ESG

SAUDI ESG REPORTING: INVESTORS ADOPT NEW PARADIGM

Environmental, social and corporate governance (ESG) is the new global benchmark – a measure that showcases a company’s performance beyond cash flows and balance sheets, but also includes activities that impact the environment and society.

While ESG does not offer hard numbers, it shows a company’s effort to cut its carbon footprint, be a good neighbour in the communities in which it operates, and pursue its activities ethically, with people guided by high moral standards through strong corporate governance.

In 2018, the Saudi Exchange partnered with the Sustainable Stock Exchanges (SSE) Initiative to promote ESG awareness among companies listed on the country’s exchange. This underscores authorities’ overall effort to create a sustainable economy, which is a key pillar of the Financial Sector Development Program of Saudi Vision 2030.

The SSE’s mission is to provide a global platform for exploring how exchanges, in collaboration with investors, companies (issuers), regulators, policymakers, and relevant international organisations can enhance performance on ESG issues, as well as encourage sustainable investment, including the financing of the UN Sustainable Development Goals. The Saudi Exchange is among 120 exchanges that have joined the SSE mission, featuring more than 62,000 companies and USD 127 trillion assets under management.

“Since then, Saudi Exchange has engaged with listed companies, standards-setters, index providers, ratings providers, investors, and other stock exchanges, through a myriad of mediums to help advance ESG disclosure in the Saudi capital market,” according to the Saudi Exchange. “The Exchange feels a responsibility to support the advancement of ESG in Saudi Arabia, and the wider region, and so it remains focused on raising awareness and encouraging listed companies to disclose ESG.”

 

‘FORCE FOR CHANGE’ ON ESG

With a market cap of USD 3 trillion at the end of August and 214 companies trading, Tadawul is the largest bourse in the wider Middle East region, playing an influential role in boosting ESG awareness among institutional and retailer investors.

“This represents a huge force for change. Many of the companies listed on Saudi Exchange already embody the principles and practices that underpin ESG because they recognise the intrinsic value of a sustainable growth model,” Mohammed Al-Rumaih, CEO of Saudi Exchange, said at the launch. “However, more needs to be done to ensure that the efforts that have already been undertaken are recognised and that more listed companies are encouraged to disclose more regarding ESG.”

Companies embracing the SSE initiatives follows these six key principles of responsible investment:

Principle 1: Incorporating ESG issues into their investment analysis and decision-making processes.

Principle 2: Being active owners and incorporating ESG issues into their ownership policies and practices.

Principle 3: Seeking appropriate disclosure on ESG issues by the entities in which they invest.

Principle 4: Promoting acceptance and implementation of the principles within the investment industry.

Principle 5: Working together to enhance their effectiveness in implementing the principles.

Principle 6: Each reporting on their activities and progress towards implementing the principles.

  

UNLOCKING NEW CAPITAL

ESG is a new metric that investors are taking into account in their investment decisions. Schroders’ Institutional Investor Study 2022 found that globally 48% of respondents are focusing on ESG’s impact on their investments – up from 38% last year and 34% in 2020. The 2022 result marked the first time impact investing was in the top three preferred approaches to sustainable investing since the study was launched in 2017. Impact investing was a particularly popular approach among respondents in Latin America (62%), followed by the UK and Europe (50%), and Asia Pacific (48%).

ESG disclosures is just the start. Saudi companies have embraced the initiative and released annual sustainability reports, which highlight key policy measures taken to reduce their impact on the environment and communities in which they operate.

Saudi authorities and companies believe strong ESG disclosures would attract this growing pool of long-term institutional investors regionally and internationally. Sharing information needed by key stakeholders to make informed decisions about the company will unlock new capital ability to create value in the short, medium, and longer term.

ESG disclosures can also help identify cost savings, enable management and board scrutiny of ESG opportunities and risks, and promote company-wide alignment on goals. Meanwhile, strong ESG reporting would enable the measurement of success and progress,which will increase a company’s brand equity. Brand equity is important as a new generation of Saudi, regional, and international investors pay special attention to their investment’s impact on the environment and social causes.