Environmental, Social, and Governance (ESG)

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The year 2021 became the year of ESG investing. Investors concerned about climate change and social justice were successful in pushing companies and regulators to make changes amid record inflows to funds focused on ESG issues.

2022 will be the year that corporations move beyond talking about ESG programs and put them into action. The rapid rise of sustainability on global agenda are driving towards a new set of priorities fueling a purpose-driven economy.


Definition of sustainability

The United Nations’ 1987 Brundtland Report calls for sustainable development that meets our needs today without compromising the needs of those in the future. This sums up the definition of sustainability.

In the UAE, the Dubai Declaration on Sustainable Finance was launched way back in 2016 to formalise the commitment of financial institutions in the UAE to achieving a climate-resilient, inclusive green economy, in line with the goals set forth in the UAE Green Agenda 2015-2030. This was followed by the Abu Dhabi Sustainable Finance Declaration in 2019, wherein the Abu Dhabi Global Market (ADGM) spearheaded the launch of the said declaration with signatories including leading UAE Authorities and private sector entities.

Dubai Sustainable Finance Working Group and ADGM Sustainable Finance Working Group; both were launched in 2019 wherein the former aimed to foster the incorporation of ESG considerations in the Dubai financial sector, mainstreaming ESG risk analysis and identifying business opportunities for innovation, whereas the latter laid down certain guiding principles which intended to serve as a catalyst in the increased implementation and integration of sustainability practices among the UAE’s financial entities.


UAE Sustainable Finance Framework 2021-2031

This Framework is a critical milestone in mainstreaming climate changes and environmental sustainability in financial decision making and risk management.

The three main pillars of the Framework are –

Pillar 1 Maintain sustainability in financial decision making and risk management.
Pillar 1 Enhance the supply and demand for sustainable finance products and green investments projects.
Pillar 1 Strengthen enabling environment that promotes sustainable financial practices through collaboration between financial and real sector stakeholders.

This framework envisages setting the UAE on a path towards a more environmentally sustainable, resource-efficient, and socially inclusive model.


Environmental, Social, and Governance (ESG) Criteria

Environmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights. Internal controls are the mechanisms, rules, and procedures implemented by a company to ensure the integrity of financial and accounting information, promote accountability, and prevent fraud.

ESG criteria can help investors avoid companies that might pose a greater financial risk due to their environmental or other practices.


Contract Lifecycle Management (CLM)

CLM is the management of an organisation’s contracts from initiation through execution, performance and renewal / expiry. CLM systems will inevitably be recognised as critical for achieving compliance with ESG commitments. An increasingly complex business world has created greater potential for non-compliant contracts, and companies would face substantial risks. In order to mitigate these potential unfavourable outcomes and accelerate their ESG strategies, companies may have to formally include their ESG commitments in their contracts with suppliers, partners, and customers. It may be imperative to consider blockchain within the CLM systems which can track and trace contract information and details.

The evolving ESG reporting standards will necessitate automating contracts with innovative CLM technologies to ensure that when it comes to ESG and sustainability, companies spend less time drafting and managing contracts, and more time ensuring performance after they have been signed.

The opportunity to make a difference requires new strategies, processes, and technologies. As ESG and sustainability advance, contract performance will increase, and businesses can be in a stronger position to become a catalyst for change.

To know more about CLM and to ensure better compliance with ESG requirements, do get in touch with us at info@jrb.ae.


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