The Time Is Now: The Case for Responsible Investing in the GCC

16 May, 2019
"Implementing ESG assessments will help set clear KPIs and identify where and how projects generate value and mitigate risks associated with them."

Times are changing. The world is moving toward an ethical, long-term sustainable way of investing. Forward-looking governments are increasingly emphasizing the role of financial markets in fostering sustainable development. Investor demand for responsible investment (RI) solutions has increased significantly, as observed by the growth of assets being allocated to RI-related investments. Combined with the shift toward low-cost equity index tracking, this has led to an increase in the number of RI indices that are now available.

We expect RI indices to become an important first step in integrating environmental, social and corporate governance (ESG) considerations for many investors with existing passive or factor-based investments. At Mercer, we define Responsible Investment as the integration of ESG factors into investment management processes and ownership practices in the belief that these factors can have a material impact on financial performance.

Meanwhile, in the GCC region, with efforts to diversify the economy, governments are gaining awareness around the importance of responsible investing. The GCC makes up four of the six Sovereign Wealth Funds (SWF), which founded the One Planet SWF Working Group in December 2017 at the occasion of the "One Planet Summit" in Paris.

Within the UAE itself, numerous initiatives — such as The Green Economy for Sustainable Development and Green Agenda — are propelling the country into the future of responsible investing. In keeping with the diversification strategy, these initiatives support Vision 2030 by aligning with the nation's economic growth ambitions and environmental sustainability goals.

Abu Dhabi is contributing to the agenda in a major way through various developments, such as Masdar City — a multi-billion dollar green energy project.1 Meanwhile, Dubai set up an energy and environment park called Enpark — a Free Zone for clean energy and environmental technology companies.2

As the business case for responsible investing gets stronger in the GCC, there is a growing demand for incorporating ESG factors or sustainability themes into investment decisions and processes. Institutions are factoring the benefits of responsible investing, not only to their investments but also to their reputation and bottom line. Sustainable investing offers attractive opportunities to tap into the growth potential of companies providing solutions to various challenges of resource scarcity, demographic changes and changes in the evolving policy responses to a range of environmental and social issues.

Studies and industry evidence have shown the benefits of integrating ESG factors on the company's long-term performance. For example, Deutsche Bank reviewed more than 100 academic studies in 2012 and concluded that companies with higher ESG ratings had a lower cost of capital in terms of debt and equity. Another study in 2015 by Hsu (Professor at the National Taichung University of Science and Technology, Taiwan) and Cheng (Professor at the National Chung Hsing University, Taiwan) found that socially responsible firms perform better in terms of credit ratings and have lower credit risk.3

With companies operating against the setting of public concerns around environmental and social issues, incorporating ESG considerations is now also considered best practice. Employees increasingly want to work for and invest in companies that make a positive environmental impact. Global initiatives and bodies, such as the CFA Institute, have highlighted the financial and reputational risks of not taking ESG considerations into account.

While the GCC is beginning to understand the benefits of applying ESG, the region hasn't been too far from its concept. Sharia-compliant investing has been around for the last two decades. Both frameworks apply the negative screening approach and seek investments which provide a sustainable return. With the combination of ESG factors and Sharia screening, Islamic investors can improve investment performance while meeting social and environmental goals at the same time.

As the UAE is now focusing on diversifying its investments, it can highly benefit from creating a responsible investing market and culture where strategy and processes go hand-in-hand as important steps for successful integration.

When seeking sustainable growth, an additional layer of insight and oversight is extremely crucial to mitigate emerging risks, like climate change. To that end, implementing ESG assessments will help set clear KPIs and identify where and how projects generate value and mitigate risks associated with them.

For example, Mercer applies an Investment Framework for Sustainable Growth with its clients, which distinguishes between the financial implications (risks) associated with environmental, social and corporate governance factors and the growth opportunities in industries most directly affected by sustainability issues. Measuring impact and mitigating risks has become increasingly important and represents a strong investment governance process.

The benefits of adopting ESG are numerous. While the GCC has started with the implementation of ESG principles, more work still needs to be done in making sure governments are fully engaged with stakeholders, including investors, and strategies are aligned across the region.

Regulatory pressures to meet global standards of ESG integration will only increase in the coming years. Instead of hiding from it, it is time for companies, investors and governments to come together and define a way of working that moves the GCC forward in terms of responsible investing and sustainable growth.

1Carvalho, Stanley, "Abu Dhabi To Invest $15 Billion in Green Energy," Reuters, January 21, 2008,
Energy and Environment Park:Setup Your Company In Enpark, UAE Freezone Setup,
Chen, Yu-Cheng and Hsu, Feng Jui, "Is a Firm's Financial Risk Associated With Corporate Social Responsibility?"Emerald City, 2015,

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Sean Daykin | 13 Jun 2019

Private equity (PE) is becoming increasingly important in the Gulf Co-operation Council (GCC) in light of recent intensified economic diversification and development efforts. It is emerging as a relatively new asset class in the region, with interest in "growth capital" rather than the more traditional "buy out" PE has seen in the developed markets of the UAE and Western Europe, in which fund managers take a majority stake. Indeed, venture capital (VC) has seen a surge of fundraising following the success of the region's VC unicorns, such as Careem, and the purchase of by Amazon. Private equity can play an important role in driving economic growth. Factors, like the region's increasing wealth, recent important economic reforms and regional governments' strong initiatives to strengthen local entrepreneurship and promote small to medium-sized enterprises, make it highly attractive for PE investments. Governments in the region are attempting to foster further growth in VC by creating incubators and regional hubs with reduced regulations to encourage entrepreneurs to set up in the region. These efforts will ultimately drive sustainable economic growth, greater prosperity, and more highly skilled jobs. However, following the highly publicized case of Abraaj Group,1 the industry is calling for more robust corporate governance in the region. Local PE managers are facing far greater scrutiny as investors are starting to pay more attention to how their funds are handled. Regional investors are asking for a better understanding in gauging the performance of private markets. Buyers and investors want to base their decisions to enter the PE market on proven and tested information, considering factors like past performance and doing their due diligence on investment and operations. While measuring the absolute and relative performance of private markets is critical, it is significantly nuanced. As "value creation" is an important aspect in the private equity story, measurement should be not only accurate but also meaningful. As with all investments, evaluating past performance is always a factor when deciding whether or not to include private equity within the overall asset allocation of a portfolio. However, PE investors must look deeper to determine a Fund's true performance, through rigorous due diligence. A combination of metrics and qualitative measures are important for providing a holistic understanding of the Fund's track record and its future performance potential. In terms of quantitative metrics, the three most commonly used ones are Internal Rate of Return (IRR), Total Value to Paid (TVPI) ratio and Distributed to Paid-In (DPI) ratio. IRR is the most widely cited metric for measuring the performance of a private market investment. This is a time-based measurement which takes into account the investment made and acquired over a period of time. The longer an investment takes to mature (or sell at a given price), the more a given annualized IRR will fall. The second measure, TVPI, considers the total of how much value is received from investments (through dividends and a sale at the end), compared to the initial investment made. The final measure is the DPI ratio, which measures how much of the initial capital is returned (through dividends or other payments) compared to how much was invested initially. DPI is a barometer of realized value, not total value. All three of these metrics play an important role in helping investors evaluate a private equity fund's historical performance. While there is no single answer for comprehensively and accurately assessing the performance of a private equity fund, these metrics when employed together can help get a better understanding of it. Gauging past performance of a fund doesn't tell you much about the performance of the next private equity fund. These commitments have a long life, and it is, therefore, necessary to consider other investment related factors. They could include the stability of the investment team, looking at how the investment team sources deals or how they create value at their portfolio companies. Following the Abraaj case, assessing managers and back office operations have become an essential measure of due diligence. Effective internal controls, strong systems and a well-staffed operations team are also critical for a private equity fund to succeed. Measuring private market performance is certainly more complicated than measuring public market performance. It requires a clear view of relevant metrics and methodologies, is informed through multiple perspectives and demands specificity of analysis. Additionally, it can be subjective, prone to manipulation and ultimately represents an imperfect assessment of the success of a private market investment. However, private market performance measurement is likely to continue to evolve, thereby improving its current shortcomings. The key for investors is to identify investment talent who can generate strong investment sustainably over time. While past performance is useful in evaluating a managers' historical track record, it won't guarantee future results. Hence, an investor needs to undertake deep "qualitative" investment with operational due diligence together to assess the likelihood of future investment success. To learn more about how Mercer can help you with your investment strategies, click here. 1 Ramady, Mohamed, "Abraaj Capital: The Rise and Fall of a Middle East Star," Al Arabiya, July 3, 2018,

Damien Balmet | 09 May 2019

Sovereign wealth funds (SWF) adopt differing mandates based on a country’s macroeconomic profile and the government’s priorities. Saving for future generations – as is the case with the Abu Dhabi Investment Authority (ADIA) or the Kuwait Investment Authority (KIA) – is the widely adopted mandate. But more recently, governments have begun to leverage their funds to transform their economies by adding an economic development component to their fund’s mandate. Consider the Kingdom of Saudi Arabia’s Public Investment Fund (PIF), which has identified several economic development initiatives under its ‘Public Investment Fund Program 2018-2020’, prioritizing maximising the value of PIF’s investments in Saudi companies; launching and developing new sectors; developing real estate and infrastructure projects and companies; and undertaking giga-project initiatives (developments costing more than $10 billion). One reason why countries establish sovereign wealth funds is to both professionalise and institutionalise the way the sovereign invests and manages its wealth. With this in mind, the combination of a strong governance framework and a highly experienced investment team are integral for success. When pursuing an economic development agenda, sovereign wealth fund investment professionals have a complex dual role to fulfil: Not only are they instructed to look after and transform the existing portfolio, but they are also tasked with identifying, initiating and leading new investment opportunities. Transforming a direct investment portfolio occurs through various initiatives aimed at improving the performance of the portfolio companies or monetising some of them. To improve performance, the critical first task is to implement best-in-class governance, often requiring the training or replacement of directors representing the sovereign wealth fund on the boards of portfolio companies. In turn, boards become more business savvy and gain more clarity on shareholders’ expectations, putting them in a stronger position to fulfil their fiduciary duties. When the situation requires drastic actions (for example, when a direct investment operates at a significant loss), the fund needs to swiftly engage an external advisor to identify strategic options, then supervise the implementation of the selected strategy. Such drastic actions can be expedited when the sovereign wealth fund owns 100 percent of the company or has the majority control of the board. Portfolio transformation also occurs when the sovereign wealth fund decides to monetise one of its portfolio companies. This can occur for various reasons, such as the need for cash to re-invest into more promising opportunities, or the need to eliminate excessive downside risk. In the Middle East, the sale of a state asset often requires an intermediary step consisting of corporatising the entity. This process aims to transform state assets or government agencies into corporations with a legal structure and financial statements for the last three or five years. Going through this process is usually the first step towards a sale or an Initial Public Offering (IPO). When it comes to new investment projects, sovereign wealth funds can operate in a structured approach. New viable investment opportunities need to be built on a detailed understanding of the economic sectors and strengths of a country. Once a sector or opportunity of interest has been identified, a more in-depth study should be performed to confirm the opportunity, its profitability, landscape of potential partners, risks, and employment potential of the project. A compelling example is the concept for a downstream aluminum cluster pursued in Bahrain by its sovereign wealth fund, Mumtalakat. One of its portfolio companies, Aluminum Bahrain (Alba), is currently building a sixth smelter line that will add 500,000 metric tonnes of aluminum per year, starting in 2019. In parallel, Mumtalakat is teaming up and co-investing with international partners to create joint ventures in Bahrain that will utilise this additional capacity while creating 2,000 new employment opportunities. By developing a strong understanding of attractive sectors in a country or a region, sovereign wealth funds should be in a position to quickly form an opinion on an opportunity. If an established player from overseas or an adjacent country has a compelling business case for expanding in the Middle East or in the country of a SWF, then the SWF should engage with the potential partner to further assess the opportunity. Funds with an economic development agenda represent a great opportunity to accelerate the development of their economy. Some African countries such as Angola (Fundo Soberano de Angola - 2012)1 and Nigeria (Nigeria Sovereign Investment Authority - 2012)2 set up their sovereign wealth funds over the last decade and both have developmental components in their mandates. Egypt passed a law in May 2018 to establish its own fund3. One of the contemplated objectives for this fund is to manage state companies ahead of listing on a stock exchange. The PIF in KSA has a huge task ahead of itself as it is expected to play a major role in the stimulation of the Saudi Arabian economy. The large and rapidly growing value of assets managed by sovereign wealth funds as well as the leadership expected of them in their countries’ economic transformation agendas is placing them in the public spotlight. It does not come as a surprise that citizens want to know how their public funds are being employed to their benefit. In developed countries, governments have traditionally focused on the regulatory aspect of an industry and then let the private sector flourish. On the contrary, in the Middle East and other developing countries, significant industries have often emerged from the will of the government. Sovereign wealth funds can be an effective tool to make this happen. To learn more click, here. 1International Forum Of Sovereign Wealth Funds 2International Forum Of Sovereign Wealth Funds 3Egypt Plans Sovereign Wealth Fund-of A Kind

Gareth Anderson | 21 Mar 2019

The size and scale of China’s domestic marketplace has become one the nation’s greatest economic achievements. From the middle-class explosion to the sweeping impact of digital transformation throughout its population and industries, China—and the global economy—are entering a new era of investment opportunities. There is money to be made by investing in China but opening up the country’s heavily regulated domestic assets to foreign investors entails a learning curve on both sides. Perspective: China vs. Growth Economies The Mercer report The Inclusion of China A-Shares in MSCI Indices: Implications for Asset Managers and Investors, explains why opening China’s domestic market to the global economy has created a wave of excitement throughout the international investment community and marketplace. This enthusiasm is being carefully managed by the measured strategy China and the MSCI are implementing while forging a framework for future growth. The initial phase only weighted 226 stocks at a mere 5 percent of their market cap, demonstrating that this new era will be defined by an incremental, long-term mindset. This cautious approach may be welcome news to competing growth economies in the region. Despite the conservative rollout of Chinese A-shares (domestic assets) to the international marketplace, inclusion in the MSCI Index will profoundly impact the global economic landscape, especially with regard to the influence of emerging economies. Take, for instance, what the MSCI Index will look like with the inclusion of 5 percent of Chinese A-shares, and then at 100 percent inclusion. Growth economies such as India, Taiwan and South Korea may be negatively impacted by the inclusion of domestic China in global indexes, especially if investors shift their focus from growth markets to new opportunities in Chinese A-shares. (Source: MSCI) Change is inherently fraught with breakthroughs, obstacles and the anxiety of the unknown. Though no one can 100 percent accurately predict the future, let’s examine the opportunities and challenges of China’s new status in the global economy, and what it means to equity investors. Opportunities from Inclusion in MSCI: 1.      Market Size: The Chinese domestic market is large, comprising more than 3,000 stocks, and is the most liquid in the world. Since the beginning of 2017, the Shanghai and Shenzhen Stock Exchanges have experienced higher aggregate daily trading volume than the New York and NASDAQ Stock Exchanges combined.  2.     Diversity: The Chinese domestic market entails a cross-section of companies that represent a broad number of industries, and it is much more diversified at the sector level than the China shares listed in the Hong Kong Stock Exchange (which is highly concentrated in IT and financials). 3.     Uniqueness: Historically, China’s A-share market has displayed a low correlation with other equity markets, marking an era of new and unexplored opportunities to create value. 4.     Limited Foreign Ownership: With domestic Chinese retail investors comprising more than 75 percent of the free-float market cap—the number of outstanding shares available to the general public—there is a lack of informed institutional owners in the market. The unprecedented nature of the situation can create inefficiencies, but also yield an environment that can be conducive to investors willing to explore new opportunities. Challenges from Inclusion in MSCI: 1.      Volatility: Although the market is large and liquid, it is volatile and has experienced periods when liquidity has fallen dramatically in short periods of time. However, China has taken steps to mitigate volatility, including the formation of a “national team” to help stabilize the market by purchasing A-shares in times of market stress. 2.     Concentration: There is concern regarding the composition of benchmarks when China A-shares are included in indices at their full weight. Global emerging market benchmarks are relatively diversified at present, but they will become increasingly dominated by China following the full inclusion of the China A-share market. However, to address this issue, many innovative organizations are recruiting analysts and portfolio managers experienced in the region—or are nurturing in-house/hybrid solutions to explore standalone investments and other strategies. 3.     Global Uncertainty: Trade tensions between the US and China, and other geopolitical concerns have made some investors skittish about opportunities in China’s domestic marketplace. As markets seek stability over chaos, an unknown future and emerging investment realities and mechanisms will have some organizations choosing to stay on the sidelines. This, however, means more potential opportunities for investors with the portfolios and risk tolerance to explore new opportunities. To learn more about how the inclusion of China’s A-shares in MSCI Indices will impact the global marketplace and create new investment opportunities for your organization, visit Mercer Wealth and Investments (or Mercer Wealth and Investments – China).

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Jackson Kam | 11 Jul 2019

Is the next global financial crisis just around the corner? If so, will it be markedly different from the last crisis? And is there a possibility the contagion will come from today's emerging markets, such as China, Turkey or Argentina? While the future is uncertain and uncontrollable, you can take calculated steps as a business leader to prepare now for what may come later. Emerging Market Economies Are on the Rise   The strength of emerging market economies was one of several top concerns for leaders in 2018, according to the Mercer Global Talent Trends study, and it continues to be a concern today. While Asia, Latin America and Africa steadily replace the North-Atlantic-centric economies as the world's engines of growth, the global economy is experiencing increasing impacts due to their growing strength. Ardavan Mobasheri, managing director and chief investment officer at ACIMA Private Wealth, believes the global leadership baton will have been completely passed to the faster-growing economies by 2030. He states, "By the end of the third decade of the century, the transition will likely be complete, with the anchors of global economic growth cast across the Pacific and the Southern Hemisphere." But as the world adjusts to the growing strength of emerging market economies, it must also adapt to those economies' inevitable speed bumps. "Speed Bumps" Are Starting to Form Globally   Emerging market assets are now retreating in the face of increasing headwinds across their geographies, including production slowdown, rising debt, higher inflation rates and slides in currencies.1 "The contagion in emerging markets happens through different channels, and it tends to be greater in periods of monetary tightening in developed markets," Pablo Goldberg, a senior fixed-income strategist with BlackRock, tells CNBC.2 "Liquidity is an issue. Investors will sell what they can sell." Desmond Lachman, a resident fellow at the American Enterprise Institute and former deputy director for the International Monetary Fund's Policy Development and Review Department, writes that U.S. economists and policymakers are ignoring risks posed by emerging economies at their own peril. "They fail to see that years of massive Fed balance sheet expansion and zero interest rates created the easiest of borrowing conditions for the emerging markets," Lachman writes. "By so doing, they removed economic policy discipline from those economies and allowed large economic imbalances in those economies to develop, especially in their public finances." Now that more capital is flowing back into U.S. assets deemed safer than emerging market assets, the acute economic vulnerabilities built up within the emerging market economies during the years of "easy" money are being revealed. These vulnerabilities, if left unchecked, will likely continue to grow and spread globally, extending their implications even further into the years to come. Business Leaders Can Adapt — Here's How   To best prepare for an uncertain financial future and avoid those vast repercussions, you'll want to first take notes on the aftermath of the last financial crisis — it can teach some strong lessons on how the global economy and financial system work. For example, according to the Mercer report, "10 Years After the Global Financial Crisis: 10 Lessons to Learn," one of the most important lessons from 2009 shows that U.S. policymakers' policies, record low policy interest rates, vast liquidity injected into the banking system and quantitative easing produced unexpected outcomes across the globe. While the monetary policies haven't been inflationary in terms of consumer prices, they have been inflationary in terms of asset prices. Now, policy rates are increasing in some economies, but the full consequences of the last crisis' aftermath on all of the world's economies are still unknown, even today. Keeping that in mind, you can take these three steps as a business leader to prepare for the next crisis: 1.  Don't abandon diversification, widely known as "the only free lunch in investment." 2.  Be dynamic, and be prepared to rotate out of assets currently at close-to-record highs if they become unfavorable once investors realize their valuations may not be based on strong fundamentals, such as underlying growth in profits. 3.  Don't abandon active management, as conditions will inevitably change. Taking these three simple steps will allow you to stay nimble and flexible enough to adapt to any situation — even a financial crisis. As markets endure various metamorphoses, remember these lessons and keep these tips in mind to ready your organization for any crises to come. Sources: 1. Teso, Yumi and Oyamada, Aline, "Emerging Markets Retreat Amid Global Growth Concerns: EM Review," Bloomberg, February 15, 2019, 2. Osterland, Andrew, "Emerging markets, despite strengths, still get no respect," CNBC, October 1, 2018, 3. Lachman, Desmond, "We ignore risks posed by emerging economies at our own peril," American Enterprise Institute, September 17, 2018,

Lewis Garrad | 11 Jul 2019

We live in a period of transformative change. It's difficult to talk about any aspect of business these days without touching on what the "future of work" means and what its implications are for individuals, companies and societies. Part of the reason for this is that we are all increasingly aware of the technological advances, changes in government policies and shifting employee expectations that are reshaping what we know as work. As artificial intelligence (AI) and automation infuse into everyday life, the opportunities to reinvent how people will work and live are significant. What does this mean for the employee experience in this age of disruption? How does an organization build an employee experience program that's relevant for this modern world? The Role of HR: Connectivity in the Human Age   According to Mercer's 2019 Global Talent Trends report, 73% of executives predict significant industry disruption in the next three years — up from 26% in 2018. Along with the constant change that disruption brings is the emergence of several human capital risks, such as a decline in employee trust and an increase in employee attrition. Organizations are realizing that people-centered transformation is the key to transferring the shockwaves of disruption into sparks of brilliance. This translates into a need for HR to lead at the drafting table, yet only two in five HR leaders participate in the idea-generation stage of major change projects today. To ensure the Human Agenda remains at the heart of change, HR needs a permanent place in the design process, rather than being a late-to-the-party guest. A critical contribution the HR function will make is helping to design and deliver exceptional employee experiences. Understanding the Employee Experience   How do you capture the moments that matter in an employee's life cycle? From onboarding to having a new manager or getting promoted, critical experiences help shape an employee's connection to the organization. Each employee is different, with diverse needs and talents — and over the course of a career people are exposed to different events and experiences. Some experiences enhance their fit with the organization, some do not and others undermine it. This translates into varying levels of employee and business performance. A more digital HR team, combined with data and analytics that new tools bring, can help leaders understand these experiences at a deeper level. Although it is still common for organizations to conduct episodic surveys of employee attitudes once a year, many are now looking to augment their employee-listening strategy with more fluid pulse surveys to provide deeper insight. Using an employee experience platform, HR teams can now conduct on-demand surveys as and when needed, and employees can give feedback when it's most relevant, with actions aligned to specific needs and timing. Platforms, like Mercer's Allegro Pulsing Tech, enable HR teams to take an active-listening approach to understand experiences over time. This generates better insights into multiple touchpoints, providing HR the opportunity to design more engaging experiences across the employee life cycle. This sets in motion a culture where employees feel heard and are supported and encouraged to do their best work every day. Increasingly, organizations acknowledge that the employee experience is as important as the customer experience. Research has shown that companies leading in customer experience often do so via exceptional cultures and engaged people. The importance of investing in the employee experience can't be ignored. Building a 21st Century Employee Experience Program   Enabling employees to thrive requires intentional redesign of critical employee experiences, using new technology and AI to make work more inclusive, personalized and focused. To do this, organizations need an employee-listening program that uses multiple methodologies to generate deeper insights for diverse stakeholders, including the employees themselves. This new type of organizational research takes an evolving approach to measurement and uses new technology to support more integrated analyses and more experimentation within the organization to generate real learning. The goal is for everyone to have a broader and deeper understanding in an optimal manner to generate a more compelling employee experience, more effective teams and a higher-performing organization. In this age of disruption, as the pace of change accelerates, individuals need support in finding new ways to adapt and contribute. Without help, individuals, organizations and societies will fail to thrive. As more tasks get automated, HR — as the guardian of the employee experience — is best placed to lead this reinvention.

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Having trouble picturing AI in your workplace? It’s already here. Robots are learning to respond to external stimuli. And while it looks simple, it’s actually a massive step forward into the future of work. Creative response and problem solving are critical if AI is going to work alongside people in the office. So what looks like an opening door, is actually an unlocked future. The future of work is here. Can you see it?  Our deep expertise, powerful insights, and real-world solutions help the people and organizations we serve take steps today to secure a better tomorrow.