Jeddah, Kingdom of Saudi Arabia, 15 April 2021 – Islamic Development Bank (IsDB) President, Dr. Bandar Hajjar, says: “Today, the Environmental, Social, and Governance (ESG) considerations should be more about values creation and rewarding companies that are leading progress rather than creating a penalizing concept.”
Dr. Hajjar made the remarks on Thursday 15th April at the 2021 series of the Future Investment Initiative (FII) Institute under the theme: ‘The Neo-Renaissance: Mobilizing ESG for a Sustainable Future.’
The IsDB President was a key feature speaker at a virtual panel session on ‘Redefining ESG: Towards Inclusive Global Sustainable Development’ where other speakers from the United States, Bahrain and Nigeria were in attendance.
Highlighting the emerging market realities, Dr. Hajjar, spoke on differentiating the application of ESG standards to different markets noting the danger that lies in ‘too strictly applying the ESG criteria.’ He stated: “Developing countries look forward to source the needed investments to achieve their Sustainable Development Goals (SDGs). However, the danger of applying ESG criteria too strictly - through excluding many companies that operate in sectors where developing countries hold a comparative advantage or in countries where the business environment is such that it would be impossible to adhere to the ESG principles on day one - is that we would further deprive these countries from much needed finance.”
The IsDB President, however, underlined the importance of observing the ESG standards and considerations despite the prevalence of such a risk saying: “This is not to say that ESG criteria are not important in developing countries or to give a free pass to companies that operate in different markets. But we need to understand the implication of excluding such companies from investment portfolio in a dynamic setting.”
He furthermore elaborated that the ESG criteria are not unified and have not been used uniformly in investment decisions, thereby, alerting that “the rise of passive ESG investments may, for example, force companies to exit a developing market possibly because the ESG rating it gets is low, thus affecting that country’s sustainability.”
In conclusion, the IsDB President elaborated on how exclusions based on ESG criteria - in countries whose core competitive sectors are driven on mining or extractive industries - could further worsen the situation by imposing too heavy a burden on certain countries leading to even less application of Global Value Chains whereby power parity could be lost further in favor of some suppliers and possibly lead to more flows of migration in geographies like the African continent.
Other panelists mostly concurred on the importance of being realistic underlining that while ESG frameworks should be really about protecting environment, and ecosystem, and having more governance, investments should also be preserved in job creating sectors.
The 45-minute discussion also focused on exchanging views on other relevant issues such as the risk of possible capital flow out of industries with low or negative environment ratings, capital reallocations and transition to low carbon economies in Africa as well as climate resilience.
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