Egypt: Towards a More Sustainable Business Environment

Sustainable development terms and expressions have recently been in increasing use in Egypt. Examples include the UN’s Sustainable Development Goals (SDG); environmental, social, and corporate governance (ESG); sustainable finance; green finance; and the voluntary carbon market. The proliferation of such new terms reflects increasing awareness in Egypt of the importance of these concepts for achieving a better future. The increasing demands of financial institutions and investors, in particular foreign ones, and peer pressure more generally, have also had a great influence on this  front.

The Egyptian Constitution of 2012, as amended, frequently refers to the term “sustainable development”. In 2016, Egypt launched a sustainable development strategy (“Egypt Vision 2030”) in line with the UN’s SDG. The strategy involves bold reforms and programmes, reflected both in new laws and regulations and in amendments to those in force, such as the Investment Law, the Capital Markets Law and the Law on Small, Medium and Micro-enterprises. This article focuses on the main new ideas embodied in relevant legislation and regulations affecting the private sector and will not tackle other more established concepts in Egypt such as corporate social responsibility (CSR).

The Egyptian regulators, notably the Financial Regulatory Authority (FRA) and the Central Bank of Egypt (CBE) had to cope with measures taken worldwide to integrate ESG across different business sectors. To implement Egypt’s sustainable development strategy, a number of initiatives have been taken; prominent among them was the issuing of a  sovereign green bond, the first of its kind in the Middle East and North Africa in 2020. In 2021, the Commercial International Bank (CIB), a renowned, listed Egyptian bank partnered with the International Finance Corporation to follow suit and issue USD100 million of green bonds. This type of bond had been introduced in 2018 as an amendment to the Executive Regulations (ER) of the Capital Markets Law. The amendment initially allowed Egyptian and foreign companies and institutions to issue three categories of green bond: (i) the green use of proceeds bond, (ii) the green revenue bond, and (iii) the green securitised bond. The ER were further amended in September 2022 to boost this type of bond, introducing female-empowerment bonds, climate bonds, sustainable development bonds, social aspect bonds, transitional environmental bonds and sustainable development associated bonds.

As recently as December 2022, the FRA issued a new decree allowing the establishment of a voluntary carbon market platform within the Egyptian Stock Exchange for the trading of carbon emissions reduction certificates (CERs).

In November 2022, the CBE issued a circular to foster sustainable finance and to work toward the realisation of Egypt Vision 2030. According to this circular, banks are required to:

The FRA in turn issued two ESG-related decrees in 2021 imposing ESG disclosure requirements on listed companies and non-banking financial services (NBFS), other than funds, securitisation activities and sukuk activities, depending on issued capital or net assets (the “ESG Decrees”). The grace period for the application of the reporting obligations under the ESG Decrees has recently come to an end and companies are now required to comply with the disclosure requirement as of the submission date of the financial statements for the financial year ending 31 December 2022.

The ESG Decrees set out a comprehensive list of key performance indicators related to environmental, social and corporate disclosures against which the board of directors shall assess and disclose their performance in a report to be attached to annual financial statements. Such a list applies to listed companies and all NBFS companies having an issued capital or net assets of not less than EGP100 million. Listed and NBFS companies having an issued capital or net assets of not less than EGP500 million shall also provide disclosure in accordance with the Task Force on Climate-Related Financial Disclosures.

A number of laws and decrees have been recently issued to encourage the private sector to embrace sustainability within their business. However, they are yet to be tested.

For example, the Investment Law No 72 of 2017 (the “Investment Law”) allows investors to dedicate up to 10% of annual profits to create a social development system. Such an amount shall be considered as a deductible cost in accordance with the Income Tax Law.

The ER to the Law on Development of Medium, Small and Micro-enterprises provides a set of non-tax incentives to projects conducting their activities in certain sectors set out in the law. Among these areas are sustainable development (Vision 2030), female empowerment and the green economy. Guidelines on the issuance of the golden license referred to in the Investment Law issued in September 2022 provide that a unified license can be granted to companies incorporated for the purpose of establishing national and strategic projects that participate in realising sustainable development according to the State’s economic development plan.

In parallel with the State’s role in encouraging the use of ESG, investors endeavour to make such concepts meaningful in their businesses. More Egyptian target companies and funds are now voluntarily bound by ESG rules as a pre-condition for funding. Furthermore, more Egyptian investors are adopting the same strategy and criteria for funding and investment as foreign funds and investors; perhaps through “fear of missing out” or perhaps simply as a reputational matter. The Sovereign Fund of Egypt has also set some ESG standards that are expected to be followed by other Egyptian investors. The Egyptian Private Equity Association and Avanz Manara, the first fund of funds in Egypt, are further increasing awareness through training. Furthermore, Avanz Manara, disclosed in 2023 its intention to establish the first carbon emission offset fund in Egypt.

Egypt is moving fast to integrate sustainable development and ESG into the Egyptian business ecosystem. The country is currently in the phase of monitoring, evaluating and encouraging the observance of ESG factors by the private sector. Its efforts on that score are reflected in recent amendments to the laws and regulations. The process is currently gaining momentum thanks to the need for funding and to the role voluntarily played by some market players in spreading awareness and imposing rules in this respect.