ESG: Bahrain's Perspective on Sustainable Growth
Energy, Utilities, Mining and COP28
Sohaila Abdul RahmanSenior Counsel,Corporate Commercial
We have all come across the acronym “ESG” (Environmental, Social, and Governance) ever more so in the last few years and for most of us our minds instantly relate ESG to the concept of “CSR” (Corporate Social Responsibility). Whilst we are not wrong to tie the two concepts together, it is important to understand the intricate differences between the two.
Simply put, CSR sets out the strategies that businesses use to ensure sustainability and the internal mechanisms by which they generate awareness about such initiatives. ESG however sets out the broader criteria or KPIs relating to environment, social and governance initiatives that assist businesses to not only achieve their strategies but also measure their achievements.
ESG comprises a broad range of topics that were formerly excluded from financial analysis but could impact how businesses handle issues like climate change, water management, the effectiveness of their health and safety systems in preventing accidents, supply chain management, how they treat their employees, and whether they foster innovation and creativity.
The table below sets out some of the criteria within each category of ESG:
Environment
Energy management including water and wastewater management, hazardous material management, environmental management and Co2 emissions.
Social
Diversity, equality and inclusion, data and privacy protection, training, employee wellness and safety
Corporate Governance
Independence of directors, compliance with mandatory and recommended governance codes, shareholder rights, business ethics, internal and external audits
Bahrain Economic Vision 2030 is deeply rooted in achieving sustainable business practices and growth for the Kingdom of Bahrain. Businesses are expected to create common values and to contribute to national, regional, and global visions and plans, such as accelerating the achievement of the UN Sustainable Development Goals.
The Bahrain 2030 Vision's three guiding principles: sustainability, justice, and competitiveness should enable Bahrain's private sector to achieve a sustainable economic growth by 2030 and incorporating ESG factors in corporate reporting will certainly further accelerate the country’s sustainable development plan.
Bahrain has long implemented key legislation and regulations to help enhance its commitment to sustainable growth. For example:
Environmental Initiatives: Bahrain has ratified several regional and international agreements, conventions and protocols related to protecting the environment and achieving sustainable development, including the Paris Agreement within the United Nations Framework Convention on Climate Change regulated by the Supreme Council for Environment.
Social Responsibility and Inclusivity: Bahrain places significant emphasis on social responsibility and inclusivity as part of its ESG agenda. The government has implemented policies and initiatives to promote social welfare, including affordable housing programs, healthcare services, and education reforms. The Labor Market Regulatory Authority ensures the fair treatment of workers and protects their rights, fostering a positive work environment. Additionally, the Supreme Council for Women monitors the advancement of Bahraini women on the national and international level by proposing and implementation of public policies, national plans and strategies related to women in public life.
Governance and Transparency: Bahrain has implemented robust regulatory frameworks, ensuring a transparent and accountable business environment. The Central Bank of Bahrain plays a vital role in supervising the financial sector, maintaining stability, and promoting ethical practices. The Bahrain Corporate Governance Code is based upon nine core Principles of corporate governance that adhere to international best practices. The purpose of the Code is to establish best-practice corporate governance principles in Bahrain, and to provide protection for investors and other company stakeholders through compliance with those principles. The Code includes recommendations to apply the principles, as well as recommendations which support the implementation of good corporate governance.
Furthermore, Bahrain Bourse has published an ESG Reporting Guide which includes not only guidance on ESG but also a list of 32 KPIs for listed companies in Bahrain to report on.
ESG allows for the identification, organisation, analysis, prioritisation, and guidance of decisions about various business risks. If ignored, these risks could be costly to the operation and survival of businesses. By proactively assessing possible problems, ESG risk management promotes sustainable, long-term growth. Early awareness of potential risks gives organisations more time to adjust and create cost-reducing initiatives.
Increasingly, Investors consider the effectiveness of a business's ESG-related risk management when assessing total risk and return. ESG is increasingly used by investors to evaluate the performance of a business who are now more aware of the significance of ESG factors in their selection of investments. Investors use ESG data to assess sustainability risks that might have an impact on a business’s financial success, just as they would use standard financial data to gauge a company's performance. ESG data can provide information at several stages of the investment process, such as stock selection, portfolio creation, and risk management, depending on the investment approach. This is based on the understanding that ESG factors have a financial impact on a business trying to achieve increased efficiency and reduce risk exposure. As a result, more companies are starting to include ESG into their everyday operations and business plans.
Some factors to take into consideration when tailoring an ESG, business should consider the following:
Responsibility: identify the parties that will be responsible for implementation and oversight of the ESG program. In order to implement ESG policies and create value, board participation and managerial backing are essential. Businesses may also want to form an ESG team or committee, hire specialists on staff and create a charter.
Identify main ESG concerns: business can use existing ESG frameworks designed to standardise the reporting of ESG data, making them useful sources for identifying important benchmarks and indicators. The following are some of the most popular ESG frameworks and standards:
- UN Principles for Responsible Investment (PRI)- Global Reporting Initiative (GRI)- Carbon Disclosure Project (CDP)- Climate Disclosure Standards Board (CDSB)- Sustainability Accounting Standards Board (SASB)
Set objectives: establishing objectives will serve as a roadmap for ESG issue. Goals should be time-bound, specific, measurable, achievable, and relevant. These will make it easier to track progress and provide a clear timeline.
ESG part of company culture: businesses should evaluate and endeavor to constantly improve their culture and practices. Providing training for management should be included into the ESG aims.
ESG reporting: produce ESG reports for stakeholders, investors, the public and establish a consistent reporting procedure (see below on further information on ESG reporting and its importance).
Consistent, accurate and transparent ESG reporting is important for many reasons, making it a corporate backbone across industries and jurisdictions. An ESG report allows businesses to drive their initiatives and successes, thereby demonstrating progress to their stakeholders.
As discussed above, Investors are increasingly relying on ESG metrics to gauge the value and growth potential of a business. An ESG report is therefore a critical piece of information used to help investors make decisions.
With the growing number of regulations globally requiring organisations to disclose and report on ESG initiatives, sustainability and governance, an ESG report provides a way for businesses to make proper disclosures and helps ensure regulatory compliance.
Since many targets can be multiyear, longer-term initiatives, ESG reporting also offers a tool to monitor progress on goals and allow for a business to hold itself accountable for its ESG performance and to ensure their ESG initiatives are more than just ‘lip service’ but are equally action backed.
It is clear that the move towards sustainable economies has given rise to a demand for transparent and comprehensive strategies and reporting. ESG plays a major role in the growth of individual organisations but more importantly it serves as a window for investors, regulators as well as other stakeholders such as ESG rating agencies to a better understanding of a business’s performance, risk exposure and overall performance.
For further information,please contact Sohaila Abdul Rahman.
Published in November 2023
