Gulf banks – how do they score on ESG?

By Nick Smallwood

The World Cup in Qatar has been a highly emotive affair, both on and off the field. The football has offered shocks (Saudi Arabia’s victory over Argentina), joy (Morocco becoming the first African country to reach the semi-finals) and bafflement (Mr Sampaio’s eyebrow-raising refereeing performance in England vs France) in equal measure. Away from the sporting action, a similar level of drama has surrounded the host nation, which has faced a barrage of ESG-related questions around its social and environmental standards. We thought that this would therefore be a good time to offer a view on how Gulf Cooperation Council (GCC) banks – including a couple of Qatari lenders –  are faring when viewed from an ESG perspective. This follows a similar exercise we conducted across Latin American lenders last year (see here). That piece also laid out our thinking on the key points to be considered when conducting ESG investments in the banking world, which is useful background for readers of this article. This time around, we review GCC banks and put them in context by comparing them to their LatAm peers.


  • Like banks elsewhere, GCC lenders are increasingly focussed on environmental lending. They have generally signed up to Net Zero 2050 and are reducing direct exposures to the fossil fuel industry. However, we think that they lag behind peers elsewhere in this field. The biggest banks have ESG lending policies and one has an exclusion list, which is pleasing. In general, however, these policies are still under development or thinner than elsewhere. The amount of environmentally friendly lending is also low, often accounting for well under 5% of loans, though it is growing. Exposure to high-risk sectors remains high, often over 20% of loans, although this is inevitable given the local economies’ high exposure to fossil fuels. Indirect exposure via governments is likely to push this number significantly higher.
  • Despite starting from a weaker position in this area, the trends are clearly positive. All banks believe that lending patterns will change materially over the next few years, partly as ESG frameworks (and their accompanying exclusion lists) evolve and partly as GCC countries diversify their economies away from fossil fuels. The UAE, for instance, wants to become a leading exporter of renewables, particularly solar panels. Labelled bonds (Green/ /Sustainable) have been issued – six banks have issued over $4bn of such paper between them – and we expect the stock to grow as primary market volumes recover. Most banks are in the process of implementing Task Force on Climate-Related Financial Disclosures (TCFD) principles and recommendations, which will dramatically improve their climate reporting. This may well be a long road – one bank’s Turkish subsidiary has excluded new thermal coal or mining projects from 2022 and expects existing exposures to be settled by 2032 – but the direction of travel has been well set.


  • For all the development that is needed on the Environmental side of things, GCC banks generally have a far more robust approach to Social concerns. These include financial inclusion, education, digitisation and data protection. Various products are available to low-income customers across the region, including pre-paid payroll cards, facilities for remittances and the availability of low-value credit. Remittances are a key consideration here that feature much less prominently elsewhere, as GCC countries often host migrant workers keen to send money back to their families.
  • GCC banks boast advanced levels of digitisation, which is helpful for their more vulnerable clients as well as for banks’ financial performance. Mobile banking apps are common, allowing people to manage their money securely. Apps typically work in a number of languages so migrant workers and ex-pats are not disadvantaged. They also help financial education, product suitability and KYC considerations, as educational documents on the various products are readily available online. Some banks even provide financial classes in schools and universities. And importantly education is not confined to customers; bank employees must be familiar with their products and sell them responsibly. Therefore, they receive training at least annually to ensure that this is the case.
  • The Social aspect of GCC banking is therefore in a better position than elsewhere. In most places, Environmental concerns have a higher profile than Social issues, while banks tend to be incentivised to lend to the lower-risk, richer end of the customer spectrum. However, GCC is fairly unique in the number of foreign workers it hosts (by no means all poor), which has forced its banks to address the issues this raises head-on and with some success. They are ahead of the curve here, and should rapidly catch up on the Environmental side.


  • Governance is a mixed bag across the region. Board independence is especially varied. The largest banks have a majority of independent board members in place, whereas most others have a minority of independent members. There are also very few women in board roles. Combined with often significant concentrations on the shareholder roster, this means that the independence and accountability of bank management must be carefully assessed before investment decisions are made. An increasingly important request from ESG investors is that a specific Board member should have responsibility for Sustainability within the bank and have this reflected in their annual Key Performance Indicators. A few banks have a dedicated Board member for ESG policy; for most this is a work in progress, and hardly any have a meaningful link to remuneration.
  • Transparency is much better. Banks report results regularly and tend to welcome engagement with investors. They have a Code of Ethics in place, and already (or soon will) have annual Sustainability Reports outlining their progress against defined ESG objectives. Board remuneration is disclosed, though not always with as much granularity as we would like. Much of this is mandated by the regulators, which tend to be credible, professional and have good relationships with management. This helps to mitigate systemic risks: we can say with confidence that we have no concerns about the financial soundness of most GCC banks, which cannot be said of all regions.

In conclusion, GCC banks’ main area for improvement lies in the Environmental space. This is no surprise given preponderance of hydrocarbons in the local economy. Development of a proper code of lending in line with the UN’s Sustainable Development Goals is long overdue but, in most cases, well on the way. We expect material improvements here over time. The banks score well on Social concerns, but in many cases need to improve the independence of the Governance structures and link remuneration to ESG KPIs. However, solid regulation and decent transparency gives us a high degree of confidence in the fundamentals of the GCC banks, making them good candidates for investment when valuations allow.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Nick Smallwood

Job Title: Emerging Markets Financials Credit Strategist

Specialist Subjects: Financial credit, Corporate credit, Emerging Markets

Likes: Football, tennis, funk/jazz, travel, history, languages

Heroes: Alexander the Great, Simon de Montfort, James Bond

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