ESG investments way forward in Saudi Arabia; energy, telecom, mining attractive: analysts

The COVID-19 pandemic attracted global attention towards the importance of adhering to environmental, social and governance (ESG) standards in industrial investments worldwide, and Saudi Arabia in particular.

Companies that have put ESG at the center of their corporate practices tended to show better resilience than others during the peak of the pandemic last year, and were able to generate greater value for shareholders, and displayed long-term growth prospects, analysts told Argaam.

The adoption of ESG principles will play a pivotal role in sustainable economic recovery from the pandemic in Saudi Arabia, according to Christina Azouri, Senior Investment Advisor and Senior Director at CA Indosuez (Switzerland) SA, Dubai Representative Office.

“ESG investments in renewable energy are in line with Saudi Arabia’s diversification strategy into a broader and a more resilient economy, with less dependence on oil and lower levels of emissions. They also address Saudi investors’ concerns about climate change risks such as changes in oil demand, rising temperatures, water supply, and the impact of extreme weather on their portfolio,” Azouri added.

Sectors such as oil and gas, petrochemicals, utilities and mining are expected to witness growth in ESG investments in the Kingdom, backed by government programs, said Oliver Gawad, Head of Economic Development Strategy and Sustainability at KPMG Saudi Arabia.

“Service-oriented sectors like finance, telecommunications, health and tourism, are equally involved in ESG, but with a lesser absolute impact on the environment aspect due to less raw materials and utilities consumption and respective emissions as compared to the industrial sector,” Gawad pointed out.

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The pandemic further helped pave the way for swift implementation of ESG programs among Saudi corporates, which, in turn, will trigger the development of new sustainable products and services across sectors.

The Saudi Exchange (Tadawul) announced plans in August 2020 to launch an ESG index in cooperation with global index provider, MSCI, this year. The index will include around 70 Saudi-listed companies and will be based on MSCI standards.

Existing challenges

Currently, the biggest challenge facing Saudi investors when it comes to ESG is the lack of clear and consistent disclosures from corporates, and the multitude of regulations and standards globally.

“Because there are many different methodologies, approaches and objectives in use, it is difficult for investors to fully understand and compare ESG investments,” William Tohme, Regional Head of Middle East and North Africa (MENA) at CFA Institute, said.

With the presence of a wide variety of ESG disclosures from companies, sometimes the metrics are difficult to compare. Andrew Tarbuck, Partner, Head of Capital Markets at Al Tamimi & Co. highlights the lack of standardization for ESG disclosures or metrics that companies should comply with.

“Without standardization of ESG metrics, corporates have the choice of either determining exactly which ESG metrics they wish to report on which might disappoint certain investors, or to report as many ESG metrics as possible to keep all stakeholders happy but for which data might not be available or is onerous to extrapolate,” Tarbuck added.

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To tackle skepticism about returns on ESG investments and increase adoption in the Kingdom, Riyadh-headquartered Future Investment Initiative (FII) Institute signed a memorandum of understanding (MoU) with European asset manager, Amundi, in April this year.

The partnership between the two entities will focus on transforming research projects into real-life solutions, depending on geographies, to tackle societal issues, and aim to drive positive change for humanity. They will also conduct and publish joint research on ESG in emerging markets.

Future outlook

Saudi investors are increasingly tapping into the ESG space in the Kingdom, and looking to back companies that are progressively implementing ESG principles.

“The performance of ESG funds during the pandemic and their alignment with the government’s vision are two factors that are catching the interests of Saudi investors, and will gain more prominence in future,” Azouri stated.

Saudi corporates showed strong desire for obtaining ESG capital from domestic and international sources. “ESG is only one of a multitude of investment metrics but it is growing in significance in Saudi Arabia, particularly due to a commitment to social and environmental development at the national strategic level,” Tarbuck added.

Saudi sovereign wealth entity, Public Investment Fund (PIF), has been instrumental in leading the integration of ESG into their investment decisions, serving as a trendsetter for the rest of the Saudi economy.

“As a result, ESG is already now being factored as a metric for investment decisions and we expect this trend to further accelerate on the back of the environmentally and socially conscious younger generations,” Gawad commented.

Write to Paromita Dey at paromita.d@argaam.com