Not long ago, businesses were judged mostly on their financial performance. More profits were essentially a byword for success.
Today, however, companies are also being evaluated on their adherence to environmental, social, and governance (ESG) principles.
Most of the world’s largest institutional investors – including sovereign wealth funds – are increasingly allocating capital to companies that are well-prepared to benefit from the transition to a green economy, as they wish to protect their portfolios against risks associated with ESG violations.
This shift reflects a greater awareness among investors, consumers and regulators of the far-reaching effects of corporate operations that go beyond short-term financial gains.
Sustainable development has emerged as a key priority for businesses, and this is particularly evident in countries with progressive and forward-looking governments like the UAE.
National initiatives and strategic plans have contributed to the rising adoption of ESG principles and reporting here.
Chief among these is the 2021 directive from the UAE Securities and Commodities Authority to mandate ESG reporting for listed companies.
This is further supported by broader long-term national plans and visions, such as the UAE Green Agenda 2030, the UAE Sustainable Finance Framework and the UAE Net Zero 2050 Strategy.
In response to this landscape, ESG criteria have come to the forefront for UAE investors.
A recent eToro survey revealed that more than 84 per cent of UAE retail investors prioritise ESG factors in their decision-making, while a further 13 per cent intend to start doing so soon.
Within the ESG umbrella, environmental factors take the lead, with 47 per cent ranking it as their highest priority. Social factors ranked second with 31 per cent, followed by governance factors at 22 per cent.
Building on what motivates investors to consider ESG in their investment decisions, more than 37 per cent agree that it provides insights beyond traditional financial analysis and over 35 per cent say that ESG directly affects financial performance.
The data suggests that, to a great extent, UAE retail investors correlate tangible ethical action with financial performance.
Globally, ESG is expected to pick up momentum in the coming years – and investment trends among millennials have a role to play.
Data from Morgan Stanley suggests that millennial investors will probably fuel the presence of sustainable investing in new asset classes and themes in the next 10 years.
Moreover, PwC estimates that the global ESG assets market may exceed $53 trillion in value by the end of 2025, highlighting a multi-trillion-dollar investment opportunity.
UAE investors are expected to reflect these global trends, driven by a desire for ethical alignment, risk mitigation and positive societal impact.
More than 38 per cent recognise the importance of ESG and more than 48 per cent find it easy to integrate into their investment strategies.
Looking ahead, sectors like renewables such as solar, hydro and wind are expected to gain traction among local investors, with 62 per cent of UAE retail investors expressing an interest in investing in this area.
At the end of the day, investors want to know that their investment will pay off in the long run and remain protected against poor environmental policies, a lack of social consciousness, or bad governance.
By taking ESG factors into account, retail investors can get a better picture of the businesses they invest in – not only for mitigating risks but also for discovering exciting opportunities.
George Naddaf is GCC and Mena regional manager at eToro
