ESG-focused companies ‘give better shareholder returns’

Alamy/Jeffrey Isaac Greenberg

• Index scores businesses on ESG
• ESG index beats pan-Arab benchmark
• Investors ‘committing to ESG’

Middle East listed companies that score highly on environmental, social and governance criteria provide a bigger total return for shareholders than their less ESG-conscious rivals.

The Hawkamah Middle East and North Africa ESG Index includes the top 50 companies by ESG score from the 150 blue-chip stocks that constitute the wider S&P Pan Arab Composite Index.

Hawkamah, the Dubai International Finance Centre’s institute of corporate governance, was founded in 2006, and launched its ESG index in 2011.

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As of August 30, the Hawkamah index provided a total return of just under 6 percent over the previous three years. 

That easily beats the pan-Arab benchmark’s return of just under 3.6 percent over the same period. 

Total return incorporates both dividend payouts and changes in a company’s stock price.

“If a company is thinking about ESG it’s likely already a high-performing business,” said Ashish Marwah, chief investment officer at Abu Dhabi’s Neovision Wealth Management.

“People have gotten the correlation-causation wrong. Companies that can adopt ESG standards are already high-performing.

“If you’re a stakeholder-inclusive organisation, then your customers, employees and shareholders are happy. Customers have loyalty towards your product, not just because it’s a good product, but because it also does good.”

The ESG index outperformed the broader pan-Arab benchmark over five and 10 years by 48 and 118 basis points respectively, although over the past 12 months the broader benchmark has provided a bigger return.

Julian Bruce, managing director of EFG Hermes’ UAE brokerage, said: “There are a lot more dedicated ESG funds than there used to be, which has led to increased share trading activity in companies considered to be strong in ESG.

“But the S&P Pan Arab Index is only tracked by regional investors – I don't know of any western institution that does – and so we tend not to follow it as much as MSCI or FTSE, which have much larger assets under management overall.”

The Hawkamah ESG index grades companies based on standards relating to governance, environmental and social considerations. For governance, these include disclosure levels, accounting practices and a formalised dividend policy.

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Environmental criteria include disclosures regarding emissions of greenhouse gasses and pollutants and energy and water consumption, while career development programmes and appropriate certification relating to employment and labour practices are examples of social indicators.

The top 10 index constituents by their weight on the benchmark include four of the UAE’s six largest banks by assets: First Abu Dhabi, Dubai’s Emirates NBD, Abu Dhabi Commercial Bank and Abu Dhabi Islamic Bank.

In terms of sector weightings, the financial services industry represents 41 percent of the benchmark, communications, including telecom operators, is 16 percent, materials is 10 percent and energy is 7 percent.

Marwah said: “Investors are increasingly committing to ESG strategies. They like it. They have dedicated teams and dedicated ESG allocations. These strategies make money for investors.”