Embedding ESG: an exchange perspective

Belief-based investing, which relates investment decisions to ethics and values has always been a matter of consideration, but this approach has gained momentum over the past few years with more asset management companies gradually valuing environmental, social, and governance (ESG) factors. The significant rise in ESG investing, with current estimates of US$89 trillion [1] assets under management pledged to the Principles for Responsible Investment (PRI) - the world’s leading proponent of responsible investment - is encouraging evidence for ethical-investing advocates because it underlines the rising popularity of belief-based investing. Indeed, it is now common practice globally for investors to integrate ESG factors when evaluating listed companies. The main drivers for ESG integration in investment decision-making have been risk management and client demand [2]. Investors have begun seeking greater transparency over their investments, so the lack of comparable ESG data and ESG disclosures has led to increased calls on exchanges globally to engage with companies on ESG reporting, as well as to educate market participants on ESG investing (‘sustainable investing’ or ‘socially responsible investing’ [SRI]).

Dubai Financial Market (DFM) - a leading Middle Eastern exchange listed on its market - is among the exchanges that have spearheaded the move to address the growing demand for ESG. DFM’s journey of corporate social responsibility initiatives began in 2003 with the launch of its DFM Stock Game to educate the younger generations, and launch of multiple social development activities. By 2016, DFM accelerated its efforts to drive industry-wide sustainability efforts by joining the UN Sustainable Stock Exchange (SSE) initiative. In line with the UAE Green Agenda 2015-2030, the country’s commitment to the Paris Agreement, the Sustainable Development Goals (SDGs), and Dubai’s Vision 2021 to create a smart and sustainable city, DFM’s sustainability strategy is aligned to six of the UN SDGs (SDG 4, 5, 8, 12, 13 & 17)[3]. Playing a key advocacy role in the region, DFM is an active participant in advisory groups for green regulations, green products, sustainability working groups, and has contributed to various global reports [4].

DFM, as the first Islamic Shari’a-compliant exchange since 2007, recognises the significant correlation between ESG and Shari’a. By 2018, DFM updated its Shari’a Standards to cater to investors’ growing interest in sustainability, the green economy and environmental protection, covering green instruments such as green Sukuk, Shares and green Investment Funds. Notably, DFM has enhanced listing requirements. For example, the "DFM Standard for Issuing, Acquiring and Trading Sukuk” states that the issuance prospectus of green sukuk shall include “disclosure whether these sukuk will finance a green project/projects along with an annex to the objectives and specifications of these projects (if applicable)."[5]

Efforts to increase understanding and awareness of ESG investing and reporting in the region have been wide-ranging. DFM organised several workshops and roundtables to raise awareness of the increasing importance of ESG factors. In 2017, DFM hosted a masterclass on ESG best practice for companies. In collaboration with the PRI and CFA Institute, DFM organised a second ESG workshop in 2018, which was part of a global roundtable initiative to receive feedback from investors and analysts. The outcome of the roundtables led to a global report, which was launched in March 2019 and to which the DFM contributed: ESG Integration in Europe, The Middle East, And Africa. DFM hosted a subsequent third ESG workshop to highlight the findings of the report on Middle East ESG integration practices for brokers and investors.

As a public listed company, DFM set up a Sustainability Committee to embed sustainability across its operations and deliver on its sustainability strategic plan, including a plan to incorporate ESG factors into DFM’s risk management framework. The exchange is developing its first fully-fledged DFM PJSC Sustainability Report and a DFM ESG Reporting Guide for listed companies to promote the standardisation of ESG data and disclosures. Increasing public disclosure on ESG factors, not only enhances market transparency, but also increases the opportunities for companies to join ESG/sustainability indices and rankings regionally and globally.

We believe that continuous collaboration with our stakeholders is key to the successful delivery of DFM’s sustainability plan, which aims to create long-term shared value for all our stakeholders. We recognise the endeavours are industry-wide and nationwide, so we are actively collaborating with our regulator, government bodies, exchanges, governance and investor relations institutions, sustainability consultants, corporate advisers and universities.

For instance, as part of our ongoing efforts to enhance governance practices, DFM organised various governance workshops, Board training sessions and Company Secretary Accreditation courses for listed companies, in collaboration with the Hawkamah Middle East Institute for Corporate Governance. Additionally, DFM, in collaboration with its listed companies and the Dubai Women Establishment, developed an online eBoard platform to increase awareness of listed company board positions and encourage female board representation. The platform enables interested applicants to submit online directly to companies, and track subsequent nominations and announcements.

As for future proofing, at DFM we recognise that financial and sociological trends such as climate change, resource scarcity and cybersecurity could all impact markets. Ongoing regulatory changes including the proposed amendment to the markets in financial instruments directive (MiFID) to incorporate ESG factors [6], and various industry-based principles such as the Task Force on Climate-related Financial Disclosures (TCFD), the Principles for Responsible Investment (PRI), Climate Bonds Initiative (CBI), and the World Federation of Exchanges (WFE) five principles, are increasingly and positively influencing our market and stakeholders.

 [1] Principles of Responsible Investment Annual Report 2018

 [2] CFA Institute and PRI Report: ESG Integration In Europe, The Middle East, And Africa: Markets, Practices, And Data 2019

 [3] DFM Sustainability Report (part of Annual Report 2018)

 [4] CFA Institute and PRI Report: ESG Integration In Europe, The Middle East, And Africa: Markets, Practices, And Data 2019; UN SSE: How Regulators can support the Sustainable Development Goals (SDGs).

 [5] DFM Shari’a Standard for Issuing, Acquiring and Trading Sukuk 

 [6] Schojdt: Integrating Sustainability into MiFID II 2019