Saudi Banks Must Prioritise ESG Compliance to Reduce Risks
Given their rising exposure to global financial markets and the increased scrutiny from rating agencies, Saudi banks have prioritised implementing environmental, social, and governance programmes.
ESG has been a growing component of worldwide corporate agendas. The COVID-19 epidemic was one of the factors that contributed to its adoption, as investors recognised the necessity to invest in the most sustainable and risk-free organisational environment.
Saudi Arabia, one of the world's top oil producers, plays a crucial part in the ESG's environmental dimension.
In response to the trend, the Kingdom has joined the Global Methane Pledge to cut carbon emissions by 30 per cent by 2030 as part of its long-term commitment to reach carbon neutrality by 2060.
In addition, the Saudi government has committed to achieving sustainable development objectives through initiatives to increase public and private sector productivity and efficiency.
Compliance with ESG norms is increasingly viewed as compulsory by investors in emerging nations, as evidenced by the expansion of ESG investments over the past few years.
In 2025, it is anticipated that global assets will be worth $140.5 trillion, of which $50 trillion, or 35.6%, will be restricted to ESG investments.
This push for ESG appears to be driven by investors and authorities in the Kingdom. Nevertheless, given the forecast that 35.6% of global assets will be restricted to ESG investments, the Kingdom might potentially lose $1.83 trillion from the emerging market, of which $900 billion in foreign capital will be lost by the banking sector in 2025.
These possible losses are the result of a lack of ESG reporting, and they necessitate that banks acquire an evaluation from ESG rating providers recognised by institutional overseas investors to qualify for ESG-restricted investments.
There have not been sufficient publicly accessible data to determine the ESG ratings of Saudi corporations for the rating agencies mentioned above.
Less than forty per cent of Saudi-listed banks have publicly given the needed information, and the majority of them have received a low score, which hinders their prospects of being selected for the allocated funds in ESG investments.
Bank executives, in particular board members, must ensure that ESG risks are a lens through which all decisions are made, particularly for credit and valuation risks in their portfolios and customer pricing.
In the post-COVID era, ESG will become increasingly fundamental to the economic equation, and the United Kingdom will not be an exception.
Source: Arab News