Mayar, The Mayor and Talking ESG in the GCC

Ahead of most business trips there is always a mixture of apprehension and excitement- especially when going to a new country. The unexpected nature and short notice left little time for the nerves to build as I considered what I actually knew about Kuwait.

The country had been the focus of global attention roughly around the time I was becoming more aware of the world around me. The Iraqi invasion of 1991 and the involvement of US, UK and coalition forces was the first event for nascent 24 hour news coverage to sink its teeth into. I remember being allowed to listen to the rolling radio news coverage on my WalkMan in class.

So, when the call came from the official at the British Embassy in Kuwait to join the Lord Mayor of London’s trade delegation to the tiny Emirate, I jumped at the chance.

In truth, amid the excitement, I was anxious about two things. The first was the prospect of my flight taking off in the middle of the worst storm to hit the UK in a decade. I was right to be nervous. I had seen an aborted landing at Gatwick that did little to ease the apprehension. Sitting in my seat, still on my phone, I thought that this was an usually bumpy taxi to the runway. I looked out of the window to discover that we hadn’t actually moved as the plane was buffeted by the 80mph gusts of Storm Ciara. 

Pictured: Mayar’s Marc Cox as part of the Lord Mayor’s Trade delegation to Kuwait

The take-off was little better. The sprint down the runway shook the plane from side to side and once in the air, introduced an up and down axis to the unwelcome movement. 

In truth, it was probably only 45 seconds until we were clear of the winds and the rest of the flight passed without incident.

The second source of nerves was in how to represent Mayar. Would it be wise to mention the phrase of the moment, ‘ESG’? Of course the ‘S’ and the ‘G’ element has a broad overlap with the principles of Islamic Finance. But how would the ‘E’ be received given that we were in one of the hydrocarbon producing centres of the world?

In this regard, I was wrong to be apprehensive. At every meeting, the topic of ESG was raised by the Kuwaitis. 

At our first breakfast meeting, the topic was given generous airtime, led by the Lord Mayor’s reflections from his recent trip to Davos, where the Environment had been the number 1 risk factor.

At a second institution we discussed that they were focussed much more intently on Governance which they felt would lead to better environmental commercial policies.

The Kuwaiti Investment Authority were hugely enthusiastic about investing in environmental projects both and home and abroad. They were of the opinion that now was the window of opportunity to transition away from reliance of oil production and start to harness one of the other natural resources of the region - the sun..

Pictured: Salam Palace now restored as a museum and daybreak over Kuwait City

The reasons for the focus in Kuwait became clear. Although ‘ESG’ is relatively new label, the fundamentals underpinning its current popularity are not. ESG should be simply viewed as an exercise in diversification and risk mitigation. 

The issue, reflected in the academic literature on the subject, is the perception that investors must choose to prioritise either purpose or profit. However, this view had been clouded by a lack of clarity of what ‘ESG’ investing actually is and compounded by a flawed approach.

The issue of definition is one that is being addressed by index providers as well as ratings agencies and the rush to be first to market will inevitably lead to two or three accepted standards. The focus on reporting may to lead to the birth of an ESG Accounting industry. 

The second issue is one of approach. Even with the focus on ESG, the approach is largely as a subset of a conventional portfolio. Viewed as restrictions, ethical criteria take an existing portfolio and slice away the ‘undesirable’ element to give a subset of the original portfolio, regardless of whether it is actively or passively managed. 

If investors use benchmarks as a pool of investment ideas and create a subset of those ideas, it is unsurprising that investors receive a subset of return. Benchmarks are necessary for performance measurement which means they represent opportunity cost rather than opportunity sets.

The Mayar approach does not view ESG criteria as restrictions but more as heuristics that guide us away from the types of companies that are unsuitable for a long-term investment strategy and toward those that are more suited. This approach allows an investor to build a portfolio of best ideas from the bottom-up and deliver alpha rather than salami slicing. 

The KIA also raised the debate of divestment versus engagement as a tool for incentivising corporate actions. Their argument is that engagement is more effective and desirable than divestment. After all, to divest, somebody else without the same focus has to buy the stock, likely at a reduced price thereby boosting returns. 

The preference for engagement does have its limits. The KIA highlighted that, although certain companies were enthusiastic ‘engagers’ and are fully committed to the transition to a carbon neutral world, others are not. 

What is clear is that ESG principles are here to stay. With the imminent adoption of ESG standards comes the opportunity for firms to establish their ESG credentials. Like accounting policies, new standards will give firms room flexibility on how certain aspects of the business reports.

The sceptics that we are, we are unwilling to take everything that we see at face value and our process is designed to weed out the firms that misrepresent their financial statements (within accounting rules) AND the firms that ‘Greenwash’ their business practices.

Regardless of the label, it is a holistic assessment of the long-term risks facing a firm that informs its attractiveness as a long-term investment opportunity.