This article has been co-written with Pablo Hernandez-Lagos, Professor of Economics at New York University Abu Dhabi.
Throughout history, there have been investors who have used their capital for the betterment of society, as well as to make financial returns. But in general, the mainstream market has been focused on investing for profit, while the business of “doing good” was left to philanthropists, charities, non-governmental organizations (NGOs), and governments.
Those assumptions have changed drastically in recent years. Conscious investing –sometimes called ethical or impact investing– turns these assumptions on their head, by creating a framework for viable investments that will advance social and environmental solutions and produce financial returns in the process.
Conscious investing is on the rise globally, and it has accelerated during the global coronavirus pandemic. The current global market size has been estimated at US$715 billion, and it is growing by 20% each year. It includes sectors as diverse as renewable energy, sustainable agriculture, microfinance and conservation, along with new solutions for staples such as housing, healthcare, and education.
And in recent months, the means of making wise conscious investment decisions have been made easier thanks to recent developments to environmental, social, and governance (ESG) standards. In September, the “big four” accounting firms (PwC, Deloitte, EY, KPMG) unveiled an ESG reporting framework to help companies implement a base-level standard for their accounting.
Middle East potential
Despite these successes, the deployment of global conscious investor funds is low in the Middle East. Researchers estimate that just 2-5% of global impact investments are placed in the MENA region. Yet, there is a wealth of opportunity for investors here– and by extension, for entrepreneurs who have the ideas that could transform our societies.
The opportunity to align Islamic values with social needs is significant. It explains why the Islamic Development Bank and United Nations Development Program launched the Global Islamic Finance and Impact Investing Platform in 2016. There is also a high level of opportunity from the very sizeable sovereign wealth fund perspective, and there are many family-owned offices in the GCC seeking a responsible and profitable home for their money.
As we look to a post-COVID-19 future, governments around the world are preparing sizeable stimulus packages, and planning for a much-needed green recovery in the process. Businesses with ESG-centered missions from their beginning will almost always involve new knowledge, new techniques, and new mindsets, leading to stronger growth.
To give an idea of the global potential for this market, the International Energy Agency (IEA), says an investment of $1 trillion will be needed over the next three years to ensure economic recovery on a sustainable footing; the agency has also formulated a three-year plan to cover a range of energy sectors. Such investments would also be a good business decision, seeing as the International Renewable Energy Agency (IRENA), headquartered in Abu Dhabi, recently estimated returns of $3-8 dollars on every dollar invested in renewable energy.
Moreover, a recent study done by UBS Global Wealth Management, conducted over more than 5,300 millionaires across 10 markets such as Brazil, China, Germany, Hong Kong, Italy, Singapore, Switzerland, UAE, United Kingdom, and the United States with at least $1 million in investable assets (excluding property), found that the highest rates of adoption in sustainable investing was found in the UAE, China, and Brazil.
The need for innovation and economic diversification thus makes conscious investing a wise strategy, and one that entrepreneurs should embrace in their business models and supply networks.
The next wave
The signs are encouraging that this wave of change will happen. According to the latest Sustainable Investing Review 2020 from Standard Chartered Private Bank, 90% of investors surveyed in the UAE said they are interested in sustainable investment, with 42 percent planning to invest 5-15 percent of their funds in sustainable investments over the next three years.
To encourage this process, startAD, the Abu Dhabi-based global accelerator anchored at NYU Abu Dhabi, recently hosted the sixth edition of Angel Rising, with a focus on “Conscious Investing and Catalyzing Technology for Good.” The Symposium convened global and local thought leaders to develop a better understanding of what it takes to become an investor in mission-driven companies. Participating startups included Cycled, which has developed a smart bin that offers rewards to people who recycle, while advising on the amount of carbon they are saving; Pulse Active Stations Network, a network of smart health kiosks in high footfall public spaces, which leverages the internet of things (IoT) to measure health and wellness indicators.
This year, startAD has also partnered with VentureSouq, King Abdullah University of Science and Technology, Sharjah Entrepreneurship Center, and Hub71 to launch the region’s first Conscious Investor Fellowship (CIF). 30 investors have already joined CIF to action conscious investments, which is a very positive sign that the region is ready to push forward and turn ideas into action.
As the world emerges from the impacts of the pandemic, regional investors have the perfect opportunity to build a social entrepreneurship hub in the GCC.