A mirage or a new market? DNB AM visits Saudi Arabia

DNB AM joined other international investors to meet Saudi Arabian companies in Riyadh this November. We met with companies operating in the financials, information technology and consumer sectors, as well as the Public Investment Fund of Saudi Arabia. DNB AM completed 17 meetings over three days and left the country filled with impressions from a market that is little discussed in the Nordics.

Saudi Arabia has captured significant international attention in the past years. Saudi Arabia has been included on the MSCI Emerging Markets Index since 2019, and the weighting of Saudi-listed stocks on the index has doubled since then. The country is seeking to establish itself as a significant regional hub for investment and international diplomacy, all the while remaining a very polarising country in Norway and beyond.

An emerging and changing market

Saudi Arabia, long viewed as a theocratic Petro-state is in the midst of an ambitious albeit lofty national project. Dubbed “Vision 2030”, the strategy for the diversification of the Saudi economy away from its dependence on petrochemicals is well on its way and international investors are taking note. Saudi Vision 2030 is a government program that aims to diversify the economy and society of Saudi Arabia. While the vision has been praised for its ambitious goals, others have pointed out the weaknesses of the program, such as its reliance on new megaprojects. However, one thing is for certain, the moonshot nature of the strategy is already drawing significant investment activity from both the Saudi government and international investors.

Reform in Saudi Arabia has been drastic, but our impression was a country in transition between two worlds. Firmly present was the strong influence of the state and national tradition, but there was also an immense optimism surrounding the internationalisation amongst Saudi business. Significant social reforms have been made considering the rights of women in the country, yet significant challenges remain. There remain parallel realities in the country where there is a advancement of the rights of the women and increased company transparency, but also a significant concentration of power for Saudi leadership under the rule of Crown Prince Muhammed Bin Salman.

Challenging Saudi companies on ESG

With increasing internationalisation comes increasing responsibility. Saudi companies are now forced to face the requirements of the international investor market with internationalisation through increasing foreign ownership of its listed companies. This also entails that Saudi-listed companies must integrate both governance of ESG matters within their operations, but also disclose and report on their efforts and operations in a meaningful way that provides investors with useful data for making more accurate risk assessment and investment decisions.

Many Saudi companies that we met during our visit are in the very nascency of ESG reporting. Reporting maturity is expected to increase rapidly with increasing national requirements as well as investor expectations.

DNB AM had prepared specific questions that we assessed as material for each company. Issues that were of relevance was for example ESG integration in the credit process for Saudi banks with particular focus on risks related to labour and sourcing of labour, governance and the rights of shareholders, data privacy and consumer protection, as well as the integration of women into the workforce and company leadership. The questions were informed by our research as well consultation with NGOs and other stakeholders ahead of the trip.

The companies were transparent and expressed their ambition to improve in the area and many companies provided clear and realistic strategies to work towards best practice. Following our visit, DNB AM has held multiple follow-up meetings with the companies to cover ESG issues more in detail and have received very positive responses in the dialogues we have had with the companies.

Saudi is no mirage

The team returned from the trip with new impressions from a country in the midst of change. Saudi companies are striving to attract the attention of international investors and are allocating considerable resources to meet the increased investor expectations. At the same time, there remains a keen awareness of the context and market in which they are operating within. Saudi Arabia and Saudi companies want the world to recognise their efforts and investors would be wrong not to. As investors and companies are turning their attention on Riyadh, new realities are also being formed and DNB AM is excited to learn more about this market going forward.