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ESG in Saudi Arabia: A kingdom-wide vision

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In 2016, Saudi Arabia unveiled Vision 2030, which sets out a transformative and ambitious plan to unlock the kingdom’s vast potential by “creating a diversified, innovative and world leading nation, for the benefit of future generations.” 

Vision 2030 creates the foundation of Saudi Arabia’s prosperity. The unparalleled diversification efforts are not just deep-rooted in the leaders’ ambitions, but they span a variety of industries, such as tourism and heritage, business and the economy. 

As a permanent and founding member of OPEC – and having one of the world’s largest proven oil reserves – it may be easy to conclude that realising Vision 2030 goals must be linked to revenues generated from non-renewable natural resources. But what makes Vision 2030 even more exciting  – and challenging – is that sustainability is at its heart.

The combination of Vision 2030 ambitions, the drive for economic diversity and social reforms, and the desire to establish the kingdom as a leader to deliver on climate and sustainability goals locally and globally means the potential for positive change is immense. ESG – and the promotion of ESG through legislation and guidance – is front and centre for Saudi Arabia’s future. The kingdom as a whole aims to achieve Net Zero by 2060, while the Public Investment Fund has announced its target to reach Net Zero by 2050.

There are many examples of ESG strategies that have already been implemented in Saudi Arabia. For example, Red Sea Global, a major development company, aims to align its activities with all 17 Sustainable Development Goals; NEOM, the bold smart city project, aims to develop 100 percent clean energy through wind, solar and hydrogen; and energy giant Saudi Aramco is placing critical importance on ESG to balance profitability, environmental protection and the growth of communities where it operates. 

In terms of the social aspects of ESG, significant progress has been made in Saudi Arabia, particularly around women’s empowerment. There is now a legal requirement for men and women to be paid equally and in 2021, the percentage of women in the workforce increased to 33 percent from 13 percent in 2015, surpassing a Vision 2030 target.

The World Bank’s Women, Business and Law Index 2021 scored Saudi Arabia at 80 out of 100, which is higher than the global average. As a law firm, we have observed a huge increase in Saudi women earning Master of Laws degrees abroad. In the technology sector, start-up rates for women are higher than those for men – and higher than the European average.

It may be obvious that the kingdom’s mega- and giga-projects are pioneering ESG, but many questions remain. Has ESG reached the general Saudi business community? What do regulators and lawmakers do to raise awareness of the existence – and importance – of ESG? And what challenges will Saudi Arabia continue to face on its ESG journey?  

Regulators, governmental and quasi-governmental bodies increasingly recognise the need for regulation and leadership to cement the importance of ESG. As a result, new laws, duties and education are being cascaded throughout the Saudi business community. 

In 2018, the Saudi Exchange became a partner exchange supporting UN Sustainable Stock Exchanges. The exchange has issued ESG disclosure guidelines, engaged in raising ESG awareness and promoting an ESG disclosure culture, and recognises the importance of adopting international best practice and to deliver on socio-economic responsibilities. 

Meanwhile, the Capital Market Authority, which regulates listed companies in Saudi Arabia, has issued corporate governance regulations on key ESG topics, such as conflicts of interest, board member duties, annual reporting, internal auditing and social responsibility initiatives.

At a government level, the Ministry of Commerce has issued corporate governance regulations for non-listed joint stock companies. This demonstrates the importance of governance for non-listed companies. In addition, the new Companies Law is due to come into force in January 2023. It will apply to all companies in the kingdom and includes a section that addresses the promoting and engaging in social responsibility activities. 

Ministries of economy and planning, finance, commerce, energy, human resources and social development, investment, and environment, water and agriculture, as well as the King Khalid Foundation, also promote ESG policies. 

It is clear that Vision 2030, regulators, lawmakers and government authorities see the importance of ESG. But how has this been implemented by the business community, especially those members of the business community that are not large listed or non-listed companies? 

The good news is that we have seen a number of companies and organisations implementing enhanced ESG initiatives, such as appropriate policies, performance metrics, ESG training, adding ESG goals to corporate key performance indicators, and embedding ESG considerations into decision-making processes and when screening potential vendors and customers.

However, ESG still has a long way to go before it is truly embedded across the entire business community. While many businesses see the conceptual value and importance of ESG, they may still believe that focusing on ESG does not enhance financial performance. 

Finance providers and investors must emphasise how potential borrowers and investee companies can perform from an ESG perspective. There has been – and continues to be – a large emphasis on green financing in the kingdom. Evidence of this allows companies to see a direct negative impact on the business if ESG is ignored. Similarly, companies who buy into the ESG journey and evolution will see positive effects and gain a competitive advantage. 

Another challenge is that ESG, as a concept, may not be very accessible or relatable for smaller and medium-sized entities. The United Nations Sustainable Development Goals may be difficult to reconcile with day-to-day business operations. Companies need to understand what appropriate, proportionate ESG looks like for their sector and the positive impact it has on the business and the wider community. Whole business community collaboration is needed to provide wide support so all can transition.

ESG will remain central to Saudi ambition and the role the kingdom will play – and wishes to play – regionally and globally. The message is that ESG is here to stay. Vision 2030, regulators, lawmakers and others drive ESG in Saudi Arabia, embedding ESG principles into society and the business community. 

The ESG regulatory journey is happening alongside other international practices, such as data privacy, antitrust and competition law. Saudi Arabia is continually enhancing the regulatory framework for business and places an increasing emphasis on compliance.  Some Middle East companies have reported that they have lost business opportunities as a result of ESG, but at the same time, other companies in this region recognise that developing ESG can be a unique selling point. The bottom line is that companies eager to do business in Saudi Arabia need to embrace ESG and design policies, procedures and governance models that work for them. 

By : Leopold Zentner is a Partner at DWF (in association with Al-Ohaly & Partners) based in Riyadh

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