Keeping an open mind

October 14, 2021

Following a trip to Riyadh, Polina shares her observations regarding Saudi Arabia’s ESG efforts and reminds investors of the need to have the right mindset when analysing emerging markets.

How open-minded are you?

Our preconceptions can sometimes dictate our reality.

As investors, it is easy to have strong views on what is good and bad for a country and naturally assume that our analysis and predictive skills are more objective than those of on-the-ground policymakers.

With the ESG focus being razor-sharp with respect to the emerging market (EM) investment universe, clients demand clear and transparent outcomes as countries address their challenges regarding environmental, social and governance matters.

Last week, I spent a few days in Saudi Arabia – my first post-Covid 19 trip to an EM destination. I was invited to speak at an ESG-focused conference for local businessmen and government officials to share our views regarding ESG risks in Saudi Arabia.

At this stage, I can imagine you might be rolling your eyes, thinking Saudi Arabia and ESG in the same sentence is an oxymoron. You might be conjuring up images of J.Khashoggi, Osama Bin Laden, 9/11, Yemen and many other reasons that could raise serious concerns regarding the Saudi ESG profile. These are important points that should not be minimised. At the same time, we would be equally remiss if we ignored the developments in other areas of the ESG analysis – some of which could play an important part in the global ESG agenda, particularly on the environmental front.

At the end of the day, if we don’t engage as investors, we will miss an opportunity to play a role in driving progress within EM, both within and outside the ESG arena. We believe strongly that when it comes to addressing ESG issues on a global basis, including EM countries in the equation is paramount to making meaningful strides forward.

For the purpose of this note, I will not focus on the topics of politics and human rights in Saudi Arabia. Not because they aren’t important – clearly, they are an integral component of any sovereign analysis. Instead, I want to share a few observations from my trip and explain why they, too, should figure in the investment debate.

What I can report is that during my few days in Saudi Arabia, I observed changes that I would not have imagined possible when I visited the country in 2016.

Without doubt, I would not have recognised the country I saw last week: women who were sitting at the back of the room in meetings last time had moved to have a seat at the table. Indeed, more than a third of members of the Saudi Debt Management Office were women.

In Riyadh, women were driving – a female official from the Ministry of Finance told me that when the government allowed women to take a driving test in 2017, the waiting time stretched to a whole year due to overwhelming demand. Women are no longer required to wear headscarves or abayas and can travel without guardian approval.

The city itself has also transformed: Riyadh was buzzing. Restaurants were full; theme parks are being built; the domestic tourism sector is thriving. The younger Saudis I chatted with expressed enthusiasm about the changes and optimism for the future.

To be sure, my impressions were based on my observations and conversations. However, I would argue this anecdotal evidence is as valuable (if not more) within our ESG analysis as third-party reports that are backward-looking and do not engage with either the government or regional and sectoral specialists.

Notwithstanding these observations, the level of engagement was what impressed me the most. There is no question that Saudi Arabia is facing substantial challenges (especially on the environmental front), but the government also acknowledged the need to reform the economy and has shown willingness to take the necessary steps on this front.

It is worth noting some achievements to-date, including fiscal stabilisation, the development of capital markets and the banking system, the digitisation of government services, in addition to social reforms.

Under its Vision 2030 initiative, designed to reduce the country’s dependence on oil, the Kingdom has announced a far-reaching economic and social reform plan which, among other initiatives, included measures to diversify its economy away from hydrocarbons and, more recently, to decarbonise its utility systems. The plan also states the intention, perhaps overly ambitiously, to generate up to 50% of the country’s electricity from clean sources. As a result, the country’s USD430 billion sovereign wealth fund (PIF) has been mandated to develop close to 70% of the renewable projects in the country across 13 sectors.

The devil will be in the detail – for us, providing transparency on those projects is key so we can gauge the potential to reach goals and progress thus far.

Notwithstanding the criticisms of ‘hype’ directed at Vision 2030, the motivation to implement change also seems real and widespread amongst the officials I met. 70% of the population is under the age of 35. The government openly acknowledges the need to think about the future generation and sustainability of the current policy mix.

Officials similarly exhibited a clear recognition of the benefits of improving the country’s ESG profile. The Saudi policymakers and corporate executives I met showed surprising readiness to have frank discussions, welcoming my rather direct feedback regarding investor priorities and concerns. They, in turn, argued for the need to apply an ESG framework to the reality of their country where, based on this, they can assess their top priorities and focus on objectives they believe are realistic.

One may agree or disagree with this approach, but the willingness to have a dialogue, exchange views and commitment to share information going forward was something I had not expected and was certainly more forthcoming than many other sovereign credits we follow.

As investors, we tend to have a short attention span. We read a headline but our real task is to look beyond it. If the headline says, for example, "Saudi Arabia is critically insufficient in meeting climate targets”, we must not assume this is the only truth.

It is incumbent on us to ask the government why it believes it is not able to comply with these targets and, if unconvinced, challenge the reasoning. In my discussions, Saudi policymakers acknowledged the problem of global warming, but they also expressed their reluctance to risk creating volatility and raw material shortages if the targets force an abrupt shut down of facilities, as we have recently seen in China.

Instead, Saudi officials propose a more gradual approach, investing in clean hydrocarbon and carbon capture, alongside oil production, with the aim of achieving a smooth transition to meeting the same target. While this reasoning, and the likelihood of timely achievability of these goals, can be challenged, participation in the debate is an important first step on the path to improved outcomes.

As investors, we have the difficult job of making judgement calls based on limited information. That said, while it's easier to follow the headlines and avoid conversations with clients on sensitive topics, our responsibility is also to have integrity in the way we scrutinise evidence, recognise improvements and show openness to hearing other points of view. It is only with this mindset that seemingly indisputable truths can be weighed up against the ever-changing facts on the ground.

EM investing challenges us to understand the mosaic of global vested interests. The best path to successful investing is having an open mind – my visit to Riyadh has reinforced this once again. The next step on that path is to continue engaging and following the evidence, to determine whether a change of mind needs to be on the cards.

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