INNOVATING FOR SUSTAINABLE INVESTMENT IN MENA:
THE HAWKAMAH/S&P ESG INDEX1
Dr. Nasser Saidi
01 February 2011
Excellencies, Ladies and Gentlemen,
Welcome to the launch of the first ever tradeable MENA-wide Environmental,
Social and Corporate Governance Index – the S&P-Hawkamah Pan Arab ESG Index
(“HASPI”) that ranks and tracks the performance, transparency and disclosure of
regional companies on ESG issues.
This Index is a result of hundreds of man hours of work done by Hawkamah, led
by Alec Aaltonen. We have researched hundreds of annual reports, we have
engaged companies and investors for their feedback, and we have organized
awareness raising workshops on the importance of ESG. This really has been
It is the result of three organizations working together: Hawkamah, Standard &
Poor’s , who have provided their expertise in index construction, and the
International Finance Corporation – our long-term partner in promoting good
corporate governance, who have not only helped to fund the project, but have
shared their wealth of knowledge in promoting sustainable investment in other
emerging markets. I want to thank both our partners – S&P and IFC - we are truly
grateful for having such committed partners and we look forward to working with
them to build an investor base for this Index.
Hawkamah’s Mission and Leading the Way
Hawkamah was set up in 2006 to bridge the corporate governance gap in the
region. The Institute was founded by international organizations including the IFC,
the OECD, the World Bank and regional organizations such as Union of Arab Banks
and the DIFC Authority. Hawkamah grew out of the recognition that there needed
Opening speech at launch of Hawkamah/S&P ESG Index, DIFC, Dubai, 1 February, 2011.
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to be a regional organization working on the ground for corporate governance to
achieve buy-in by stakeholders. Since then we have been at the forefront of the
corporate governance debate in the region.
Much of our work has been about putting corporate governance in the agendas of
policy makers. We do not just talk about the importance of good corporate
governance in abstract terms, but provide the region’s companies and regulators
with practical tools on how to improve corporate governance in the region. We
have done this with the banking sector, insurance industry and insolvency
regimes, for example. We will be issuing a Policy Brief on corporate governance
for Islamic Financial Institutions and Guidelines for the Private Equity industry in
the coming weeks. Hawkamah is a ‘think and do’ tank!
In the early days, we became accustomed to hearing two things: 1) the region
needs good corporate governance 2) but that the region is not ready for reform.
But by engaging government & industry in our work, by conducting surveys and
studies, we have created regional benchmarks which have acted as catalysts for
Hawkamah’s research indicates that there have been significant improvements in
corporate governance in the region in just a few short years. Although we still
have issues with implementation, the concept & principles of corporate
governance are now well accepted across the region. Regulators and companies
have taken substantial steps, albeit from a low base, to improve their practices.
Just looking at the GCC, in the past two years, corporate governance codes for
listed companies have been issued in Qatar, the UAE and Bahrain. Last year both
the Saudi and Omani Capital Market Authorities set up corporate governance
units to ensure proper implementation and compliance with their governance
codes. We also welcome Kuwait’s efforts in establishing a Capital Market
Authority, promising a new era of governance for Kuwaiti markets.
As with our previous initiatives to bridge the corporate governance gap in the
region, HASPI is both ambitious and groundbreaking. Firstly, environmental and
social factors are linked with corporate governance factors. For the first time in
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the region, these factors have been extensively quantified and translated into a
series of scores measuring the reporting practices of MENA companies.
The S&P-Hawkamah Pan Arab ESG Index includes the top 50 MENA companies
based on their performance on nearly 200 ESG metrics, when compared to their
regional peers. The constituents of the Index are drawn from a universe of the
150 largest and most liquid companies listed on the national stock exchanges of
11 markets: Bahrain, Egypt, Jordan, Lebanon, Kuwait, Morocco, Oman, Qatar,
Kingdom of Saudi Arabia, Tunisia and the United Arab Emirates. HASPI ranks
MENA companies on nearly 200 ESG Issues Including carbon emissions, water and
energy consumption, employee health and safety, community investment,
charitable giving, financial reporting and auditing, Board independence and
executive remuneration. Ms Alka Banerjee from S&P will cover the specifics of the
methodology in her presentation. The methodology has been proven through the
development of similar ESG indexes in Brazil, India and China.
The development of HASPI is a response to a number of regional and global
developments. The first is the global financial crisis. It is now recognized that the
financial crisis was essentially a result of corporate governance failures and
malpractices on multiple levels. Indeed, the recent 576-page report by the US
government’s financial crisis inquiry commission, states that the 2008 financial
meltdown was avoidable and largely caused by unnecessary risk-taking, corporate
mismanagement and inept regulation.
Most of the blame for the financial crisis can be placed on governance failures at
the senior management level, on board level and on the regulatory level. But
investors are waking up to the fact that firstly corporate governance concerns
were not adequately incorporated into their investment decisions, and secondly
that they were not fulfilling their duties as share owners in pushing for corporate
governance improvements in their investee companies.
In the epicenters of the financial crisis – the US and UK, the emerging new
corporate governance framework places much responsibility on the shoulders of
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investors for monitoring the governance practices in the companies they invest in.
In the UK for example, the regulator has issued a Stewardship Code – a
counterpart to their Corporate Governance Code that applies to shareholders,
rather than companies. A similar Code is under development in South Africa and
on the European level.
I call for the GCC countries, who are capital exporting countries and major global
investors, to develop similar guidelines. We must change investment policies to
become active -if not activist- share owners and not passive shareholders!
Investors are also recognizing the importance of incorporating environmental and
social criteria corporate governance criteria in their investment decision-making
processes. For today’s long-term investors, i.e., the SWFs, Islamic financial
industry, pension funds, the providers of patient capital, investment risk is linked
not only to whether a company is well-governed with strong internal controls and
auditing processes, but also to whether it manages relationships with its
employees, customers and the communities in which it operates, and has a strong
regard for the environmental impact of its business.
It is now generally accepted that ESG issues can have medium & long-term
consequences for a company’s financial performance. The recent BP Gulf of
Mexico oil spill, which halved the company’s share price in a couple of weeks, is a
prime illustration of the risks of neglecting ESG. To put it simply, incorporating
ESG in the investment decision process is good for the bottom line.
This thinking or what has become known as responsible investment or sustainable
investment is becoming increasingly part of the mainstream in the global
investment community. In the past four years, 800 institutions across the world
have signed up to the United Nations Principles for Responsible Investment.
These signatories represent around USD 22 trillion of assets, which is more than
10% of total global capital markets. This trend is set to continue. The Responsible
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Investment market is forecast to grow to account for 15-20% of the total global
market by 2015.2
Tapping into the SRI investments/ Tool for international institutional investors
We are currently witnessing a significant global flow of capital from the
developed markets to the emerging markets driven by the quest for higher
returns and the pumping of liquidity by the Fed and other central banks. But our
region is overlooked by global investors. The MENA region tends to be better at
exporting capital than retaining and importing capital. But attracting international
institutional investors is particularly important for the region in that ‘patient
capital’ tends to dampen market volatility and deepens the sophistication of
markets with more efficiently priced stocks.
Market perceptions and expectations of returns and risks determine where global
capital will flow, and, ceteris paribus, it will flow to where it is best protected.
Global capital flows will generally avoid markets where investor protection is
perceived as weak or uncertain – and this is the general perception of the MENA
Although ESG reporting among the regional companies on the whole is weak
when compared to other emerging markets, the companies included in the HASPI
stand out as the better performing companies. In other words, the ESG Index is a
useful tool for institutional investors in identifying MENA companies with strong
Of course, a company’s inclusion in HASPI is not a guarantee that fraud,
governance scandals or environmental disasters will not happen. But it provides
an extra layer of assurance. In these turbulent times, fund managers need that
extra layer of assurance. And then there is the human dynamic - a fund manager
will face many awkward questions from investors if he or she decides to invest in
See Booz & Co.
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a company that is not part of the Index, which then experiences an ESG-related
incident! Neglect ESG at your own peril!
International institutional investors tend to be wary of the MENA region because
of our poor track record in transparency, ESG disclosure and reporting. The
Hawkamah/S&P Index addresses the elephant in the room, and identifies the
companies that go the extra mile in ESG reporting. The reporting has a “signaling
effect”, acting as a proxy for good management. The potential is large: the IFC
estimates that MENA assets under management related to sustainability are in
excess of $54 billion, greater than in India or China.
SRI and Regional Investors
Socially responsible investing is yet to take off among the region’s institutional
investors. For example, there are only two UNPRI signatories in the MENA,
Hawkamah being the first. Abraaj Capital, one of Hawkamah’s partners, remains
the only investor in the region to sign up to the Principles. I urge all regional
investors to adopt these Principles and Hawkamah is more than happy to
facilitate this process.
The underdeveloped state of responsible investing is not particularly surprising,
given that ESG is a relatively new concept in the region. Though investors in the
region do acknowledge the importance of ESG for sustainable and lower return
volatility, ESG factors are not formally integrated in the investment process. Part
of this is due to unavailability of data and indicators, lack of know-how, lack of
governance specialists within investment houses, and because it is a difficult task
to assign a numerical figure to governance criteria.
That is why the S&P/Hawkamah Index is particularly useful to the region’s
investors. HASPI is based on the tried and tested methodology of two earlier
indices – one in India and the other in Egypt- both of which have outperformed
the market benchmark. HASPI, in other words, is a useful tool for the region’s
investors as a way to incorporate ESG factors in their investment process.
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The ESG Index and Listed Companies
HASPI is not only a tool for investors, but also for companies. Hawkamah believes
in providing incentives for performance. Inclusion in the Index provides public
recognition for the region’s companies of their ESG practices. But the Index is
more than just a badge of honor. As the SRI movement spreads among the
investment community, capital will start flowing towards companies with better
ESG reporting, thereby improving their access to external capital.
It also sets the benchmark for companies for the type of ESG or sustainability
reporting expected by long-term investors. I encourage the region’s stock
exchanges and regulators to pay heed to this new benchmark and mandate
improved sustainability reporting by the companies they are listing & supervising.
ESG reporting should be part of listing criteria.
The Ultimate Beneficiaries
So far I have mentioned a number of reasons why Hawkamah started the
development of this Index with our partners - I have highlighted the link between
ESG and long-term performance, how ESG is good for the bottom line, how the
Index will potentially help attract long-term international institutional investors to
the MENA, which in turn will help deepen our markets and make them more
efficient. But the ultimate beneficiaries of our companies practicing better ESG
and of our investors adopting ESG criteria are all of us, including future
The MENA region is also particularly vulnerable to climate change. We live in
some of the most fragile ecologies on earth. We are one of the most vulnerable
regions to warming, reduced precipitation and rise in sea levels. Water supply
sources in the Arab world, two-thirds of which originate outside the region, are
being stretched to their limits. The level of water scarcity is the highest in the
world and is rapidly growing, threatening to lead to confrontation, to ‘water
A recent report by the Arab Forum for Environment and Development stated that
the Arab world will be facing severe water shortages as early as 2015, as the
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annual per capita share will be less than 500 cubic meters. This is less than 10% of
the world’s average. The same report warned that without fundamental changes
in policies and practices, the situation will get worse, with drastic social, political
and economic ramifications.
Global models predict sea levels rising from about 0.1 to 0.3 meters by the year
2050 and from about 0.1 to 0.9 meters by 2100. For MENA, the social, economic,
and ecological impacts are expected to be relatively higher compared to the rest
of the world. Low-lying coastal areas in Tunisia, Lebanon, Qatar, Libya, UAE,
Kuwait, and particularly Egypt are at particular risk.
Adding to environmental stress & damage, the MENA region is becoming a
significant contributor in terms of greenhouse emissions. Currently it represents
about 6% of global greenhouse gas emissions, but we have the fastest rising
regional per capita emissions in the world. The region’s emissions grew five times
faster than the global average from 1990-2005.
We can easily imagine the impact of an oil spill similar to the one in the Gulf of
Mexico happening here. The damage would be an environmental and human life
threatening calamity, an ecocide. The Gulf here is our livelihood. We must ensure
that our governments and companies are doing their best to manage and
minimize their environmental risks. For the sustainability, not only of our
investments and companies, but of our region and way of life, for inter-
generational equity – we need to start taking ESG seriously.
We must do so by supporting initiatives such as HASPI, but other initiatives as well
such as the work of the Clean Energy Business Council, which aims to stimulate
investment in the development and deployment of the world’s best clean energy
technologies in our region.
As the World Bank reminds us, the economic costs of environmental degradation
are high in our region, varying from 2.1 percent of gross domestic product (GDP)
in Tunisia, to as high as 7.1 percent of GDP in Iran. “This high cost of
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environmental degradation spills into public finances, household budgets, the
competitiveness of the economy, and inter-generational equity.”3
For Hawkamah, the rationale for developing HASPI is to address investor concerns
about ESG practices in the MENA companies and raise awareness among regional
companies and market players of the need for better ESG practices to attract
patient capital, as well as to address core environmental and societal challenges,
in the light of international best practice and standards. In essence, HASPI should
be viewed as a useful benchmark for corporate sector reform in the region. It
aligns both the incentives to build our markets and societies, with the need to
modernize our corporations by providing market incentives to corporate actors
Beyond this launch, more work needs to be done. Hawkamah stands ready to
work with the region’s regulators, its stock markets and companies to improve
our ESG practices.
Thank you for your time and support.
See World Bank “Sector Brief - Environment in MENA" http://go.worldbank.org/CUS7GMVHM0
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