Achieving environmental, social, and governance impact: The business agenda of the future for GCC banks

Achieving environmental, social, and governance impact

The business agenda of the future for GCC banks

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Executive summary

The concept of environmental, social, and governance (ESG) issues is well known in the Gulf Cooperation Council (GCC) countries, which are engaged in an ambitious transition toward more sustainable economies. Still, the concept has yet to register sufficient impact in the GCC banking sector despite substantial increases in ESG reporting and awareness of the related benefits for the environment and society. For GCC banks, ESG awareness represents a business opportunity that can improve the bottom line and that will require significant investments by businesses across industries.

GCC banks, like their global peers, are experiencing growing pressure from stakeholders such as regulators, employees, investors, and customers to increase their ESG activity. ESG lending could include supporting the development of renewable energy assets and the reduction of emissions, enabling the circular economy or using ESG principles to reduce greenhouse gas (GHG) emissions and operating costs, for example, by cutting back on business travel.

To grasp the ESG opportunity, GCC banks can move quickly to incorporate ESG principles into their business strategy and create the necessary structural changes in their operating models to pursue these new strategies and capture value. To embed ESG issues into a winning business strategy, GCC banks can adopt a four-point plan:

Baseline the existing business and operating model, and stakeholders’ expectations (including current and future needs/requests from customers, investors, and employees)

Define a target for ESG aspirations and strategic initiatives to reach it, and quantify the economic impact of ESG initiatives

Adopt policies and integrate sustainability into the business strategy in a consistent manner

Develop a road map for each initiative and report externally and internally on the ESG agenda

Getting a handle on ESG

The 26th United Nations Climate Change Conference (COP26) concluded in November 2021 amid considerable urgency about the need to take action against climate change. GCC governments have announced their participation, with the United Arab Emirates (UAE) committed to net-zero emissions by 2050, and Bahrain and Saudi Arabia aiming for net-zero by 2060. Greater attention to ESG issues is part of the effort made in response to climate change globally.

Although the concept of environmental, social, and governance (ESG) issues is well known in the GCC countries, which are engaged in an ambitious energy transition toward a sustainable energy system, it has not yet had sufficient impact among GCC banks.

In the GCC, banks too often confine ESG efforts to reporting. In that area, GCC banks have improved considerably compared with a few years ago. One-third of GCC banks now publish a sustainability or ESG report, versus none five years ago.

However, GCC banks can do more. GCC banks can now build on that important first step. ESG is about more than reporting, more than doing good for the environment or even for society. It is also a business opportunity, because ESG initiatives require significant investments by businesses across industries and offer opportunities to reduce costs, increase productivity (e.g., by motivating staff), increase the top line through new customer acquisition, and increase revenues from ESG-sensitive customers. By leading on ESG issues, banks can generate ESG and bottom-line impact.

GCC banks’ ESG reporting has increased from almost zero five years ago (2020)

Conclusion

In an environment of urgency over climate change, GCC countries are accelerating their diversification away from fossil fuels, and are increasing attention to ESG issues. GCC banks have a vital role to play in these national efforts. Banks can contribute to ambitious national net-zero goals by demonstrating leadership on ESG, while seizing the business opportunities that ESG concerns create and improving their bottom line.