The Importance of ESG Integration for Financial Stability: A Study of Energy-Intensive Companies in Saudi Arabia

Abstract

This study assesses the financial strength and ESG (Environmental, Social, and Governance) commitments of a selected group of energy-intensive companies listed on the Saudi Stock Exchange (Tadawul). Altman’s Z-score is employed to identify firms with minimal or no bankruptcy risk. ESG-related activities are evaluated through a manual review of each company's annual board reports, in accordance with the guidelines issued by the Saudi Capital Market Authority (CMA). We utilize human experience and AI applications to search board annual reports for companies under analysis. We identify and score ESG activities under each factor. The results indicate a weak positive correlation between financial stability and ESG integration. We used visual inspection, Spearman's correlation, and robust checks to understand this relationship better. Based on further investigation, we apply a scatter plot to visualize the relationship, which illustrates clusters rather than a distinctive correlation pattern. As a result, we apply hierarchal clustering analysis that suggests three different data clusters that we could link to the company's efforts for financial stability and ESG integration. These findings provide valuable insights for investors and risk managers in evaluating risk-return trade-offs. Moreover, the results can support policymakers and stakeholders in formulating environmentally responsible, sustainable strategies by introducing effective regulatory frameworks and fostering public trust.