Sustainable financing and investing survey 2020 report ESG investing gaining ground Executive summary Issuers and investors back sustainability beliefs with action

Environmental and social issues have never been more prominent in capital markets. New strategies, funds and financing instruments that engage with these issues are emerging at an accelerating pace.

This reflects the consensus among almost all players now that sustainability is a core dimension of value, according to our global survey of 2,000 market participants.

The research was conducted in them reduce emphasis on ESG There is strong support for further July and August when market permanently. A somewhat more growth of the green, social and participants around the world statistically significant group (9% sustainable bond markets: 36% had been dealing with the savage of investors, 12% of issuers) have of all bond investors do not buy effects of the coronavirus on the put it on ice temporarily. these bonds yet, but expect to economy for several months. start buying them seriously for the These positive responses — in the first time. With markets hugely volatile as face of a global pandemic with governments’ and central banks’ unprecedented and still unfolding Moreover, many make a greater responses to the pandemic have impact — underscore how central claim for sustainable finance — played out, market participants’ sustainability is becoming to not just that it is important, but thinking on sustainability has been financing and investing, all over that it pays for itself. Half (49%) affected in a variety of contrasting the world. of investing institutions around ways — and often with notable the world argue that factoring differences between regions and Of the 1,000 issuers and 1,000 environmental and social issues even individual countries. investors who answered our into their strategies improves detailed questions, 89% regard portfolio returns and/or lowers Some might expect this to environmental and social issues investment risk. make them take their focus off as important. Among issuers, the sustainability and environmental, proportion is 93%. This is down slightly from 54% social and governance (ESG) a year ago, and is one of many issues. Instead, the pandemic This consciousness is very firmly areas of the survey that reveal the has made issuers and investors rooted in all the regions and major profound and complex impact more convinced than ever of the markets we surveyed: in Asia, the of the COVID-19 pandemic on need for sustainability. Nearly Americas, Europe and the Middle sustainable finance. Among 30% of investors (and 40% in East. investors, 87% say it has changed Asia) affirm that the pandemic has how they consider environmental, strengthened their commitment Finance practitioners have not social and governance issues, to considering ESG issues. Of just recognised the seriousness while 92% of issuers say it issuers, 41% now believe even of these issues — they are has altered their approach to more strongly that becoming determined to act themselves, by sustainability. sustainable is important. making the way they invest, raise Only a tiny proportion (some capital and allocate it to projects 1.5%) say the pandemic will make more informed by sustainability.

2 | Sustainable Financing and Investing Survey 2020 of investors say ESG can 49% improve returns or lower risk

The survey points to many notable trends shaping sustainable finance, including:

¡ Issuers have moved ahead of investors in their commitment to sustainability: 97% globally expect to redeploy capital in response to environmental and social challenges and opportunities over the next five years, up from 94% in 2019

¡ Among issuers, 94% disclose aspects of their environmental and social performance, and 93% to 98% believe their capital providers (shareholders, bondholders and bank lenders) care about this

¡ Values are still the commonest driver for issuers’ commitment to the environment and society: 55% say this is a reason for their stances

¡ Risk/return and external pressures are now more influential than values in pushing investors towards sustainability awareness: 49% cite risk/return versus 38% values

¡ Although the COVID-19 pandemic has influenced investor attitudes in a variety of ways, just 9% globally are unwilling to pursue ESG investing and only 46% still feel held back by obstacles. That is a big reduction from the 61% who felt obstructed a year ago

¡ Over half of investors (51%) have already adopted firm-wide policies on responsible investing/ESG issues and 35% now disclose the ESG characteristics of their whole portfolios — up from 24% in 2019

¡ Investment opportunities in sustainable infrastructure stand out — particularly in energy technologies (above all, renewable power and lower carbon fuels) and water and waste water systems

¡ Climate change is acknowledged — 55% of issuers say they are already affected or view it as a threat within 10 years, while 76% of investors recognise it as the most urgent threat to humanity or one of its most serious challenges

Sustainable Financing and Investing Survey 2020 | 3 Middle East report ESG investing gaining ground

Values drive Middle East to engage with sustainability

Sustainable finance is gaining though. An exceptionally meagre 7% of between issuers (55%, from 54% last momentum in the Middle East. While investors say they always take ESG factors year), shortage of expertise or qualified fewer investors than elsewhere have into consideration in their investments, staff (50% from 46%) and lack of demand firm-wide policies on responsible for example. Nor will many support from clients (44% from 41%). investing or ESG (36%, against a environmentally or socially desirable global average of 51%), a large share projects at the risk of lowering their More positive signals emerge from the (41%, more than anywhere else) are returns. number of investors who expect to adopt intending to develop a policy. ESG policies. And among the minority Similarly, despite the SDGs’ focus on who have done so already, very high This stage in the region’s evolution of prosperity, health and security for all, numbers seek out material ESG issues sustainable finance means the survey fewer investors than elsewhere (17% when they invest and incorporate impact produces some contrasting results. versus a 28% global average) view this as goals. Also, Middle Eastern investors are Among issuers, 93% say environmental vital for economic success. Despite 49% optimistic about the benefits of ESG. More and social (E&S) issues are important to having expressed interest in the product in this region than elsewhere see potential them — but only 65% of investors feel that last year, few issuers have issued green for ESG strategies to outperform. Yet way. Within these majorities, the shares bonds or green/sustainability-linked loans investors do feel held back in responsible saying E&S issues are ‘very important’ are yet — perhaps unsurprising when 50% investing. They attribute this to a range lower than in other regions, though this is of investors in the region say they will not of factors, including lack of comparability somewhat less true in Saudi Arabia than buy the former. Issuers also feel that as of ESG data, shortage of expertise locally the rest of the Middle East. few as 3% of their investors are excited by and a lack of demand from asset owners. their sustainability efforts and drawn to Yet for market participants that do invest as a result. More generally, moral values remain respond to these issues, the level of influential in the region. When asked engagement with some issues — such as This could change, though, as Middle why they care about environmental and the UN Sustainable Development Goals Eastern investors are now ahead of social issues, 62% of issuers and 47% of (SDGs) — is high. Issuers and investors both Asia and Europe in regarding client investors say ‘we believe it’s right’ — in also adhere strongly to core values, demand as an E&S driver. The share of each case, the strongest level globally while the COVID-19 pandemic has clearly investors in the region who say they feel (though the proportions have fallen from strengthened interest in sustainable held back from pursuing ESG investing last year, as in other regions, as other finance in the region. Issuers and more fully and broadly has fallen, from factors have grown in importance, such investors also see significant opportunities 77% last year to 69% — though this is still as financial performance and external for sustainable infrastructure investment, much higher than in other regions. Among pressures). This year’s global averages are especially in energy and water. Some those who feel held back, the most 55% and 38%. Moreover, an exceptional aspects of sustainable financing and commonly cited reasons are the same as 70% of issuers in the UAE answer this investing are coming from a low base, in 2019: lack of ESG data comparability way.

Values dominate Middle Eastern issuers’ thinking about environment and society; investors conscious of regulators We care about environmental and social issues because:

Middle East issuers Global Middle East investors Global

70% 70%

60% 55% 60% 49% 43% 50% 50% 41% 37% 38% 40% 33% 34% 40% 28% 30% 26% 30% 20% 18% 20% 10% 10% 0% 12% 16% 62% 17% 0% 35% 47% 58% 47% 47% 3.6% 1.5%

Our customers want us to Our clients want us to Our employees want us to Society expects it NGOs or pressure groups demand us to Regulators require it Regulators require us to We believe it’s right to care about the world and society We believe it’s right to care about the world and society It can improve investment returns and/or reduce investment risk Paying attention to these issues can improve returns

4 | Sustainable Financing and Investing Survey 2020 Key findings

¡ Among Middle Eastern investors, 36% have firm-wide policies on responsible investing or ESG issues — a Pandemic awakening lower share than in other regions, though Saudi institutions Growing attention to employees’ health are above average on this and wellbeing

¡ However, 41% intend to adopt such policies — more The global COVID-19 pandemic has accelerated than elsewhere engagement with ESG issues in the Middle East. Above average proportions of issuers (44% versus ¡ Of those that have responsible investing policies, 68%, the 41% global average) and investors (30% versus more than in any other region, incorporate approaches for 29%) now believe more strongly than before in the identifying material ESG issues. Some 45%, again more importance of becoming sustainable or considering than elsewhere, include impact goals or metrics in their ESG issues in investing. Saudi investors have investment decision-making particularly increased their ESG focus.

¡ Environmental and social issues are important to 93% An above average proportion of UAE issuers say they of issuers and 65% of investors, regard environmental and temporarily lowered their emphasis on sustainability to social issues as important, with about a third of the total focus on other issues, however. The pandemic has also saying they are very important (up to 43% in Saudi Arabia) raised emphasis on social welfare in the region, with an unmatched 43% of issuers and 36% of investors ¡ Some 11% of investors feel a responsibility to make regarding this as more important than before. Moreover, investments with good outward effects on the two thirds of issuers put greater emphasis on employees’ environment and society, even if this carries the risk of social wellbeing than before and over half of investors compromising returns see greater value in organisations that take care of employees’ health and avoid excessive management pay. ¡ A majority (54%) are willing to make such investments if Each of these proportions is the survey’s highest level they don’t involve compromising returns globally for that issue.

¡ As in 2019, issuers lead other regions in their plans to All the same, responses are inconsistent. For example, reallocate capital in light of environmental and social despite the increased emphasis on social welfare and challenges and opportunities. The proportion expecting to wellbeing, only 7% of Middle Eastern issuers say the do so to a substantial or noticeable extent remains around pandemic has made being sensitive to society’s needs last year’s unmatched 85% more important to them. A higher proportion (15%) regard this as less important now. ¡ The COVID-19 pandemic has pushed the Middle East towards greater engagement with sustainable finance. Two Similarly, the share of investors that see greater value in thirds of investors view ESG considerations generally or organisations that support employees’ social wellbeing is social issues specifically as more important than before, below average. while 44% of issuers have been strengthened in their view of sustainability’s importance

¡ Issuer disclosure of some kinds of information lags other regions — only 18% report their carbon footprints, for example

¡ In contrast, reporting of alignment with the UN’s Sustainable Development Goals (particularly in annual reports) is exceptionally high

¡ Among investors, 15% align their policies with the recommendations of the Task Force on Climate- Related Financial Disclosures (TCFD) or other reporting frameworks, compared with a 36% global average

¡ Regulators’ influence is mixed — 58% of investors attribute their stances on environmental and social issues to regulators, compared with a 41% global average, but only 16% of issuers do (26% globally). Moreover, the proportion of investors who feel held back from ESG investing that report regulatory or legal constraints as an obstacle has risen from under 25% last year to 36% now

Sustainable Financing and Investing Survey 2020 | 5 Middle East report

Data and knowledge problems dominate barriers to ESG investing in Middle East If you are being held back from pursuing ESG investing more fully and broadly, what are you being held back by?

Lack of Relatively poor Inconsistency of Shortage of comparability of financial returns ESG definitions expertise ESG data across or qualified issuers staff

27% 26% 28% Poor Regulatory Lack of quality or or legal attractive Lack of availability constraints investment 46% disclosure of ESG opportunities by issuers data Lack of demand from clients 11% Our firm does not want to go further in this 28% 27% 23% 21% direction 9%

Disclosure to grow Investors and regulators will demand more information

Most issuers in the Middle East disclose. Now 90% reveal details of and corporate social responsibility (CSR) disclose information about their their sustainability strategies, but this is reports, such as websites. Of seven environmental and social impacts, below the global average of 96%. Middle areas of disclosure scrutinised, for but the nature of disclosures Eastern issuers are the most likely in six of them, Middle East issuers have appears quite light. the world to disclose their strategies for above average disclosure through other climate change — 98% say they do. And channels. Only 2% say they do not disclose — well they are well above average for reporting below global levels — and most are on their alignment with the Paris Like issuers, the region’s investors content to do so, with only 4% saying Agreement, with 84% claiming to do have limited alignment with the they disclose too much, again below the this. Many disclose how they are aligned recommendations of the Task Force on worldwide norm. with the Sustainable Development Climate-Related Financial Disclosures Goals, too. (TCFD) or other reporting frameworks. Moreover, more than anywhere else, Both groups lag their global averages issuers in this region expect their But when it comes to more factual significantly. disclosure to increase. Altogether, 57% information, less is revealed. Of issuers expect this, against 45% globally. Some in the Middle East, 18% publish 21% of issuers welcome the increase; their carbon footprints, against a 36% believe what they are doing now global average of 54%, and for other of issuers regard is about right but say investors or environmental metrics it is 73% in the social welfare as regulators want them to disclose more. Middle East, 84% globally. more important 43% than before the The expected rise in disclosure makes Issuers here make greater use than pandemic sense when issuers are asked what they elsewhere of channels other than annual

6 | Sustainable Financing and Investing Survey 2020 Middle Eastern investors feel progress is impeded Infrastructure potential Is anything holding you back from pursuing ESG investing Water and energy top of investment more fully and broadly? priority lists

Global investors Middle Eastern issuers and investors see clear potential for sustainable infrastructure investment, though they 46% emphasise different areas for this.

Unsurprisingly, given the region’s climate, investors particularly 69% highlight opportunities in improving water and waste water infrastructure — ahead of those elsewhere. Middle East investors Issuers emphasise a different area, but again one prominent in the region — energy. The intensity of their enthusiasm for Yes, there are certain opportunities in lower carbon forms of fossil fuel energy, such issues holding us back as gas, is unmatched. Their appetite for emissions-free sources No, nothing is holding us back such as wind, solar and tidal is also very high.

Middle Eastern issuers enthusiastic about cleaner power; investors go for water and batteries

Middle Eastern issuers — The highest priorities for Middle Eastern investors — Across all the countries where sustainable infrastructure investment in the country where I you invest, which forms of sustainable infrastructure do you work should be: think offer the most attractive investment opportunities?

Middle Eastern issuers Global Middle Eastern investors Global 7 5.9 7 6 5.7 6 4.5 4.4 4.4 5 4.3 5 4.2 4.4 3.7 4.1 4.2 3.9 3.8 4 4 3.5 3.1 3.0 3 3 2 2

1 0.2 1 0.2 6.9 6.4 5.2 4.2 3.7 3.5 3.4 3.2 4.8 3.3 3.2 2.7 2.5 2.0 1.6 1.4 0 0 0.1 0.0

Lower carbon forms of hydrocarbon energy such as gas Smart cities that allow people and goods to move more efficiently Emission-free energy such as wind, solar, tidal and hydroelectric power Improved electricity storage Electrifying the transport system including cars Hydrogen power Better water and waste water infrastructure Other Carbon capture and storage

Respondents were asked to choose as many as they wished of the nine kinds of infrastructure and rank them in order of priority. The scores shown here reflect both the intensity and breadth of respondents’ enthusiasm for each option. The maximum score, if every respondent had made an option top priority, would be 9.

Sustainable Financing and Investing Survey 2020 | 7 Methodology

GlobalCapital, the capital markets wide diversity of organisations, by size, From these, a structured sample newspaper, and Euromoney Insight geography and type of activity. Investors was extracted for use in the survey. conducted a global survey of and issuers were invited to participate This comprised 1,000 issuers and investors and capital markets issuers in online surveys, comprising multiple 1,000 investors, distributed across 34 in July and August 2020. The survey choice questions. territories in four regions. The sample is unusual in questioning issuers and was designed to give broad geographical investors at the same time. The surveys were offered in Chinese, coverage of each of the regions. English, French, German, Japanese, The questionnaires for issuers and Portuguese, Russian and Spanish. Over Where there were too many responses investors were different, but in 2,500 responses were received from from a particular country, those from many cases the questions were issuers and investors. To participate, larger organisations were used. complementary, to give insight into the each respondent had to state their name, perceptions each group have of the contact details, job title, the name, All data shows percentages of those other. nature and size of their organisation, and who answered that question. where they were based. Responses are The study was designed to cover a treated anonymously. The sample analysed is as follows:

Issuers Investors

Americas 250 250

US 125 125 Issuers Investors Issuers Investors Canada 50 50 Europe 275 275 Asia 325 325 Argentina 22 24 United Kingdom 75 75 Mainland China 104 100 Brazil 29 30 France 50 50 Hong Kong SAR 47 50 Mexico 24 21 Germany 50 50 Singapore 50 50 Issuers Investors Belgium, 20 22 Australia 21 25 Middle East 150 150 Netherlands, Luxembourg India 22 20 Saudi Arabia 46 50 Italy 23 22 Indonesia 19 19 UAE 49 51 Denmark, 20 19 Japan 19 19 , Jordan, 13 20 Sweden, Norway, Finland Malaysia 21 23

Kuwait 21 16 Russia 14 15 Thailand 22 19

Qatar 21 13 Spain 23 22 TOTAL 1,000 1,000

8 | Sustainable Financing and Investing Survey 2020 Investors by asset type Investors by type

100% 100% 1% 0% 2% 5% 6% 2% 4% 2% 2% 4% 1% 17% 4% 4% 90% 90% 4% 5% 2% 5% 32% 6% 9% 4% 5% 80% 80% 5% 16% 13% 30% 70% 70% 18% 13%

60% 60% 9% 28% 22% 22% 28% 5% 50% 50% 8% 40% 40% 16% 30% 30% 43% 41% 62% 29% 27% 20% 40% 20% 10% 10%

0% 0% Global Global Americas Asia Europe Middle East

Equity Asset manager Non-financial company Debt Bank Family office Both equity and debt Insurance company Foundation Pension fund Other

Investors by assets under management Issuers by annual revenue

100% 2% 100% 10% 13% 10% 11% 7% 17% 19% 19% 17% 7% 90% 90% 13% 13% 18% 12% 17% 80% 80% 34% 31% 33% 47% 19%

70% 70% 10% 29% 46% 19% 36% 60% 60% 9% 50% 50%

40% 40% 26% 31% 37% 24% 22% 29% 28% 30% 30%

15% 20% 20% 11% 18% 9% 10% 10% 8% 0% 23% 13% 22% 4% 75% 0% 14% 10% 9% 0% 54% Global Americas Asia Europe Middle Global Americas Asia Europe Middle East East

Over $100bn $10bn+ $25bn to $100bn $1bn to $10bn $5bn to $25bn $500m to $1bn $1bn to $5bn $250m to $500m Up to $1bn Up to $250m

Issuers by type

Central government 7 Oil, gas, coal and chemicals 55 Telecoms 49

Supranational organisation 1 Metals and mining 35 Information technology 99

Local government 15 Building materials 36 Consumer goods 52

Banking 187 Transport 35 Retail and consumer services 70

Insurance 41 Electricity and water 37 Business services 54

Real estate 67 Industrial goods 57 Agriculture, food, beverages, tobacco 38

Other 12 Healthcare 53

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