Sustainability Risk Management and Financial Distress: The Moderating Role of Financial Performance in Saudi Firms

The rising demand for sustainability disclosure, the risks it entails, and the strategies firms employ to manage these risks represent a critical area of contemporary research. This research aims to investigate the impact of sustainability risk management (SRM) on a firm’s financial distress (FFD). In addition, it examines the influence of the firm’s financial performance as a moderator variable on this relationship. This research adapts a quantitative analysis to explore these relations based on a sample of 77 Saudi firms listed on the Tadawul stock exchange in 2023. It relies on the SRM score presented by Morningstar Sustainalytics, as it is considered one of the largest environmental, social, & governance (ESG) rating firms. While the direct relationship between SRM and FFD is statistically insignificant, the findings show a significant moderating effect of firm performance, especially for firms with medium SRM levels. This demonstrates the importance of organizational and contextual factors in the interplay between SRM and FFD. The research results have valuable insights for decision-makers in the Kingdom of Saudi Arabia by providing more understanding about the importance of adopting a comprehensive risk management framework that includes sustainability risks. Adapting sustainability practices and risk management becomes essential for Saudi firms. Therefore, managers in Saudi firms should consider the firms’ profitability when implementing SRM strategies, as these may not consistently contribute to stability across all financial conditions.