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The Impact of ESG Performance on the Financial Performance of Saudi Arabian Companies
Alhanafi, Tala
Alhanafi, Tala
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Abstract
In this paper, the effect of ESG practices on companies’ financial performance in Saudi Arabia is investigated. The research tests this relationship on the ground of two essential variables; the accounting indicator ratios ROA (return on assets), ROE (return on common equity), and ROC (return on capital) used to measure the financial performance, and the ESG disclosure value. ESG is a non-financial score that measures a company's environmental, social, and governance reporting practices. Sustainability practices is one of the most prominent and vital pillars that are incorporated into the Saudi Vision 2030 which is why this article attempts to measure its impact on firm profitability. Through the utilization of the Bloomberg database, the financial statements and ESG reports of 26 companies through the period 2012-2021 were extracted and examined. The raw data was organized by sector, then analyzed using the Eviews software r esulting in around 1000 data points.The sectors are banking sector, food & beverages sector, insurance sector, energy sector, materials sector, commercial & professional sector, utilities sector, telecommunication services sector, retailing sector, real estate sector, diversified financials sector, and lastly the consumer sector. The analysis was done on all sectors together as a whole, and then for each sector separately. When considering the effect of ESG on financial performance of companies from all sectors as a whole, findings revealed a positive relationship between ESG and all financial indicators (ROA, ROE, and ROC). However, only the relationship between ESG and ROE is significant while ROA and ROC demonstrated an insignificant positive correlation. Contrarily, when the hypothesis was tested on each individual sector, results diverged considerably. Four out of the eleven sectors examined had a uniform result. That is, the financial performance of the banking sector, commercial & professional sector, consumer services sector, and materials sector all exhibited a significant negative correlation with ESG. The other sectors, on the other hand, did not reveal consistent results, making it difficult to make an accurate and inclusive conclusion regarding whether ESG practices positively or negatively impact these sectors’ financial performance.