Saudi Arabian Environmental, Social and Governance Situation
25/02/2025 - Written by Michal Bilinski
Introduction
Saudi Arabia, as a pivotal player in the Middle East, is crucial to the region-wide integration of Environmental, Social, and Governance (ESG) principles into its economic and corporate frameworks. This shift plays a role in the nation’s transition into the Vision 2030 governance framework, which aims to diversify economic opportunities and reduce dependency on oil revenues. It is vital to note that whilst Vision 2030 sets out governance goals related to sustainability, the diversification of economic growth will also partially be attributed to the aim of becoming a major hub for the development and distribution of military hardware. By prioritising sustainable energy practices, Saudi Arabia signals to its Western counterparts that they remain in touch with the emergent issues regarding climate. Consequently, this prioritisation of ESG values seeks to source further investment from global partners, which in turn enhances its geopolitical influence and ensures economic stability. Riyadh has already attracted over $10 billion in ESG-related investments according to the most recent data, reflecting growing confidence in its commitment to sustainability.
However, the wider context of the situation may suggest that Saudi Arabia’s ESG compliance is a mere act to assure investors of its forward-thinking nature, ensuring growth in the emerging sustainability-oriented markets. This contradicts the seemingly transitionless embracement with which Saudi Arabia displays itself to the Western energy partners in order to secure further financial support for experimental policies.
Contextual Analysis
Whilst Saudi Arabia's economic focus on ESG is a sign of the ongoing efforts of the global community to police the social responsibility which states and corporations alike bear for the ongoing climate shifts, it is surprising. From the inception of the twenty-first century, Saudi Arabia has been resistant to renewable energy transitions, making this policy change a notable step towards economic diversification. As 50% of Saudi Arabia’s GDP relies upon oil and gas production and its membership in OPEC, the paradigm shift from actively opposing transition to sustainable energy to incorporating it suggests that Saudi Arabia’s economic model of governance is changing.
To consider Saudi Arabia’s current impact on the world and its need for ESG policies, it has emitted approximately 736 million metric tons of CO2 in 2024, making it one of the highest per capita emitters globally. Constrastingly, its GCC neighbours the UAE emitted around 229 million metric tons, and Bahrain emitted 36 million metric tons of CO2. Although Saudi Arabia’s focus on renewable energy has been rapidly increasing, its current 0.2% share in renewable energy pales in comparison to the global average of 39%. This indicates that perhaps the urgency with which Saudi Arabia approaches its deliverables must be accelerated in order to be the trendsetter in terms of ESG as it perceives itself.
Consequently, the attempt to suddenly shift the narrative from being one of the biggest emitters to a proponent of environmentally and socially sustainable change may be explained as a way to establish regional hegemony. The country’s planned Vision 2030 is the key focus of the current administration to ensure this goal is met. Launched in 2016, Saudi Arabia aimed to align with global sustainability goals through key targets, such as increasing renewable energy production to 50% of the total energy mix by 2030.
This effort to accelerate ESG performance and adoption comparatively to its neighbours led the Saudi government to push for the Saudi Exchange to install ESG Disclosure Guidelines to monitor the Saudi companies’ involvement in climate change and to guide them to more environmentally viable options. Ultimately, despite historic considerations Saudi Arabia seeks to signal its ability to move past natural resources and align itself with the future practices that minimise carbon outputs.
Key Players and Stakeholders
Government: The Saudi government plays a central role in incorporating ESG practices and creating regulatory frameworks. In 2021, the government sought to allocate $190 billion by 2030 such as the construction of the Sakaka Solar Power Plant to which over $280 million were directed in an effort to diversify the energy sector.
Public Investment Fund: As Saudi Arabia’s wealthiest investment fund with $925 billion in assets, the attention towards green projects PIF pays significantly impact ESG adoption by private and public companies. A notable example is its $3.2 billion investment in renewable energy infrastructure across Saudi Arabia with the private sector.
Private Sector: SMEs within Saudi Arabia face challenges in adopting ESG due to costs and regulatory lack of cohesive legal frameworks to reference. Saudi’s Aramco however as a large enterprise has shown that the integration of ESG principles into oil production can be achieved through carbon offsetting as per the 2023 report. The delivery upon these promises however depends on the execution and validity of the reports conducted. Due to an absence of independent reporting on ESG compliance within Saudi Arabia and heavy government oversight, scholars lack an in-depth overview into the private sector.
Regional Partners: The UAE and Bahrain have advanced ESG policies that influence Saudi Arabia’s approach. The UAE’s framework regarding ESG adoption is reported as one of the key models from which Vision 2030 is modelled.
Western States: European Union’s France, Germany and the Netherlands, as well as the United Kingdom and the United States act as the main stakeholders with large investments within the Kingdom. Due to their focus on ESG, it will be vital for Riyadh to showcase ongoing commitment to the transition and integrate ESG into the future of energy.
Opportunities and Risks
Opportunities:
Robust ESG practices can make Saudi Arabian companies more appealing to global start ups seeking sustainable investment opportunities and ground to develop in, attracting further capital. A 2023 report estimated that global ESG-focused assets will reach $53 trillion by 2025, with Saudi Arabia positioned to capture a significant stake in related investments should it pursue its Vision 2030 approach, significantly ameliorating the impact of the partial transition of focus from oil production.
Embracing ESG will allow the resource economy which Saudi Arabia possesses to transition into the development of new products and services that meet global sustainability standards and enhance the political standing of the Kingdom with its Western partners. Saudi Arabia has committed $50 billion to clean energy infrastructure, with the goal of increasing non-oil GDP contributions from 16% to 35% by 2030.
A commitment to ESG would allow Saudi Arabia to enhance its global image and project itself as a forward-thinking and environmentally friendly country, positioning it as a leader in sustainable development.
Risks:
Lack of adequate frameworks and actual commitment may lead to further criticism of the Kingdom’s commitment to ESG guidelines, potentially leading to depreciation of economic relationships with current partners in the European Union. Indeed, inconsistent ESG implementation may lead to skepticism and decreased investor confidence. According to the recent report published by KPMG, Saudi Arabia’s private sector struggles with reporting whether ESG guidelines are adhered to.
Market position and stakeholder trust within the Saudi Arabian private sector may become damaged due to a lack of implementation, harming routes of development of new spheres of services and decrease in foreign capital in emerging technology sectors. Transitioning from oil revenue poses short-term financial risks and requires substantial investment.
While major corporations can adopt ESG quite easily due to abundance of resources, SMEs struggle due to financial and operational constraints. Therefore the government must consider them alongside transnational corporations to maximise the lack of disruption to the social governance of native Saudi businesses and those trading regionally.
Policy Recommendations
Development and enforcement of legal regulations that mandate ESG incorporation within corporate settings, ensuring transparency and accountability of the private sector to the government. Enforcement of corporate ESG compliance which prioritises accountability.
Introduction of tax benefits and subsidies for businesses adopting ESG principles to help SMEs with the transitional phases and to hire exceptional talent in the sphere to manage the transition.
Creation of educational awareness and financial incentives to companies to increase commitment to ESG principles. Establishment of monitoring mechanisms and bodies, seeking guidance from reliable NGOs to assess and report on the performance of companies in relation to set ESG goals.
Development of crucial partnerships between the government, private sector, and international organizations. As Saudi Arabia has strengthened its ties with the World Bank in regards to data sharing and knowledge distribution, potential for advisory from the World Bank on the development of ESG practices that have a minimal impact on the government is possible.
Conclusion
Whilst relatively a new element of Saudi Arabia’s government, ESG currently plays a crucial element in its Vision 2030 strategy. As per said strategy, Saudi Arabia will aim to align with global sustainability goals while ensuring long-term economic stability, especially as its economy is reliant upon the highly profitable oil industry which fuels its economy.
Despite challenges, the Kingdom has an opportunity to establish itself as a regional leader in ESG, attracting investment and enhancing its geopolitical influence. Whilst the lead for the most ESG-conscious country remains with its Gulf neighbours the UAE, Saudi Arabia has been making significant leaps to close the gap and ensure its lead in the region.
With stronger regulations, financial incentives, and public-private cooperation, Saudi Arabia can fully integrate ESG into its economic model, ensuring a sustainable future. It remains to be seen whether this wish is a mere power play to keep a steady supply of financial investments from the West, or a genuine pathway onto which the Kingdom is stepping to increase its presence.