In December 2023, the COP28 UN Climate Change Conference was hosted in Dubai, once again putting the spotlight on global climate change action and handing the Middle East hosting responsibilities. Describing the current period as “the beginning of the end” of the fossil fuel era,¹ this iteration of COP not only gave us the first global stocktake of progress against the 1.5°C by 2023 global warming target, but more specifically a unique opportunity to assess how the host region, the Middle East, stacks up in terms of both contribution to global warming and reduction of corporate carbon emissions.

Indices are a useful way to measure the performance of a basket of stocks, but they can also provide insight into the environmental credentials of listed companies. In this blog, we explore the carbon characteristics of the region via the S&P Pan Arab Composite and the S&P/Hawkamah ESG Pan Arab Index. The latter index measures the performance of the 50 top-performing stocks in the region, while incorporating environmental, social and governance (ESG) factors. The former index is a broad, float-adjusted, market-capitalization-weighted index with no specific ESG criteria incorporated, and acts as the benchmark for the ESG index.

Using S&P Global Trucost environmental data, we can assess how constituents of these indices have historically contributed to overall emissions and related metrics. This analysis enables us to explore a number of facets of climate transition. For example, which industries are the heaviest CO2 polluters? Which companies are leading the charge from a decarbonization perspective? How does the inclusion of ESG criteria in index design affect its carbon performance when compared to the benchmark?

Exhibit 1 provides us an overview of how the weighted-average carbon intensity (WACI) of the S&P Pan Arab Composite has increased over time.² One noteworthy observation here is that corporate disclosure has improved with time, with more companies providing more thorough disclosure of their carbon performance. This is combined with improved modeling techniques on non-disclosing corporates.³

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With overall emissions rising, which companies are most heavily contributing? Exhibit 2 provides an overview of which stocks have the greatest WACI, meaning that based on their weight in the index, they have the highest proportional CO2 emissions.The S&P Pan Arab Composite has more stocks, meaning weights within the index are generally smaller than in the S&P/Hawkamah Pan Arab ESG Index. As a result, although ACWA Power Co has a WACI of 839.8, its smaller index weight minimizes its contribution to the overall WACI of the S&P Pan Arab Composite. Conversely, in the S&P/Hawkamah Pan Arab ESG Index, the lower number of stocks mean that they have greater weight in the index, leading to greater concentration. As a result, the overall index-level WACI of the ESG index has historically been higher.

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As depicted in Exhibit 3, due to concentration within the S&P/Hawkamah Pan Arab ESG Index, it had a greater carbon intensity than its benchmark in 2021, 2022 and 2023.

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Exhibit 4 depicts the overall country-level contribution of carbon intensity of the S&P Pan Arab Composite. As of June 2024, over one-half of the emissions of the index came from Saudi Arabia, while Kuwait was the second-largest contributor, at 14% of overall index emissions. This is aligned with country representation by market capitalization.

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To identify sectors that are making progress, it is possible to compare the sector-level intensity and observe which sectors have seen reductions over time. Exhibit 4 shows the Trucost Revenue Sectors that have made the most progress since December 2019.

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Coal Power Generation has experienced the largest reduction in intensity over this period, driven by Taqa Morocco’s declining carbon intensity. However, overall emissions at an index level have increased, highlighting the need for corporate action on CO2 emissions.

This carbon analysis reveals that the S&P/Hawkamah ESG Pan Arab Index exhibited a higher WACI than its benchmark over the five-year period studied. While this finding highlights a notable disconnect between ESG scoring and actual carbon performance, it also emphasizes the evolving nature of ESG indices as they adapt to the complexities of sustainability metrics. While the S&P/Hawkamah ESG Pan Arab Index represents a significant step forward in promoting responsible investment practices in the region, encouraging companies to enhance their ESG performance and transparency, for those market participants seeking an improved carbon reduction at an index level, it may be the case that this should be factored into specific index design principles.

Ultimately, the S&P/Hawkamah ESG Pan Arab Index can serve as a valuable tool for assessing the ESG performance of companies within the region, as it integrates considerations for environmental, social and governance issues. As expectations on corporate sustainability proliferate, the index continues to act as a robust measurement of these crucial topics.

¹See a summary of COP28 here: https://unfccc.int/cop28/5-key-takeaways

²For more information on metric calculation please see Index Carbon Metrics Explained.

³The full methodology available at Trucost Environmental Data: Methodology.

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