“The level of climate risk reporting performance and firm characteristics: Evidence from the Saudi Stock Exchange”

In recent decades, stakeholders have begun to place a greater emphasis on sustain-ability-related issues, including climate change. Furthermore, the implementation of climate change initiatives has prompted companies to disclose information regarding their evaluation and handling of climate-related risks and potential benefits. However, there is a lack of existing literature that investigates this issue in less developed markets, particularly in Saudi Arabia, where the capital market is rapidly developing. The objective of this study is to assess the degree of performance in reporting climate risk and investigate potential correlations between climate risk reporting performance and firm characteristics among non-financial firms in Saudi Arabia during the period from 2018 to 2021. To achieve the objectives of the study, a total of 515 firm-year observations were utilized, representing 140 non-financial firms in the context of Saudi Arabia. The study’s findings illustrate that the climate risk reporting performance level has steadily improved in Saudi companies over the years. In addition, the findings reveal that firm size and industry exhibit a positive correlation with climate risk reporting performance. Conversely, firm leverage and profitability do not demonstrate such associations. The results are in line with alternative measures of climate risk reporting performance, as well as when climate risk reporting performance is broken down into the four core elements. Policymakers and market regulators could use these results to promote awareness of the factors that influence climate risk reporting performance and to enhance sustainable practices.


INTRODUCTION
In recent years, concerns about the state of the environment and efforts about how to protect it have increased considerably amongst regulators, society, and governments (Da Silva Monteiro & Aibar-Guzmán, 2010).This made rise to the concept of sustainability which became very critical for the planet.As a result, over the last decade, sustainability has become a critical dimension for various stakeholders, putting pressure on organizations to adhere to its principles (Gulluscio et al., 2020).Although there are three main pillars of sustainability: environmental, social, and economic, the environmental one has received the most attention, specifically climate risk.
The topic of climate change has emerged as a prominent subject of discussion in both public and political spheres, being recognized as a significant and urgent global challenge (Andrew & Cortese, 2011).It also became one of the most pressing concerns facing governments, societies, and businesses; and managing the risks associated with this phenomenon became the most challenging objective of business organi-zations (Daradkeh et al., 2023).The United Nations has formulated a set of 17 Sustainable Development Goals (SDGs) with the aim of addressing a diverse range of global challenges (United Nations, n.d.).Among these 17 goals, goal number 13, which is "climate action", aims to "take immediate action to fight against climate change and its effects" (United Nations, n.d.), has become a pressing issue.Therefore, countries initiated measures and collaborated to address this phenomenon, ultimately leading to the establishment of the Paris Agreement in 2015.Representatives from 195 countries proposed measures to restrict the acceleration of global warming (Park et al., 2023).The objective posits that an increase in greenhouse gas (GHG) and carbon dioxide (CO2) emissions is the root cause of climate change, and that addressing these causes is necessary to combat this phenomenon (Gulluscio et al., 2020).
These challenges and objectives have in turn led to the creation of sustainability reporting, through which companies provide information to their stakeholders about the social and environmental impacts of their operations (Pellegrino & Lodhia, 2012) as businesses and industries are often regarded as the main contributors to environmental problems (Amran et al., 2012).In particular, climate risk reporting, which is providing information about a company's climate change practices, risks, and mitigation policies (Venugopal et al., 2009), became a main requirement from investors, regulators, and the public.As a result, scholarly literature addressing the scope, quality, and factors influencing climate risk disclosure by firms on a global scale started to emerge and grow.However, previous research has failed to establish a unanimous agreement regarding the characteristics and extent of the effects of factors influencing climate risk reporting.

LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT
In literature from around the globe, the extent and quality of climate risk reporting performance (CRRP) have been analyzed at length.Previous literature thought of trying to identify the critical factors that affect the performance of climate risk reporting and categorized these factors into firm characteristics factors Several theories have been employed to explain the determinants of climate risk disclosure, including legitimacy, stakeholder, and institutional theories (Mathuva et al., 2017).As per Suchman's (1995) definition, legitimacy is "a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions" (p.574).Consequently, firms typically seek approval of their goals and actions to ensure their continued existence in the society in which they operate (Reverte, 2009).This implies that legitimacy is contingent upon the degree to which firms align their goals and actions with the accepted social and cultural norms (Zimmerman & Zeitz, 2002).Consequently, legitimacy has become a vital asset that companies must possess to ensure their survival and expansion (Suárez-Rico et al., 2018).One method for achieving this legitimacy is through sustainability reporting (Hooghiemstra, 2000), which has established the legitimacy theory as the primary theoretical explanation for the disclosure of social and environmental information (Jenkins & Yakovleva, 2006).
In line with the legitimacy theory, stakeholder theory explains how companies manage their stakeholders since these stakeholders have control over their resources (Comyns, 2016).The stakeholder theory emphasizes that, in addition to shareholders and creditors, there exists a diverse array of entities, including NGOs, media, and regulatory bodies, that possess an interest in the environmental and social performance of firms.Consequently, these stakeholders seek information pertaining to the effects of a firm's activities on both society and the environment (Moneva & Llena, 2000).Consequently, firms tend to divulge information pertaining to these activities to fulfil stakeholder demands and establish their standing within the broader societal context (Da Silva Monteiro & Aibar-Guzmán, 2010).
The final point to be addressed is the argument put forth by the institutional theory, which posits that firms react to various institutional pressures, namely regulatory, normative, and cognitive pressures, by adjusting their actions and structure (Amran et al., 2012).Accordingly, firms tend to be more environmentally conscious if there are strong regulatory forces, institutionalized normative calls for environmentally conscious behavior, and a successful benchmark (Campbell, 2006).Thus, it is frequently employed to explicate the impact of alterations in societal values, advancements in technology, and regulatory measures on firms' determinations regarding sustainable practices and environmental management (Hanna et al., 2023).Despina et al. (2011) posit that a direct relationship can be observed between the size of a company and its inclination to divulge environmental data, with the intention of bolstering public confidence.Additionally, these firms are subject to heightened public visibility and scrutiny, necessitating increased disclosure of environmental information to maintain their legitimacy (Cincalova & Hedija, 2020).Furthermore, as the public closely monitors the actions of large companies, regulators tend to impose stricter regulations on them to improve their public image.The regulations are frequently focused on stricter environmental standards and performance.Therefore, to avoid disciplinary action, large firms tend to comply with these regulations and disclose a greater amount of information regarding their environmental activities.Lastly, large firms attract more interest from stakeholders, they are more likely be subjected to increased stakeholders' pressure and they respond by complying with their disclosure requirements to seek their approval.Boshnak (2020) posits that corporations experiencing higher levels of profitability are susceptible to heightened scrutiny from both the general public and regulatory entities.Consequently, these corporations exhibit a tendency to adhere to the principles of legitimacy and institutional theories through the practice of disclosing a larger quantity of information regarding their social and environmental endeavors.Furthermore, organizations that possess greater financial advantages are inclined to maintain favorable connections with their stakeholders in order to safeguard their profits.As a result, they are more likely to conform to the demands of disclosing additional information imposed upon them by these stakeholders.Nevertheless, the current body of scholarly literature concerning the relationship between profitability and the level of climate risk disclosure has yielded inconclusive results.In the studies by Kouloukoui et (Alotaibi, 2020).Furthermore, due to Saudi Arabia's rapid economic development, the Saudi Arabian General Investment Authority has placed a greater emphasis on the transparency of reporting firms' social, environmental, and governance performance (Boshnak, 2020).This is due in part to the country's reliance on oil and the negative perception of the oil industry in terms of environmental impact (Issa, 2017).In addition, Saudi Arabia adopted a number of climate change initiatives in accordance with the sustainable development plan adopted by the United Nations and signed by the nation (Alotaibi, 2020).Finally, Saudi Arabia has adopted a green initiative aimed at reducing emissions, afforestation, and protecting land and sea (Saudi Arabia Green Initiatives, n.d.); thus, effectively reporting the impacts and strategies of Saudi companies on climate risk will aid in achieving these goals.Consequently, the present study adopted a comparable approach in representing the industry-type variable.Table 2 displays the measurements of the variables along with their corresponding explanations.is the level of climate risk reporting performance, FSize is the natural logarithm of total assets, Lev is the ratio of total debt to total assets, ROA is Net income divided by total assets, and Industry is a dummy variable set to 1 for industrial firms and 0 for service firms.(Habbash, 2015).Furthermore, it is noteworthy that the SD for the CRRP in the sample is relatively high.This observation suggests that there exists a significant degree of variability in the extent of climate risk reporting among the sample participants involved in the study.Regarding the independent variables, the average firm size of the sample is 9.3057, with a range spanning from 7.3802 to 12.335.This is similar the samples used in previous social responsibility reporting and environmental reporting studies in Saudi Arabia (Abdulhaq & Muhamed, 2015;Habbash, 2015).In the sample, the mean values of the leverage and profitability levels were 0.496 and 0.292, respectively.The leverage had a high SD of 0.5735.It is worth mentioning that some companies in the sample reported net losses, given that the minimum value of the ROA is -58.3%.Finally, in the sample, the manufacturing industry comprised the vast majority of firms (84.27%), while only 81 companies (15.73%) belonged to the service industry.

RESULTS AND DISCUSSION
Moreover, Table 4 (2022).The reason for this is that companies in the industrial sector have a greater impact on the environment compared to those in the service sector.Therefore, they feel a greater compulsion to disclose information regarding their impact on climate risk in order to improve their image.This aligns with both the legitimacy and stakeholder theories.
Table 6 shows the correlation and significance levels of the various variables used in the model during the four-year period.The table below shows that a firm's size, profitability, and industry type all have a positive and substantial link with the CRRP.However, there is no substantial relationship between the CRRP and the company's leverage level.
The result of a firm's size is consistent with findings from previous research in the literature, as the vast majority of these studies concluded that the size of the firm has a significant and positive effect on the level of climate risk report-  Although the correlation matrix indicates the absence of multicollinearity, as the highest correlation between any two independent variables is 0.2795, which falls below the maximum threshold of 0.8 or 0.9 (Field, 2009), a Variance Inflation Factor (VIF) analysis was performed to validate the regression model's reliability.According to Table 7, the VIF with the highest value is 1.12.This value is still below the threshold of 10, which is considered the point at which multicollinearity becomes a significant issue (Kennedy, 2008) and the recommended value of 5 (Hair et al., 2008).
Regression analysis was utilized to assess the hypotheses outlined in Table 8  On the contrary, the results of the regression model did not provide support for the second or third hypotheses, as there was no significant impact of leverage or profitability on the CRRP.
This can be attributed to the fact that larger firms in the manufacturing industry are subjected to more  monitoring from the societies in which they operate, as well as greater public scrutiny of their actions; as a result, they must disclose more climate risk information to maintain their legitimacy and comply with increased pressure from their stakeholders.Furthermore, institutional pressure on these companies is high because their actions have a greater environmental impact.To avoid disciplinary action, large manufacturing companies typically comply with these regulations and disclose more information regarding their environmental activities.In contrast, although the findings did not support hypotheses 3 and 4, they are consistent with those of Alturki (2014), Eleftheriadis and Anagnostopoulou (2015), and Habbash (2016), as the level of climate risk reporting in the sample was not influenced by the firm's leverage and profitability.Further analysis was performed in this study, utilizing the four primary sections of the CRRP, to validate the results and ensure their consistency.As a result, four further models were computed: Model 1, which represents the governance element of the CRRP; Model 2, which pertains to strategy; Model 3, which concerns risk management; and Model 4, which concerns metrics and targets.Based on this analysis, and as presented in Table 10, the size of non-financial firms in Saudi Arabia and the industry they belong to exhibit a positive and noteworthy influence on all four elements.However, the profitability of a firm does not demonstrate any significant impact on any of the four elements, which aligns with the initial findings.Nevertheless, the sole disparity observed between the outcomes of the additional test and the initial test employing the CRRP lies in the fact that the firm's leverage exhibits a noteworthy adverse influence on the strategy element, with a significance level of 10%.It is important to acknowledge that the outcomes obtained from these models exhibit lower robustness compared to the initial model, as indicated by their lower R-squared values.
To sum up, the research findings show that hypotheses 1 and 4 are supported while hypotheses 2 and 3 are rejected.Thus, the findings suggest that firm size and industry are likely to have higher significance in determining the climate risk reporting performance level.

CONCLUSIONS
The objective of this study was to examine the effectiveness of climate risk reporting among non-financial companies in Saudi Arabia.Furthermore, the study examined the impact of different firm characteristics on the level of climate risk reporting.Based on an analysis conducted on a sample of non-financial firms in Saudi Arabia spanning from 2018 to 2021, the findings indicate that although the level of CRRP was initially modest, there was a noticeable enhancement in the performance of climate risk reporting over the examined period.Hence, efforts and awareness of the need of reporting on climate risk performance have expanded among Saudi non-financial firms to meet stakeholders' demands and demonstrate their legitimacy in society.In addition, the results confirmed that there are positive and statistically significant relationships between a firm's size and the industry to which it belongs and the CRRP, whereas leverage and profitability have no significant effect on the CRRP.The study employed alternative measures for the dependent variable, CRRP, to assess its robustness.Thus, it was discovered that the findings are consistent with the primary findings of this study.Furthermore, the findings align with the four major elements of CRRP, thereby validating the conclusions of the study.
This study makes a number of contributions.To the best of the authors' knowledge, this research study stands as the only endeavor to assess the degree of climate risk reporting within the Saudi Arabian context.Most previous studies have examined the extent of CSR and voluntary reporting.Moreover, this specific study represents the only investigation undertaken in the Saudi Arabian context that examines the determinants that impact the degree of disclosure regarding climate risks.To accomplish this, the study utilizes a collection of eleven components that are associated with risk management, policy, strategy, metrics, and objectives.Moreover, it is imperative to mention that the sample utilized in this specific investigation has never been used before in the Saudi Arabian context.Therefore, the primary objective of this study is to provide the latest findings regarding the impact of firm attributes of non-financial firms in Saudi Arabia on the CRRP.The findings of this study can help investors make well-informed decisions about their investments in these companies and their compliance with various environmental regulations.It also improves managers' understanding of the significance of CRRP and aids them in their climate risk management planning and decision-making tasks.Finally, the findings of this study can assist policymakers and market regulators in raising awareness of CRRP determinants and promoting sustainable practices.

Table 1 .
(Sudradjat & Mai, 2022)04;Linsley & Shrives, 2006)bservations derived from 140 non-financial companies that were publicly listed on the stock market of Saudi Arabia during the period spanning from 2018 to 2021.The sample initially comprised 568 observations, as presented in Table1.Despite this, 53 observations were eliminated from the sample because these companies did not issue a board report that would enable us to collect non-financial data.Additionally, the sample comprised financial and non-financial data for a total of 140 companies.The financial data were collected using various electronic sources, such as the Thomson Reuter EIKON database, Wall Street Journal, Argaam, and Yahoo Finance websites.On the other hand, the non-financial data were manually gathered from the annual board reports of these companies.The content analysis technique was used to analyze the non-financial data.Finally, the sample excluded data from financial firms because these companies have special regulations and disclosure practices(Beretta & Bozzolan, 2004;Linsley & Shrives, 2006), and to prevent industry bias(Sudradjat & Mai, 2022).Sample selection (Al-Gamrh & Al-Dhamari, 2016;Habbash, 2016;Issa, 2017).The results of their study suggest that the size of a firm has a notable and favorable im-Investment Management and Financial Innovations, Volume 20, Issue 4, 2023 http://dx.doi.org/10.21511/imfi.20(4).2023.29 1 https://assets.bbhub.io/company/sites/60/2020/10/2019-TCFD-Status-Report-FINAL-0531191.pdf2.RESEARCH METHOD

Table 2 .
Measurements of variables coefficients, is error of company i in year t, CRRP

Table 4 .
Descriptive statistics of CRRP by elements and year

Table 6 .
Pearson correlation matrix

Table 8 .
Regression results

Table 9 .
The findings that are presented in Table9are consistent with the outcomes of the preliminary test.These findings indicate that the size and industry classification of non-financial firms in Saudi Arabia have a positive and statistically significant effect on the CRRP.However, the analysis revealed that the leverage and profitability of the firm do not exert a significant influence on the CRRP.However, this model's R-squared value is only 13.06%, indicating that the results from the initial analysis were more reliable.