The Shift to ESG: Lessons from the Front Line
One surprising outcome in a year where plummeting profits have forced businesses to reassess their priorities has been the major shift to ESG (environmental, social and corporate governance), areas long seen has expensive and offering little return. How can suffering businesses make the shift?
ESG standards deal with broad aspects of business operations, such as how employees are treated, how supply chains are managed, what materials are used, and anything else that affects businesses and communities. For some time, these standards received little attention and were long seen as drags on profit that were best ignored. But in the past year, they have become front and centre for companies and investors alike.
ESG initiatives are now a major source of investment. Morningstar recently found that 73 percent of its ESG indexes have outperformed their non-ESG equivalents since their inception. Globally, sustainable funds based on ESG themes pulled in a record-breaking $20.6 billion of new money in 2019 – almost four times the 2018 figure of $5.5 billion, itself a record. In January at the World Economic Forum (WEF) in Davos, a coalition of multinationals signed up to the Stakeholder Capitalism Metrics, a set of ESG standards released by the WEF and the International Business Council in September 2020.
Some regions are more advanced in this process than others. Gulf economies have suffered more intensely than others from the crash in oil prices and global paradigm shift to address climate change resulting in a boom for ESG-focused diversification initiatives in the region. The CFA Institute found that 94% of retail investors in the UAE were interested in or applied ESG principles in 2020, up from 90% in 2018.
Not only does ESG boost business resilience, but it also aligns with international priorities to reduce emissions. According to an article by Oxford Business Group, “ESG ties in to different diversification strategies. Last year’s slump in oil prices served to underline the importance of a more broad-based economy. Investments guided by ESG – for example, in renewable energy – offer a way to augment diversification.”
In addition, real commitments are being made by buy-side players throughout the world into achieving net zero emissions by 2050 and restricting global warming to within two degrees above pre-industrial levels. This includes the six-member countries of the Gulf Cooperation Council who are on the frontline for the need to diversify and refocus on ESG. What lessons can be learned for international businesses that are struggling to make the switch?
Omar Alghanim set up the Family Business Council – Gulf (FBCG) to support family businesses in the region back in 2014. Since then, its networking, resources, and governance support have been fundamental to preserving businesses in the region and most recently facilitating recovery from the pandemic not just for businesses, but for GCC states themselves.
“I do not think it is an exaggeration to say that the economic prosperity of the GCC rests on the success of its family businesses,” said Omar Alghanim in Arabian Business. Family businesses account for some 90 percent of the GCC private sector economy and are responsible for 80 percent of the GCC’s employment.
Alghanim, who has lived, studied, and worked around the world including in the Middle East, Europe, and the U.S., recognises that this is a global shift. “According to the Family Firm Institute, family enterprises constitute around two-thirds of all businesses around the world, generate approximately 70 to 90 percent of annual global GDP, and create 50 to 80 percent of jobs in the majority of countries worldwide. The past seven years have been tough in the Gulf but our early recognition of the need for structures to support businesses in their transition has been critical to their long-term survival.”
The FBCG has been developing initiatives to bring stakeholders together to develop best practices that not only support family businesses in the immediate term, but can then be presented to policymakers and governments who can develop structures to support their implementation.
Omar Alghanim sees a real opportunity in the current climate. “Family business leaders and international leaders have the same objectives: creating a sustainable future for ourselves and our children. There is a major opportunity for the two to work together to develop the best support mechanisms to facilitate this future.”
The time to act is now.