ESG initially emerged as a framework to help companies address material environmental, social, and governance risks to shareholder value creation. While it dominated business discussions over the past decade, major Wall Street institutions have recently distanced themselves amid accusations of promoting a nefarious left-wing agenda or “woke capitalism.” The concept’s interpretation varies significantly between markets — while it has become entangled in US cultural wars, countries like Saudi Arabia have adopted and deployed this framework to drive economic change and encourage foreign direct investment.
Crown Prince Mohammed bin Salman’s Vision 2030 requires a national strategy to integrate public sector laws and regulations with capital market incentives. The concept of reporting on ESG performance is playing a pivotal role in this strategy, helping Saudi companies improve corporate governance, streamline operations, and boost sustainable growth.
Importantly, investors are increasingly focused on good ESG performance, which means that Saudi companies excelling in this area will be more attractive to foreign capital. While it is true that some investors exclude oil and gas, many recognize the critical importance of ESG performance in this sector. Saudi Arabia, whose resources have powered the West’s growth for the better part of a century, has emerged as a leader in its transformation while demonstrating how ESG can be effectively applied in emerging market development. The country’s unprecedented, wide-scale adoption of ESG guidelines is a logical and compelling step toward sustainable economic growth.
The conversation around ESG originated in the context of efforts to liberalize Saudi Arabia’s financial markets and attract foreign direct investment. Many reforms were undertaken starting in 2017, including the T+2 settlement cycle, the introduction of securities borrowing and short selling, and allowing foreign investors access to the Nomu parallel market (an alternative equity market with lighter listing requirements).
The introduction of the Saudi Stock Exchange (Tadawul)’s ESG Guidelines was part of this effort. These guidelines explain the economic value of ESG, the concept of materiality, the benefits of ESG reporting, options for how to report (including an integrated report), and the importance of board commitment to ESG.
The concept of reporting on ESG performance is playing a pivotal role in helping Saudi companies improve corporate governance, streamline operations, and boost sustainable growth.
Saudi Stock Exchange CEO Mohammed Al-Rumaih confirmed the exchange’s central role in the transition process: “Saudi Arabia (is developing) a financial ecosystem that connects the hopes and opportunities of the Middle East to the world — the Saudi Exchange sits at the center of the economic ambitions that will drive this transformation.”
In reviewing the guidelines, retired Harvard Business School Prof. Robert Eccles, now at the Said Business School at the University of Oxford, commented: “I am impressed with what Tadawul has done on ESG. They clearly understand its importance, and I’m very pleased to see the excellent guidance they have provided for listed companies in Saudi Arabia.”
The exchange has spearheaded the broad application of ESG standards by helping members understand ESG terminology, emerging best practices, measurement techniques, and tangible business cases. Furthermore, the exchange has issued specific recommendations for sustainability reporting and an unambiguous directive to implement them. This directive currently applies to no fewer than 240 listed companies, with a total market capitalization of SR10.1 trillion ($2.69 trillion).
Most major Saudi commercial enterprises, starting with the Saudi-owned energy colossus Aramco, whose market capitalization of $1.74 trillion is the world’s third largest, have implemented sustainability principles directly into their business strategies. Additionally, most of the large-cap Saudi companies included in the Morgan Stanley Emerging Market Index, such as Almarai, Saudi National Bank, and Saudi Telecom Co., have also taken steps toward embedding ESG directly into their business strategies. Notably, the country’s ESG mandates extend beyond publicly listed companies, as the Saudi government has held its own ministries accountable to the same standards.
In 2017, there were only 50 Qualified Financial Investors with registered accounts on the exchange. Today, that number has grown to more than 2,500, representing a 50-fold increase since its launch. From 2016 to the present, the Saudi Stock Exchange has risen from 25th to the ninth largest exchange globally as of September 2024.
Thus far, the exchange’s “conformity and integration” strategy has proven effective. According to the Kingdom’s Ministry of Investment: “FDI data from 2017 to 2023 shows that Saudi Arabia’s FDI stock grew by approximately 80 percent in 2023 compared to 2017. Similarly, FDI inflow increased by more than 240 percent in 2023 compared to 2017. FDI inflow as a percentage of FDI stock rose from 6 percent in 2017 to 11 percent in 2023.”
Looking ahead, Saudi Arabia aims to deepen its commitment to sustainable growth by implementing a more formal sustainability standards framework, such as the International Sustainability Standards Board, which has been adopted by IFRS. The Saudi Organization for Certified Public Accountants is currently evaluating the feasibility of adopting the ISSB’s standards. “I am very excited about the interest in Saudi in the ISSB,” said Eccles. “Adoption there would help spread its standards throughout the Middle East and beyond.”
Implementing the ISSB’s standards would further enhance the regulatory landscape, building on the considerable progress already achieved. Meanwhile, in the West — particularly in the US and, to a lesser extent, the UK — there remains internal dissent over the social and political implications of an ESG consensus. However, whatever one’s political bias, this narrative overlooks the reality that Saudi Arabia has a deep commitment to economic diversification and reform.
It has been fashionable for Western media to ascribe anything positive the Kingdom has done as whitewashing, greenwashing, or merely a diversion to extend its oil-production window. While Saudi Arabia does not rank highly with respect to many Western ideals of governance and freedom, the West itself often falls short of its own standards of governance and is increasingly criticized by the global community for the divergence between its aspirations and reality. While it is true that Saudi Arabia is not a “democratic” country as typically defined, there are clear advantages to having a centrally planned economy under its current leadership. This structure allows intelligent policies, such as support for ESG, to be implemented with quality and scale.
Considering the above, it would be a mistake to dismiss these efforts as merely whitewashing or "ESG washing," as Western media has frequently done, the country’s substantial work and accomplishments over the past eight years in pushing for ESG integration throughout the entire public and private sector is too valuable to be ignored. Unlike the US or European countries, Saudi Arabia is not a fully diversified economy and does not have 200 years to make its transition. Ultimately, the success of Saudi Arabia’s planning choices will be demonstrated by the amount of capital it attracts to its projects, the quality of the investments made, and the returns these investments generate for shareholders.
What the government and private sector have managed to achieve together is, at its core, clear evidence of a deep commitment to a large-scale transformation that serves both current and future generations of its citizens while contributing to global sustainability efforts. Ironically, this transformation also highlights the less sustainable policies of its critics, who are increasingly polarized around these same issues.
The Kingdom’s utilization and implementation of ESG is not the controversy it has stirred up in the West or what activists perceive it to be. Instead, the ESG agenda has been employed as a cornerstone for driving the country’s economic development. Not everything being implemented has been, or will be, a resounding success. The journey ahead will involve trial and error, but what truly matters is the dedication and commitment to seeing it through.
• Maria Al-Zahrani is a Wall Street-trained finance professional with expertise in corporate, governmental, and export credit agency finance.