Filling the gap in ESG framework: Saudi Arabia

Saudi Arabia's sovereign wealth fund has asked banks to help it develop an environmental, social and governance (ESG) framework, as per a recent article in Reuters. According to the article, development of ESG framework was likely a precursor for a multibillion dollar bond sale, which would be the Saudi wealth fund's first.

ESG has been one of the hottest topics in the world of finance. There is ample demand from investors for ESG compliant instruments but due to lack of expertise and uniform reporting norms, companies and institutions are at their own free will with respect to their ESG disclosures. There seems to be a gap in standardising ESG reporting framework which governments and financial reporting boards across the world aim to fill.

Earlier this year, the International Financial Reporting Standards Foundation announced its plans to develop a single, global ESG framework. Mirroring these global trends, in the MENA region, Saudi Arabia’s sovereign wealth fund has asked banks to help in the development of an ESG framework. The government of Oman had also recently announced its plans to develop an ESG framework.

The Kingdom of Saudi Arabia has been keen in implementing ESG related programmes. Few initiatives taken in the recent past include the following:

• • In August 2020, the Saudi exchange announced its plans to launch an ESG index along with MSCI by end of 2021 or Q1 2021.
  • Saudi stock exchange and the Future Investment Initiative Institute signed a MoU to spread ESG awareness in the country, earlier this year.

ESG integration in Saudi Arabia remains at a nascent stage. The country, which is one of the largest producers of oil worldwide, plans to become carbon neutral and aims to generate 50% of its electricity from renewables by 2030. This initiative, being a crucial step towards long-term sustainable development, goes with other “green turns” in the region’s economy.

In October 2020, a top performing emerging market bond fund avoided investments in Saudi Arabia as it scored low in the fund’s ESG ratings. On the other hand Saudi Arabia enjoyed the benefits from ESG-conscious investors when Saudi Electricity’s green sukuk issuance was oversubscribed five times. These reflect that ESG can no longer be ignored and companies/institutions must embrace it to avoid constrained growth and increased scrutiny.