ESG: Putting your money where your mouth is

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It is naive to point out that it is all about money, but in the case of international relations – and of business and investing – making the world a better place doesn’t trump a pay cheque.

It seems impossible to go to a meeting in London without a quip about how environmental, social and governance (ESG) is integral to every investment mandate.

Yet responding to questions as to whether the ESG overlay of many funds may mean they choose not to invest in the upcoming initial public offering (IPO) of Saudi Aramco, one London-based asset manager said thatwhile his clients “won’t buy coal”, oil is of no concern.

“It’s the way you spin it,” the investor says. “Any restrictions would probably be related to Saudi directly, to women’s rights and the rule of law.”

There is an uneasy relationship between firms advocating a sustainable revolution, virtue-signalling investments to end the socio-environmental ‘crisis’ and the need to deliver returns.

Some funds, of course, will simply choose not to invest, but the problem that arises is passive investment. No matter how committed the firm is to sustainable development, they may end up holding this company anyway.

Two large London-based asset managers approached by Euromoney refused to even discuss the topic, deeming it too sensitive.

Drone attack

Just over a year ago, the crown prince of Saudi Arabia Mohammed bin Salman was visibly cold-shouldered by world leaders at the G20 after the murder of Saudi Arabian journalist Jamal Khashoggi at the Saudi consulate in Istanbul.

Now though, the UK and the US have jumped to align themselves with the Gulf’s richest nation after a drone attack on two large oil facilities. At the same time, investors are readying themselves for the world’s largest IPO from its most profitable company.

There is no doubt that Aramco is an extremely lucrative company; backed by the most valuable commodity in the world and one at which good governance is central to operations.

It will also make up a decent portion of indices, has good earnings potential, and will attract a vast and diversified investor base. All sound justifications for participating.

The Saudi government has taken great pains to ready its prized asset for the international market.

Bond investors were given the first look into the financials of this mammoth company in April with the publication of its prospectus. The near-500 A4-page document was the most detailed study of a Saudi business ever made public, and the closest look at how the country really makes its money.

The country is one of the worst, everything is subsidized and there is no incentive to use less 

 – Investor

By all accounts, it is a largely slick operation. As one investor who visited an Aramco facility just days after the attacks told Euromoney: “Net-net, it is as if nothing has happened.” Drone attacks, he said, happen all the time – the only difference was that this one had met its target.

Aramco had restored full oil production and capacity to levels they were at before the attacks by September 25, according to Reuters, while markets had largely shrugged off the momentary impact of the drop in production in one trading session.

This is not a house of cards in the vein of WeWork, a loss-making property company re-packaged as a technology firm and gambling on uncertain metrics. By these measures, Aramco is a sound investment and as transparent about its earnings and outlook as it could possibly be.

But with ESG now at the centre of almost every investment mandate, is this an investment that firms – committed to investing under this framework – should be making?

Governance aside, the environmental and social impact of the company and its jurisdiction are found lacking.

Saudi Arabia may have the second-lowest carbon intensity among international oil producers, according to a study cited in its prospectus, but in terms of energy consumption, one investor says, anecdotally: “The country is one of the worst, everything is subsidized and there is no incentive to use less.”

A bulk plant owned by Saudi Aramco


There has long been a tension between ESG, diversification and returns.

A recent paper by Legal & General Investment Management (LGIM) finds that excluding energy – and tobacco – from portfolios in recent years is “likely to have impaired a portfolio’s yield through this period”, as well as concentrating exposure and risk in unintended ways.

The oil and gas sector makes up 8.55% of the FTSE Emerging Index as of August 30, the largest component after banks, technology and retail.

LGIM does, however, note that there are evident diversification benefits to energy exposure, and that it is possible to find companies where meaningful ESG impact is leading to emissions and fossil-fuel reductions.

“One might even logically conclude that energy is a pretty good business – but only with the right exposure,” it says, though advocates careful stock picking.

But not everyone has a choice. Saudi Arabia has just entered the FTSE Russell and MSCI Indices, meaning that many investors will be forced to hold it.

Saudi Arabia makes up 1.67% of the FTSE Emerging Index, which is tracked by around $140 billion of funds, much of which will be funnelled into Aramco.

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