The call for sustainability has never been more pressing than it is today. As governments and industries strive to bring down carbon emission figures, the financial ecosystem is also undergoing a profound transformation. At the forefront of this pivotal, sustainability-centric and data-driven shift is S&P Global Sustainable1.
In this interview, Mona Naqvi discusses sustainable finance. She is the global head of sustainable capital markets at S&P Global Sustainable1. She also touches upon the role of environmental, social, and corporate governance data in empowering investors in the Middle East.
Economy Middle East: How does the Middle East influence the future of sustainable finance?
Mona Naqvi: The Middle East is inherently exposed to several physical climate hazards and risks that people think about when discussing ESG. As a region, it is one of the most sensitive areas in terms of heat stress, drought, water shortages and in the case of the United Arab Emirates, rising sea levels.
Economies in the Gulf countries, in general, are also heavily dependent on fossil fuels and oil reserves. As we know, that’s no longer going to be as large of a part of the global energy grid mix going forward. We’re in the midst of one of the largest industrial-scale transformations in history. The markets here in this region are at the precipice of that. How well they are able to transition will really set the tone and the pace for the global transition.
Economy Middle East: Can you elaborate on the significance of ESG data in the Middle East’s sustainable capital markets and how it aids decision-making for investors and businesses?
Mona Naqvi: In terms of the role of ESG data, it’s helpful to step back. Ocean Tomo has been conducting yearly study looking at what’s driving the value of a corporation. In the 1950s, it was physical capital and assets in the balance sheet. What’s changed is with the rise of technology, the rise of information technology and patents is that there’s now more emphasis on intellectual capital. Intangible assets now account for a much larger proportion of corporate value today. We’ve had a complete role reversal: Before, 80 percent of the value of a corporation came from the tangible. Now more than 90 percent is from the intangible.
However, financial data and reporting have not sufficiently modernized to keep pace with this large-scale change. Intangible asset value is notoriously difficult to measure. Looking at balance sheet flows is no longer enough to assess where the risks and opportunities lie.
ESG data is described as “extra-financial”, meaning it is typically sourced outside of traditional financial disclosures. It’s about new and alternative sources of information that allow us to uncover hidden externalities where the risks might actually be.
To give a more concrete example, reputational risk is now incredibly important. Companies find that they need to maintain a social license to operate. So, there’s this real feedback mechanism that actually plays out quite materially. From an investor’s perspective, having the right data and the tools to equip them to assess where the risks are is critical to making sure that they have a resilient investment portfolio to face real-world economic risks.
Economy Middle East: ESG policies do differ sector by sector. What’s the most common one that needs to be solved?
Mona Naqvi: It’s right to point out that it’s an industry-specific thing. But a common challenge is how to bring different key performance indicators and metrics together in a holistic strategy that is easy to explain and justify – while, at the same time, not watering down the impacts of various objectives.
It’s the complexity that’s inherent to optimizing across many different questions. This is why I think it’s important for investors to be really clear on their own investment philosophy and theory of change and to make sure that they’re leveraging the expertise of folks like us at S&P Global.
This is ultimately about uncertainty and it’s really just how can we help navigate to reduce the surprises along the way so that investors don’t have to face undue losses.
Economy Middle East: Looking ahead, what trends do you foresee in sustainability, and how is S&P Global preparing to contribute to these changes?
Mona Naqvi: Sustainability is now integral to almost every single industry. It’s about mainstreaming that. And the intersection with technology and the new tools that we’re seeing at a rapid pace of innovation has become a key part of driving businesses going forward.
For us at S&P Global, we see ourselves as solution providers that equip investors with the decision-useful intelligence they need, whatever their own investment objective may be.
We’re not here to sway investors one way or the other. We’re just here to provide them with the most up-to-date information. It’s about making sure that investors have all the information they need to make decisions that align with their own investment beliefs.
Economy Middle East: COP28 is also just down the line. What do you expect to achieve from COP28 and how do you think that contributes to this region?
Mona Naqvi: In general, it’s very difficult to measure the success of a COP in the immediate aftermath since there’s a bit of a time lag. But simply shedding a light on unique ESG conversations taking place in this region is already important. Bringing people together physically in a location such as the UAE is shining a spotlight on the significance of this region when it comes to unlocking the global transformation to a low-carbon economy.
It couldn’t be in a better location in terms of bringing together the Western world and the Eastern world. The Global North-South divide is also a critical piece of the transition. It’s about making sure that we’re not pursuing environmental objectives at the expense of societal goals.
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