11 minute read
How ESG is rapidly taking over the Financial Services industry Saudi Arabia
Ebrahim Baeshen, Office Managing Partner, Jeddah, KPMG in Saudi Arabia
Ebrahim Baeshen, Office Managing Partner, Jeddah, KPMG, talks with MEA Finance about how the pandemic heightened ESG practices in the Kingdom of Saudi Arabia and explains why it is a vital component in the success of banks
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To what extent did SAMA’s interventions to support the economy through the pandemic act as an exemplar to Saudi’s banks?
Amid the pandemic related financial depression, the Saudi Central Bank (SAMA), stepped in to support banks and businesses. Tasked with keeping the economy afloat during the perfect storm of lockdowns, record-low oil prices, and a near global economic collapse, the Saudi Central Bank proved itself capable. SAMA allocations across sectors ensured government dues to the private sector are paid in a timely manner, a wage subsidy of 60% of Saudi employees’ salaries in the private sector, generous assistance to SMEs and measures that promote halting layoffs and sustaining employment despite the restrictive work environment Work-From-Home (WFH) and 30% staff presence in offices.
SAMA’s measures set a tone in the Kingdom that banks picked up on – the pandemic is a societal crisis that can only be eased through direct support to people. The stimulus packages also ensured the continued operability – and profitability – of the banking system and may have proved instrumental in allowing banks to continue their Environmental, Social, and Corporate Governance (ESG) programmes which were under pressure from the pandemic and under the spotlight of investors who themselves are pivotal as measures of the and health and sustainability of banks and, hence, the economy.
An overview of Saudi economy shows it is weathering and absorbing the pandemic shocks with the government stimulus. Planned expenditure for fiscal year 2021 stands at SAR 990 billion, with a continued focus on promoting economic growth and improving spending efficiency. I view the government’s decision to maintain a similar level of public expenditure as last year, despite the volatility in the oil market, as a testament of its commitment towards achieving fiscal, social, and economic targets.
According to Saudi Ministry of Finance (MoF), real GDP growth contracted by 3.7% in fiscal year 2020, driven by a combination of COVID-19- related containment measures within Saudi Arabia and the negative global impact of the pandemic on international oil demand and prices. An easing of domestic pandemic-related restrictions, an oil price recovery from the lows seen in April 2020 and improvements
in several leading demand indicators support the Saudi MoF’s expectation of a broad-based rebound in real GDP growth of 3.2% in 2021. KPMG, however, notes that the economy in nominal terms will not return to its 2019 size until 2022.
How vital will successful ESG programmes become to the growth and the health of Banks in Saudi Arabia?
In just a matter of weeks, COVID-19 changed the dynamics of the global economy. As the crisis unfolded, many businesses and investors shifted their focus from profits to people; human impact became more important than economic impact. Issues related to human equality, access to health services and societal welfare topped the agenda. It quickly became clear that the environment and social issues have a deep and direct influence on economic stability.
While the pandemic may have slowed ESG progress initially, it is clear that banks across the globe now recognize that their ESG agendas are a tool for returning to prosperity, as well as a deciding factor for many would-be customers and investors. New ESG-tied products and models are being developed, tested and commercialized. The bottom line is that banks can no longer afford to overlook ESG and must embrace it to avoid constrained growth and increased regulatory and public scrutiny.
Euromoney, in its January 2021 survey has found the outperformance of ESG assets during the COVID-19 crisis vindicated proponents’ claims for the sector and encouraged record inflows into funds with sustainability characteristics. The big question now is whether the momentum can be maintained in 2021.
Keeping up with the new global trend, Tadawul’s planned ESG-themed Index is a landmark move which reflects ESG is gaining importance as a strategic metric for investing in the Kingdom.
So, maintaining a track-record of successful ESG programmes will be vital for the health of Saudi banks, maintaining sustainability credentials, keeping the investors aware of it and building the most sustainable banks in the future.
How can ESG programmes help banks with investors, in their regularity obligations and with their reputational risk concerns?
Among many pandemic triggered uncertainties, one thing is certain; that pressure from regulators, investors and the public for greater adoption of ESG will increase. Regulators recognize that moving towards a low-carbon economy will create additional complexities for financial services firms.
Regulators are concerned that banks are ill-prepared for these types of credentials and conduct risks that could arise, both in terms of the direct risks. For example, the physical impact of climate change on assets and the transition risks which is the challenges inherent in a wholesale move towards a low-carbon economy.
Nonetheless, governments will prioritize the effectiveness of ESGrelated regulations in reaching climate change goals over the difficulties faced by banks.
What role do you see KPMG taking in assisting the Saudi banking sector formulate appropriate and effective ESG programmes?
Now, as we realize the role of the ESG as a new necessity in contemporary financial ecosystem, financial organisations need to develop ESG methodologies and its best practices.
KPMG member firms’ work with banks and other organizations across the financial services ecosystem suggests that there are four key actions that bank executives should be addressing today for strengthening and achieving ESG ratings.
Understand your current baseline.
More than simply quantifying the financial risks and probabilities, banks should create an understanding of common ESG expectations of key stakeholders and build awareness of leading ESG practices, in particular amongst senior management and board members. This includes taking time to understand their current practices and exposures, including whether they have the right data, the right capabilities and the right processes to monitor and manage
ESG appropriately going forward.
I. Know what is expected.
While regulatory and supervisory authorities are exploring approaches as to how they might provide specific targets or expectations, bank executives should be talking to their regulatory authorities to understand what is expected of them and how those expectations may change over the short to medium-term. They should also be working proactively with their regulators and authorities to seek out facts, develop standards and identify solutions. II. Put it on your risk radar. For many banks, ESG factors remain a reputational risk. But they need to be more than that. Bank executives, and particularly boards, should be ensuring that ESG risks are a lens through which all decisions are made, especially in relation to credit and valuation risks in their portfolios, reflecting the strategic nature of these risks. III. Develop a strategy. ESG risks cannot be managed off the side of a desk. It requires banks to develop a robust strategy that is integrated into the overall business strategy for the organization. While the strategy must retain a level of flexibility, it must also be actionable and measurable.
Are there ESG activities that are culturally unique to Saudi Arabia and the wider Gulf and what could these be?
ESG-compatible investments standards in Saudi Arabia have significantly improved in recent times. Social reforms, lowering the dependence on oil and diversifying the economy, launch of new mega projects and improved governance mechanism are levelling the ground for FDI, creating new jobs for Saudis and attracting the top foreign talent.
One example of the changing nature of ESG programmes in Saudi Arabia during the pandemic was the cancellation of Hajj in 2020. In previous years, many organizations in the Kingdom funded Hajj for their employees or customers – a unique aspect of ESG in the Kingdom. With this expenditure removed from their 2020 ESG budgets, organizations either diverted the funds to other ESG programmes or simply spared other parts of their ESG budgets from pandemic-related cuts.
Banks in Saudi Arabia have long been at the forefront of the national ESG conversation. Some of the Kingdom’s international institutions and banks have been exposed to the global trends shaping ESG agendas, such as climate action, diversity, and the rise of the activist investor. Also, as one the world’s largest oil producers, Saudi Arabia itself has a particularly important role to play in the ‘E’, or environment, part of the equation.
Environmental
Saudi Arabia being the largest oil producer in the world has a greater responsibility and Vision 2030 translates it with stress on lowering dependence on fossil fuel, reducing the carbon footprint, habitat protection and air emissions. The renewable programme and the use of advanced technologies to produce blue and green hydrogen are just two examples to prove that case.
Social
Sweeping social reforms in Saudi Arabia have paved the way for stronger ESG standards in the Kingdom. Moving beyond Gulf and towards international best practices are attracting global stakeholders to review their strategies for the Kingdom.
Governance
Drastic reshuffle in ministries for transparency, Saudi Arabia’s anticorruption authority (Nazaha) started a crackdown on corruption which sets the pace for Saudi Arabia to align the public and private governance with best practices. It will set the stage for Saudi Arabia to present its case for a mature governance agenda.
What is your view on the implementation of ESG activities across the financial sector in the Gulf region?
The pandemic, in general, has created a paradigm shift and accelerated the implantation of ESG programmes for sustainable agendas at financial institutions. ESG is currently being factored as a metric for investment decisions. Health and e-commerce companies are at the top of investment considerations. The movement towards renewable energy has also gained momentum in the Middle East.
Investors are the main drivers behind the growth and implementation of ESG programmes moving forward. In 2019, more than 2,300 world investment management firms representing SAR 322 trillion ($86 trillion) in assets under management have pledged to integrate ESG factors in their investment decisions by becoming signatories to the United Nations backed Principles for Responsible Investment (PRI). This represents an astronomical growth of 309% in assets under management since 2010 when signatories represented $21 trillion in assets under management.
Gulf states, as a result of falling oil prices, are focusing ESG programmes which are pushing regulators to prepare and implement ESG strategies and standards. ESG programmes and their implementation has been on the agenda of Gulf states and they have developed metrics based on local regulatory systems.
Saudi Arabia in 2019 implemented a SR 105 billion ($28 billion) renewable energy programme which offers loans for clean energy projects and the manufacturers of renewable energy components.
Dubai, in line with its commitment to drive market growth and sustainability in financial markets, introduced its ESG reporting guide to assist its stock listed (DFM) companies to incorporate Environmental, Social and Governance information into their reporting processes.
There are several other recent efforts in the UAE and the wider region that have sought to tackle the broad range of ESGs.
KPMG helps companies to develop ESG services to match the differing needs of asset managers at various levels of ESG maturity. KPMG covers ESG areas such as: Developing and implementing ESG strategy, monitoring and reporting on performance, review processes and assure disclosures.
How much more time do you think KPMG will be devoting to ESG advisory for the banking sector in 2021?
Designing an ESG strategy can build actionable guidelines to help banks and institutions create a value-chain of responsible and sustainable operations. At this point, seamless customer experience becomes a core of ESG for banks. One example, it has been noted that during the pandemic, customers need quick, contactless and protected services.
For setting ESG strategy, banks need to start working on formulating a crossfunctional internal team, sifting and gathering relevant data, data analysis and feedback to establish a strategy framework, seeking banks’ feedback and specific requirements, and establishing a governance committee.
Since the COVID-19 pandemic has amplified the need for ESG; so will KPMG’s Ebrahim Oboud Baeshen is the Office Managing Partner in KPMGs Jeddah office. He is a seasoned professional with over 20 years of experience in accounting, audit and Zakat advisory. His current role involves providing a wide range of services, including due diligence, corporate finance and accounting advisory to family-owned businesses, corporates and public sector clients in the infrastructure, consumer and industrial markets sectors. In addition, Ebrahim has significant experience in organization design, diagnostic reviews and making recommendations for organizational governance structure.
He has a bachelor’s degree in Accounting from King Abdulaziz University, Saudi Arabia, Certified Public Accountant, Executive MBA from The University of Detroit – Michigan, USA, Master’s Degree in Computer Information Systems from The University of Detroit – Michigan, USA, Certified Arbitrator by the Ministry of Justice of the Kingdom of Saudi Arabia.
Ebrahim holds positions of Chairman of the Committee of Chartered Accountants at the Industrial Chamber of Commerce in Jeddah, Board member of the Saudi Organization of Certified Public Accountant (SOCPA), Member of several committees in the Saudi Organization of Certified Public Accountant (SOCPA), and is member of the Municipal Council in Jeddah, Saudi Arabia.
future time be spent on designing ESG strategies, especially in the Gulf region, as these states lack the future-ready practices, so that when the need arises they can present a case to investors.
KPMG predicts that for those banks that do not pursue a strong ESG agenda, the consequences could be severe. Banks risk negative reactions from investors, customer defections, adverse ratings, and a rise in the cost of capital. An ESG strategy at banks, just like all other strategies, needs to be carefully reviewed and regularly updated to ensure it remains aligned to stakeholder expectations.
