Good governance indices planned

Standard & Poor’s and the Institute for Corporate Governance (Hawkamah) have teamed up to launch a series of corporate governance and sustainability indices beginning the summer of next year. The move is intended to increase transparency among equity markets in the Middle East and North Africa (Mena) region.

The S&P-Hawkamah ESG Mena indices will raise the profile of local firms that perform well compared to their peers in terms of environmental, social and corporate governance (ESG) responsibility parameters, said Dr Nasser Saidi, Executive Director of Hawkamah.
 
“International investors, particularly institutional ones, are attracted to regional markets and firms,” he told Emirates Business. “They look at a wide variety of criteria and indicators in choosing a company to invest in – and one of the most important criteria is corporate governance.”

The indices will employ an “innovative” methodology that quantifies a company’s ESG practices and translates them into a scoring system, which is then used to rank each company against its peers in the Mena region.

Saidi said this “painstaking” project will operate in co-ordination with local authorities – the Dubai International Financial Centre, the Union of National Banks and  other “regional and international partners”.

“Funding is likely to come from stakeholders who want to participate in the initiative. We are seeking investments from institutions such as World Bank and the United Nations,” said Saidi.

The indices represent a first in the region and are to include stocks from 11 markets initially. They will focus on the best performing stocks as measured by their level of concern for the interests of internal and external stakeholders, shareholders, employees, customers, the community and the environment.

The development of the indices will be modelled on the S&P ESG India index, a project originated last year by S&P’s, Crisil and KLD Research and Analytics, with partial financial support of the International Finance Corporation (IFC), a member of World Bank.

Alka Banerjee, S&P’s vice-president for index services, said each company’s performance would be measured based on its publications and annual reports.

“We will list 197 questions and then screen and scale each company’s performance based on their publication, which is standardised and open,” she said. “We will study their reports and then we will answer the questions based on that.”

After scaling, S&P’s will cross-check the validity of the statements with different independent third-party sources. “ESG matters not just because it is a good thing to have but because it involves reputations and operational risk and stakeholder’s interests, customers, employees and the environment in which these  companies operate,” she said.

Robert Shakotko, S&P’s managing director, Index Services, said the methodology used the scores that companies receive on ESG parameters as index constituent weights.

“This ensures index performance is based on a company’s investments in ESG parameters rather than its sheer market size,” he said, adding S&P will tailor the approach more precisely to the prevailing disclosure and reporting standards in each local market through Hawkamah’s expertise.

Saidi said: “Hawkamah contributes its understanding of the Mena business and regulatory context, which, when coupled with S&P’s experience in ESG metrics and indices, will form a reference point for investors, regulators and the private sector on corporate governance reform in the Gulf and strengthen investor confidence.”