How foreign investors run environmental, social and governance due diligence on a company or project in Saudi Arabia, with the local issues each stage must cover.
ESG due diligence in Saudi Arabia follows the same logic as anywhere else, but the material issues differ: extreme heat and water scarcity, worker welfare and housing, Saudisation, energy intensity, and governance in family-owned and state-linked companies. The Saudi Exchange has published ESG disclosure guidance, the Saudi Green Initiative sets national climate direction, and PIF has issued green bonds, so local counterparts increasingly expect the questions. The stages below help an investor ask them in the right order.
Before stage one
Start from your own fund or corporate ESG policy and translate it into the local context. A generic questionnaire will ask about the wrong things and miss heat stress, labour housing or water abstraction. Agree with the target company early what information will be shared and in what language, since many documents will be in Arabic.
- Your ESG policy and exclusion list, applied to the target's activities.
- A materiality view for the sector and location, including heat and water.
- Access to site visits, not only documents.
- Advisers who read Arabic documents and know local regulation.
Stage 1: Assess materiality
Identify which environmental, social and governance issues are material for the sector and location, using sector standards and local conditions.
- Deliverable: A materiality map with the issues to investigate.
- Owner: ESG lead.
- Approval gate: Investment committee agrees the scope.
Stage 2: Review environmental compliance
Check environmental permits, emissions, waste and water use against requirements enforced by the National Center for Environmental Compliance and other regulators.
- Deliverable: An environmental compliance review with gaps listed.
- Owner: Environmental consultant.
- Approval gate: No unresolved material violations.
Stage 3: Review labour and social issues
Examine worker contracts, wage payment through the Wage Protection System, accommodation standards, heat stress controls including the summer midday outdoor work restrictions, and health and safety records.
- Deliverable: A labour and social review including site visit findings.
- Owner: Social specialist.
- Approval gate: Material worker welfare issues have a correction plan.
Stage 4: Review governance
Assess board structure, related-party transactions, anti-corruption controls and, for listed companies, compliance with Capital Market Authority governance rules.
- Deliverable: A governance review with recommendations.
- Owner: Legal and governance adviser.
- Approval gate: Key governance risks addressed in transaction documents.
Stage 5: Assess climate risk and transition
Evaluate physical risks such as heat and flooding and transition risks linked to energy use, with reference to the Saudi Green Initiative and national targets.
- Deliverable: A climate risk summary.
- Owner: ESG lead with specialists.
- Approval gate: Material risks priced or mitigated.
Stage 6: Agree an action plan
Turn findings into an ESG action plan with owners, deadlines and budget, attached to the investment agreement.
- Deliverable: A signed ESG action plan.
- Owner: Deal team and management.
- Approval gate: Plan included in legal documents.
Stage 7: Monitor after investment
Report on the action plan and key indicators regularly, and review at each board meeting.
- Deliverable: Periodic ESG reports.
- Owner: Portfolio manager.
- Approval gate: Progress reviewed annually.
Handovers between stages
The weak point is between findings and legal documents. If the action plan is not written into the investment agreement, it tends to remain a report that management files away. Involve lawyers early so ESG commitments become covenants, conditions precedent or reporting duties with consequences. A second weak point is language: findings drawn from Arabic documents should be summarised for the investment committee without losing the detail that made them material.
How you know it is finished
The process is complete when material issues are understood and either priced into the deal or mitigated, the action plan is signed into the investment documents with owners and budgets, and monitoring against agreed indicators is running with the first report delivered on time.
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Frequently Asked Questions
Does Saudi Arabia have ESG disclosure requirements?
The Saudi Exchange has published ESG disclosure guidelines for listed companies, and the Capital Market Authority sets corporate governance rules for them. Environmental and social reporting has been largely voluntary but is developing, and some sectors and lenders ask for more. Check the current guidance and any sector rules that apply to the target company.
What are the main ESG risks when investing in Saudi Arabia?
Common material issues include heat stress and worker welfare, labour accommodation standards, water scarcity, energy intensity and emissions, Saudisation compliance and governance in family-owned or state-linked companies, such as related-party dealings. Materiality depends heavily on the sector and location, so a construction contractor and a software company will have very different lists.
Are there green bonds in Saudi Arabia?
Yes. PIF and several Saudi companies and banks have issued green bonds and green sukuk, and a voluntary carbon market initiative has been launched in Riyadh. Frameworks and use of proceeds vary by issuer, so review each issuer's green financing framework and the independent second-party opinion before treating an instrument as green.
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