Improvements in Saudi Arabian companies’ environmental, social and governance (ESG) performance are likely to attract more investment to the kingdom from international institutional investors, experts say, as new financial products with a focus on sustainability come to market.
This week the kingdom’s first ESG exchange-traded fund (ETF) listed on the Saudi Stock Exchange (Tadawul) by Riyadh-based investment banking company Yaqeen Capital.
Yaqeen’s head of asset management told AGBI that, in the wake of global trends, the company is preparing for a “surge in ESG-focused funds, green bonds, and impact-driven investments” in the kingdom.
“The ESG investment landscape in Saudi Arabia is rapidly evolving,” said Fahad Alanazi. “Yaqeen believes that ESG investing will become a mainstream strategy.”
The shariah-compliant Yaqeen S&P ESG Mena (Middle East and North Africa) ETF was launched with an initial SAR10 million ($2.7 million) of assets under management.
The global pool of ESG assets is growing each year – institutional ESG assets under management could hit $34 trillion next year.
Once seen as a subcategory for niche investors, “ESG is now integrated into what you would consider as regular risk assessments, regular policies, and best practices”, said Jasmine Mehta, executive director of ESG and climate corporate sales at MSCI Inc, a global provider of equity, fixed income and real estate indices.
“We don’t see that integration so fluidly here in Saudi today but, if you compare with two, three, four years ago, it’s a considerable improvement to what it was.”
Compared to other emerging markets, Saudi Arabia is lagging behind on ESG. Saudi companies often attract poor ratings, not just on environmental performance but also on governance, where they are frequently penalised for low transparency and board accountability.
Ahmed AlShabanah, CEO of Yaqeen Capital, this week told delegates at the Capital Market Forum (CMF) in Riyadh that the number of Saudi companies reporting effectively on ESG and meeting acceptable compliance standards is “insignificant”.
Of thousands of companies listed throughout the Arab world, he said, only 36 are compliant.
“Attracting international investments in capital requires companies to have a better performance with sustainability,” said Mehta.
On the MSCI World ESG Screened index, companies in the six-member Gulf Cooperation Council (GCC) only make up “a very low double-digit number,” she said, “but it’s still a significant improvement from having practically none of those companies around three years ago.”
The Tadawul is trying to attract more funds – particularly institutional capital – from overseas investors. Tadawul executives have repeatedly spoken about their desire to see more dual listings and cooperation with other exchanges.
Speaking at the CMF this week, investment minister Khalid Al Falih said that the kingdom was working “closely” with the London Stock Exchange on ESG and green finance, in an effort to channel more global capital to the kingdom for it to become a “regional hub” for finance.
ESG-related financial instruments, such as the new Yaqeen ETF, could “boost acceptance of ESG”, Mehta said, and promote better sustainability, transparency, and more regular reporting. “That would automatically bring in more fund-flow,” she said.
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