The hefty carbon footprint of the oil-producing economies of the Gulf Cooperation Council (GCC) states has substantial implications for climate change globally. As the findings of our recent study of listed companies in GCC countries show, sustainability reporting developments in the region offer a mix of hope and disappointment. While fewer companies are providing stakeholders with information on how they conduct the materiality assessment for their sustainability reports, those that do are providing better disclosures.
Materiality is a familiar concept in the accounting world. It guides professional accountants in the preparation of financial statements and directs how auditors plan and perform audits. The concept has been applied to sustainability reporting by standard-setters such as the Global Reporting Initiative (GRI), so that sustainability reports can give stakeholders useful information on key issues, even when there is bad news or poor sustainability performance, rather than serve primarily as marketing tools.
Our study identified the extent to which materiality assessment disclosure has been adopted in the region by mapping the materiality assessment disclosures in the sustainability reports of GCC-listed companies in the four years to 2017, the latest period for which full reports were available. The six member states of the GCC are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE.
Materiality index
Using a scale of 0 to 5, where 0 indicates no reference to a materiality assessment and 5 comprehensive disclosure on the steps of the materiality assessment, we measured the quality of corporate materiality assessment disclosures of listed companies operating in the GCC.
Our research findings indicate that across seven GCC stock exchanges (Abu Dhabi Securities Exchange, Bahrain Stock Exchange, Dubai Financial Market, Boursa Kuwait, Muscat Securities Market, Qatar Stock Exchange and Saudi Stock Exchange) materiality disclosure rates declined over the period. Just 8.6% of reporters provided information on their materiality assessment in 2017 compared with 10.2% in 2013.
Our research findings indicate that across seven GCC stock exchanges materiality disclosure rates declined over the period
However, the average masks some variation. In Bahrain, Qatar and Saudi Arabia, the disclosure rate rose over the period – in Qatar’s case it more than doubled. Meanwhile, the 2017 rate fell to almost half what it was in 2013 among listed companies quoted in Abu Dhabi, Dubai, Kuwait and Oman.
This decline could be a reflection of a fall in GRI adoption rates among these companies – from 11.9% in 2013 to 8.2% in 2017. For example, listed companies based in Qatar led the GCC in terms of GRI adoption and had the highest materiality assessment disclosure rates, whereas GRI adoption rates in Kuwait declined from 10.7% in 2013 to 3.1% in 2017, leaving Kuwait with the lowest materiality assessment disclosure rates in 2017.
In terms of materiality assessment disclosure scores rather than rates, the average for listed GCC companies improved over the period – from 2.39 to 3.08 (out of a maximum score of 5).
These results indicate that while fewer companies prefer to provide stakeholders with information on how they conduct their materiality assessment, those that do are providing better (ie more comprehensive) disclosures.
In examining the corporate characteristics that influence materiality assessment disclosures scores, we found that good corporate governance practices (specifically the presence of independent directors on corporate boards) and company financial position (ie higher financial performance and lower leverage) assist in improving the quality of corporate materiality assessment disclosures.
Going forward
Despite the commitment of GCC governments to achieving the UN’s Sustainable Development Goals (SDGs), a significant majority of GCC-listed companies provide no information on materiality assessment in their sustainability reports. To improve this performance, regulators should introduce tougher regulation of materiality assessment disclosures in sustainability reporting and the subsequent assurance of these disclosures.
Stock exchanges should also be encouraged to ensure companies adhere to corporate governance requirements, particularly around board structure, as these improve materiality assessment disclosures, which translate into greater transparency and corporate accountability. Such changes have the potential to further the sustainability agenda and support the GCC states’ desire to implement the UN SDGs and transition to sustainable development.
Read the first article in this mini-series, on sustainability reporting progress among listed GCC companies, in the April issue of AB.
For more information
The accountancy profession has a vital role to play in sustainability and climate action. To find out more, visit ACCA’s new Rethinking Sustainable Business hub and join the conversation on climate action.
