Abu Dhabi — While asset management in the Gulf Cooperation Council ( GCC ) is currently in a phase of rapid transformation, its primary focus is not on environmental, social and governance ( ESG ) factors.

In fact, as the region and its large institutional funds continue to integrate with global capital markets, local investors may eventually find themselves behind the curve in adopting the sustainability-driven investment strategies that are now commonplace in the rest of the world.

Discussions with industry leaders indicate that while the G ( governance ) component remains a critical area of regulatory innovation, the broader ESG agenda is decidedly not a priority for investors or managers in the region right now.

Instead, the industry is preoccupied with two more fundamental goals: building out a nascent market structure and aggressively adopting alternative and digital asset classes.

The current lack of emphasis on the E ( environmental ) and S ( social ) components of ESG is driven by a combination of market maturity and a structural conflict with existing local investment norms.

The traditional asset management industry in the Middle East is described as “very, very nascent” and “just about kickstarting”.

For many firms, the immediate priority is basic market development, which includes a push towards innovative, income-making strategies like hybrid funds and private credit to serve a demand that the market hasn’t previously had access to.

This focus on core expansion and capital formation positions ESG as a secondary, or later-stage, concern.

This sentiment is so pronounced that during discussions with industry leaders, there was an explicit request to remove the “sustainable investment parts” from moderator questions, indicating a low comfort level and lack of prepared response on the topic.

A significant structural issue also arises from the region’s large Shariah-compliant investment universe.

Many in the West assume an easy alignment between Shariah and ESG principles, but industry experts say “this is a lot less clear than most people assume it is”.

While some basic alignment exists in terms of specific exclusions, a substantial portion of the Shariah-compliant issuing universe in the GCC actually “scores very poorly on ESG” overall.

This suggests that the region’s existing ethical investing framework does not adequately address modern environmental or social metrics, preventing the E and S components from becoming central investment themes.

If any letter of the ESG framework is receiving attention, it is the G, though often through the lens of regulatory progress and economic stewardship rather than typical fund-level compliance.

Regulators are actively pursuing large-scale innovations like the GCC fund passporting regime and working towards harmonized anti-money laundering frameworks.

These initiatives are essential governance milestones aimed at standardizing, securing and scaling the regional market for cross-border fund distribution and overall growth.

Also, asset managers are concentrating on innovative financing solutions, particularly for small and medium-sized enterprises, which are seen as the way to bridge funding gaps and “achieve goals like Vision 2030” and oil diversification.

This focus is a form of economic governance, prioritizing a national mandate for economic development and capital deployment over pure sustainability screens.

For investors in the GCC, the current lack of focus on the E and S components has a mixed impact.

For example, they are gaining access to new asset classes and greater liquidity at a pace comparable to global markets, while the development of hybrid, semi-liquid funds and tokenization initiatives is addressing the long-standing hurdle of illiquidity in alternative investments.

On the other hand, a primary reliance on the existing Shariah-compliant universe means that investors may be unknowingly accepting assets that score poorly on modern E and S metrics.

This lack of rigorous non-financial screening could expose portfolios to heightened E and S risks, including future carbon transition costs, regulatory penalties or reputational damage that a globally-focused ESG fund would typically screen out.