Saudi banks must focus on ESG compliance to lower risks
Saudi banks have started to prioritize adopting environment, social and governance programs given their growing exposure to global financial markets and the heightened attention from rating agencies.
ESG has increasingly become part of the global corporate agendas. The COVID-19 pandemic was among the factors pushing for its adoption as investors realized the need to invest in the most sustainable and safe corporate environment to lower their risks.
Saudi Arabia, one of the world’s largest oil producers, has a vital role in the environmental aspect of the ESG.
The Kingdom has responded to the trend by joining the Global Methane Pledge to reduce 30 percent of carbon emissions by 2030 as a part of its long-term commitment and aim to achieve net carbon neutrality by 2060.
Additionally, the Saudi government has committed to sustainable development goals through proposals to improve productivity and efficiency in the public and private sectors.
Investors in emerging markets increasingly perceive compliance with ESG standards as obligatory, demonstrated by the growth of ESG investments over the past few years.
It is projected that in 2025 the value of the total global assets will be $140.5 trillion, of which $50 trillion, or 35.6 percent, will be restricted to ESG investments.
This drive toward ESG seems to be driven by regulators and investors in the Kingdom. However, given the projection that 35.6 percent of global assets will be restricted to ESG investments, the Kingdom could potentially lose $1.83 trillion from the emerging market, $900 billion of which will be lost in foreign capital by the banking sector in 2025.
These potential losses stem from a lack of ESG reporting and require banks to acquire an evaluation by ESG rating providers recognized by institutional foreign investors to be chosen for ESG-restricted investments.
The mentioned rating providers have not covered the Kingdom since there has not been sufficient publicly available data to determine the ESG ratings of Saudi companies.
Less than 40 percent of Saudi-listed banks have publicly disclosed the requested data and have mostly gotten a low score, which blocks their chances of being chosen for the allocated funds in ESG investments.
Bank executives, particularly board members, need to ensure that ESG risks are a lens through which all decisions are made, especially concerning credit and valuation risks in their portfolios and customer pricing.
ESG will increasingly become central to the economic equation globally, and the Kingdom will be no exception in the post-COVID world.
• Fadi Al-Shihabi, ESG & Sustainability Lead at KPMG in Saudi Arabia.