The MEASA region (Middle East, Africa, and Southern Asia) should be high on the agenda for global investors due to its rapid pace of economic growth and the youthful demographics that will drive future demand for products and services, but the majority are missing out on this significant opportunity.
The region accounts for 15 percent of global GDP and around a third of economic growth currently. But MEASA represents only 4 percent of the widely followed Morgan Stanley All Country World Index (ACWI) due to a number of factors, including lagging capital markets development and relatively low stock liquidity.
Many global institutional investors decide that no exposure at all is better than taking the trouble to explore and analyse a region that they perceive is full of risk. This dynamic only serves to compound the problem – more investment flows would actually improve liquidity and more professional scrutiny would add pressure for improved corporate governance and regulatory oversight.
Breaking this vicious circle requires a catalyst – for exchanges and listed companies to move at pace to address environment, social and governance (ESG) risks, and confidently communicate their progress. This would increase engagement and provide investors with greater comfort, paving the way for capital inflows and improved valuations that more accurately reflect the growth prospects of listed companies in the MEASA region.
Exchanges have an important role to play in elevating ESG – particularly by setting and enforcing governance standards, for example on board independence and diversity, as well as disclosure. The Abu Dhabi Securities Exchange (ADX), for example, is moving in the right direction by becoming a partner in the UN-led Sustainable Stock Exchange initiative (SSE) and ensuring the listed companies complied this year with its own ESG disclosure guidance.
The guidance includes 31 ESG indicators are mapped against Global Reporting Initiatives (GRI) indicators and the UN Sustainable Development Goals.
ESG is necessarily a process, and while changing global investor perception of risk in the MEASA region will take time – it will be achieved through many small victories at the corporate level. In the UAE, there is clear direction from the government that companies should get on board its sustainability agenda.
If this trend is replicated across the MEASA region, there can be a real shift in capital market allocations that will support not only growth, but sustainable economic development led by a responsible and globally engaged private sector..