCC Countries individual country reports for Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab 86 The Centre for International Private Enterprise strengthens democracy around the globe through advocacy, business associations, corporate and democratic governance, access to information, CIPE’s work in the MENA region involves a broader cross-section of society in the process of involve supporting grassroots and other business associations through programs on anti-corruption support will render these organizations capable of representing the private sector by participating in 87 The Egyptian Institute of Directors (EIoD) is a professional and research center operating under corporate governance in the MENA region, and to do so in a manner that meets the best interests of (International Finance Corporation), Organization for Economic Cooperation and Development 88 ‘Code of Best Practice of Corporate Governance’ 85 86 87 88 147 89 conferences and workshops, and serves as a point of expertise and information exchange with other As part of the Fifth MENA Development Forum (MDF5)90, the center implemented a successful ‘Strengthening Responsible Corporate Citizenship in the Businesses of the MENA Region’. Two North African case studies for Egypt and Morocco were 91 business community, and media, and aims to promote sensible environmental policies and programs Publications by AFED include ‘Arab Environment: Climate Change’, and ‘Arab Environment: Future Challenges’ ‘Making a Transition to a Green Economy: Challenges and Opportunities’, and ‘AFED’S Corporate Environmental Responsibility (CER)’. Sustainability Excellence Sustainability Excellence is a consultancy based in the Arab region providing sustainability strategy, the ‘Responsible Competitiveness in the Arab World’ responsible competitiveness index that correlated responsible practices with the competitiveness of ‘Responsible Competitiveness in Jordan’, Networks and Associations – Regional Level The Arab Sustainability Leadership Group The Arab Sustainability Leadership Group (ASLG) is a Queen Rania Al Abdullah initiative, aiming with a commitment to achieving the highest levels of sustainability management, performance, delivered on their commitments to adopt sustainability management and reporting, highlighting 89 90 91 148 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 The Abu Dhabi Sustainability Group (ADSG) is a membership organization whose mission is to promote sustainability management in Abu Dhabi by providing learning and knowledge sharing commit to adopting best practices of sustainability management and reporting, and to participate 92 The association counts a network of 600 prominent members of young business executives and sustainable business environment through vision, hope, and enthusiasm to stand as one of Egypt’s The association established a taskforce on corporate governance to spread awareness and ‘Corporate Governance… The Future for Family Firms’ Development Finance Institutions IFC (International Finance Corporation)93 Among IFC’s efforts in the MENA region is the production of the ‘Corporate Governance Success Stories’ report, which presents an overview of companies in the region that have taken serious steps Egypt on free Investment zones where IFC continues to support the Egyptian government’s efforts and sustainable private sector, IFC delivers investment and advisory services through its network 92 93 149 Civil Society No civil society organizations have played explicit roles in promoting SI in the MENA region, but several countries, and the ability of citizens to drive up business performance is building, resulting in a growing pressure for government and corporations to accelerate the adoption of sustainable Consequently, civil society organizations in the region require extensive capacity- building to pressure they can exert on investors, listed companies and other concerned stakeholders to support 150 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 Appendix 4 - Exchange Rates Used Exchange Rates Used Country Bahrain 2.65224 Egypt 0.17528 1.41044 Kuwait 3.47826 Lebanon 0.00067 Morocco 0.11603 Oman 2.59707 Qatar 0.27484 Saudi Arabia 0.26666 Tunisia 0.67967 United Arab Emirates 0.27226 Euro 1.28952 United Kingdom 1.54461 Source: http www xe com currency , accessed September 4, 2010 151 Appendix 5- Explanation of Terms and Abbreviations Explanation of terms An explanation of relevant terms relating to SI, investor types, and the MENA capital markets used in the report follows: Investment Terms Assets Under Management Periodic investment income produced for investors at reasonably predictable levels by a variety of municipal, corporate, and Fixed income government agency bonds, as well as by other high-yielding A strategy practiced mostly by private equity houses to exit an Exit strategy Foreign Direct investment Family owned businesses A legal entity created by government to undertake commercial State-owned enterprises Sustainable Investment Terms The explicit inclusion by asset managers of environmental, social, ESG Integration The exclusion investment approach where negative criteria Negative Screening An investment approach that seeks to invest in companies with Positive Screening It over-weights companies that demonstrate environmental or socially responsible leadership, and under-weights companies An investment approach where the leading companies with regard Best in Class to ESG criteria from each individual sector or industry group are 152 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 An investment approach that focuses on a subset of equities Thematic Investment behavior by exercising their rights as owners, often through Shareholder Activism this is done to promote shareholder resolutions focused on An approach applied by fund managers to encourage more Engagement Engagement may extend to voting practices and include MENA-Relevant Terms of a person’s wealth, to be used to support the poor, aged, and debtors Zakat depending on the wealth of the person, and the means by which they An Islamic decree issued by a mufti (scholar) or a religious lawyer on a Fatwa An act or activity that complies with the requirements of the Shari’ah, Shari’ah- compliant Islamic Islamic banking practices are those that conform with Shari’ah principles Banks Sukuk Sovereign Cleantech refers to any clean technology which reduces the environmental Cleantech Islamic Funds 153 Glossary of Abbreviations Acronym ADIA Abu Dhabi Investment Authority Arab Forum for Environment and AFED Development ARCI Arab Responsible Competitiveness Index AUM Assets Under Management CAGR Compound Annual Growth Rate CEO CIA Central Intelligence Agency CIB Commercial International Bank CIFP Country Indicators for Foreign Policy CIPE Center for International Private Enterprise CPI Corruption Perception Index CSE Casablanca Stock Exchange CSR Corporate Social Responsibility DJIM Dow Jones Islamic Market EFI Ethical Framework for Investment EHS Environment, Health and Safety EIoD Egyptian Institute of Directors EMEA Europe, Middle East, and Africa EP Equator Principles EPI Environmental Performance Index Emirates Securities and Commodities ESCA Authority ESG Environment, Social and Governance FDI Foreign Direct Investment FOE Family Owned Enterprises GAPP Generally Accepted Principle of Practice 154 SUSTAINABLE INVESTMENT IN THE MIDDLE EAST AND NORTH AFRICA, 2010 GCC Gulf Co-operation Council GDP Gross Domestic Product GE General Electric GEM Gender Empowerment Measures GNP Gross National Product GP General Partner GRI Global Reporting Initiative HNWI High Net Worth Individuals IFC International Finance Corporation IIF Institute of International Finance ILO International Labor Organization IMF International Monetary Fund International Petroleum Investment IPIC Company IPO Initial Public Offering IWG International Working Group LP Limited Partner LTA Lebanese Transparency Association MENA Middle East and North Africa MSE Muscat Securities Exchange NGPF Norwegian Government Pension Fund Organization for Economic Co-operation OECD and Development OPIC Overseas Private Investment Corporation PE Private Equity PLC Publicly Listed Company PPP Purchasing Power Parity Responsible Competitiveness Index – RCI Saudi S&P Standard and Poor’s 155 SAGIA Saudi Arabian General Investment Authority SEZ Special Economic Zone SI Sustainable Investment SOE State Owned Enterprise SSIF Social Security Investment Fund SWF Sovereign Wealth Fund UAE United Arab Emirates UHNWI Ultra-High Net Worth Individuals UNGC United Nations Global Compact United Nations Principles for Responsible UN PRI Investment UNDP United Nations Development Program United Nations Environment Program UNEP FI Finance Initiative USD United States Dollar WEF World Economic Forum 2011