The impact of climate change is everywhere. We know that climate change presents significant risks to all sectors of the economy – and it is changing how investors and businesses make decisions across the globe.
Approach to climate related risk in Oman and the wider gulf region has evolved in the last few years – with several climate related reporting frameworks being developed (including directions from the Government of Oman and the Central Bank of Oman). This aligns with a wider regional approach - with the ESG Disclosure Metrics for Listed Companies published by the Gulf Cooperation Council (GCC) in January 2023. These metrics set out voluntary disclosures across the three key areas of sustainability – Environmental (e.g. reducing greenhouse gas emissions and climate risk mitigation), Social (e.g. labour practices) and Governance (e.g. board decision making, diversity and reporting). The GCC ESG disclosure guidance is voluntary – but it demonstrates the six GCC nations' commitment to a unified approach to ESG reporting across the region and to the transition towards greener and more sustainable economies. Further, In 2021, the Saudi Arabia stock exchange Tadawul announced sustainability disclosure guidelines for listed companies to promote greater ESG reporting and the UAE and Bahrain impose similar obligations on companies listed on their stock exchanges.
The Muscat Stock Exchange (MSX) has now developed guidance for all companies publicly listed on MSX to report on their ESG performance. It will be compulsory from 2025 (for 2024 activities), and MSX encourages all publicly listed companies to voluntarily report in 2024 (covering their 2023 activities).
The intention is that companies are obliged to disclose certain ESG information which communicates their commitments to reducing their emissions and to maintaining responsible and ethical business strategies – while delivering for their key stakeholders (including investors, clients, partners, suppliers, employees and their overall communities). This enhanced level of disclosure will enable investors to evaluate listed companies based on their performance against these ESG metrics. This reporting is likely to be of particular interest to institutional investors and companies who can demonstrate strong metrics may be able to attract further investment.
Our full commentary on the MSX Disclosure Guideline is available here.
ESG reporting – contract drafting
The MSX guidance acknowledges that a key challenge of ESG reporting is that it requires accurate and meaningful data. Collecting and interpreting this data requires material effort from reporting companies. But benefits are clear – including increased investor confidence and safeguarding reputational risk.
As MSX listed organisations consider how they fulfil and report against the required metrics, it will be important that their business strategies, policies and supply chains are also aligned with these requirements.
As organisations commit to sustainable practices or emissions reductions, it is important that policies and contracts remain fit for purpose and reflect those goals. Improved contracts can greatly assist companies with the data gathering required for ESG reporting and also ensure that appropriate obligations are imposed on the organisation's supply chains. If this is not done, there is a risk that standard contracts and precedents act as a barrier to those commitments being actioned and so it is essential that contracts move with the ESG/climate agenda.
The Chancery Lane Project (TCLP) is an independent organisation that has brought together lawyers from around the world to develop contractual drafting to address climate change. Trowers & Hamlins has been involved with the project since its inception and have worked to tailor provisions for a variety of contracts in order to provide a proportionate and achievable approach.
TCLP has a wealth of material and guidance covering all sectors and jurisdictions – but in general terms, we recommend businesses consider introducing the following as a starting point:
Procurement: There are significant risks in not addressing procurement of suitable and reputable suppliers – including potential damage to a business' reputation. By asking tailored questions as part of a procurement exercise, an organisation is likely to be better placed to partner with suitable counterparties. A due diligence questionnaire (similar to the one published by TCLP) is likely to be useful starting point. It provides a wide range of questions on climate related, social and governance issues that could be tailored to align with MSX reporting requirements.
Supply Chain Contracts: The majority of an organisation's emissions come from their supply chain rather than their direct operations (Scope 3 emissions). TCLP's Net Zero Standard clause for Suppliers covers:
- reduction targets and reporting for emissions associated with the relevant supply contract or wider business;
- cascading obligations through the supply chain; and
- pricing incentive mechanisms. This increases transparency and accountability – and provides tools for businesses to require emissions data from its supply chain.
Governance and reporting: Governance factors are a key aspect of ESG considerations – including structure and composition of boards, decision making processes, and engagement with stakeholders. Having clear governance processes in place will help organisations get ready for the practical implications of the MSX Disclosure Guidelines. Standard form board papers and shareholder resolutions that address climate impacts of significant contracts/decisions may be a helpful starting point. TCLP's templates create a governance structure which will enable the board to take necessary decisions and actions in order to meet climate/ESG related targets.This structure also works to embed robust consideration of those issues as part of the board's decision-making process. That process can then also be fed back into ESG reporting metrics – and makes compliance more manageable.
As with any standard form drafting, care should be taken in incorporating these clauses into existing documents, these new obligations are likely to conflict with existing drafting and so it is recommended that a full review and redraft is undertaken, rather than simply adding one of the proposed clauses.
Conclusions
Many organisations are not in a position to incorporate the full range of climate related drafting into active projects. There are natural concerns around added complexity and additional reporting which can lead to delay and additional costs. But increasingly interests or supply chains and reporting entities are aligned, and we are seeing that organisations are more engaged about sharing data and helping to achieve collective targets.
As ESG reporting becomes even more widespread, it is likely that climate related drafting will become more ambitious and sophisticated. Institutional and other investors are now expecting that this information to be provided and companies which are behind in their adoption of these reporting requirements may be less successful in attracting investment.
Overall, the publication of mandatory ESG reporting requirements demonstrates the trajectory of change in sustainable practices. Relevant organisations need to consider the requirements – and take steps to prepare for compliance.
