How GCC Investment Firms Can Adapt to Seize New Opportunities

The pressure on investors to make real progress on environmental, social and governance (ESG) issues has rapidly intensified. Private equity firms, major investors and sovereign wealth funds (SWFs), with a fully-fledged governance model, a multi-year investment horizon and relative freedom from short-term pressures , are well placed to lead this sustainable finance revolution.

The challenge for the region’s governments, business community and civil society is to translate climate concerns into action. Currently, GCC countries recycle, reuse or recover a small fraction of the plastic and metal waste they produce, far less than the global average of 32%.

Electric vehicles are rare and there is good reason to believe that more people would adopt sustainable lifestyles if the public and private sectors made them more accessible through financial incentives, public awareness initiatives, investments in green infrastructure and a wider choice of affordable green vehicles. user-friendly goods and services. This would not only allow GCC countries to advance their green agendas, but would also create significant new opportunities for growth in sectors as diverse as tourism, consumer goods, transportation, real estate and education.

Although there is no single sustainability playbook, several strategic options can be considered for creating value through sustainability, and these provide a menu of potential actions for companies that are charting the course to follow :

· Transforming sustainability laggards: Buy and transform assets whose sustainability performance lags based on environmental and social factors, deploying a well-developed toolkit and sustainability-focused strategies and capabilities

· Change entire wallet: Continued improvement in sustainability performance across the portfolio year-on-year, driven by broader deployment of levers, potentially leveraging a shared playbook

· Sustainability as a service: Invest in companies that provide data, consulting, engineering and other transformational services to businesses that are on a sustainable path

Invest in sustainability leaders: Investing in companies with leading sustainability performance

Among these strategic options, private equity firms, major investors and sovereign wealth funds have a set of key factors to focus on to fully integrate and leverage the strategies mentioned above:

Investing in capabilities and culture
The capability gap is one of the biggest barriers to action for private equity firms, major investors and sovereign wealth funds today. Installing champions with the right multi-stakeholder experience to straddle both the traditional investment and sustainability worlds can be an essential first step in building institutional capacity. However, operational responsibility cannot be isolated under these champions alone; it must be intentionally moved within the organizational culture, creating a sense of ownership of sustainability imperatives at all levels.

Focus on a long-term plan
Building capacity and driving cultural change to develop evidence of value will take time and will likely involve some false starts along the way. To stay the course, companies need to take advantage of the greater time horizon flexibility of private markets and maximize long-term results, not just quick wins – for example, by embracing experimentation.

Communicate the plan, along with measurable milestones along the way
Given the long time horizon required to achieve results at the asset and portfolio level, communicating the long-term plan and progress towards it to all stakeholders is critical to gaining and maintaining buy-in. Reporting progress requires both standardized metrics (to enable comparisons) and custom reporting (to account for the unique aspects of each investment), as well as asset-level transparency as portfolios rotate approximately every five years.

Don’t just divest, transform
Divestment and sector rotation offer quick wins for a single investor, but they don’t eliminate sustainability laggards from the global mix. As these assets continue to operate, the systemic risks they create will eventually affect returns across the market. Large investors who are essentially universal owners and may have long-term obligations cannot escape these systemic risks. Sustainability challenges must be tackled head-on by deploying capital to transform these gray assets.

Collaborate to overcome key barriers
Addressing measurement challenges and setting the right incentives cannot be accomplished in isolation. Investment firms in the region must continue to work together to set standards and policies. The current momentum and relative maturity of climate change action can provide a testing ground for action on these ecosystem challenges, providing models for system-wide collaboration across a broader set of sustainability topics.

Current national commitments under the Paris Agreement are insufficient to limit warming to 1.5°C with no or limited overshoot and would require a sharp acceleration of mitigation efforts after 2030 to likely limit warming to 2°C.

The transition to a net zero world on a wide range of interrelated drivers and constraints, including policies and technologies where notable advances over the past decade have opened up new large-scale opportunities for deep decarbonization. Private equity firms, major investors and sovereign wealth funds in the region must respond to rapidly changing societal goals and sustainability expectations. This not only presents financial, reputational and regulatory risks to manage, but also opportunities for long-term value creation.

They must act to seize this opportunity.

Antoine Samaha is a partner at the Boston Consulting Group (BCG)