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Wednesday 20 November 2019

CLIMATE II

Crude hard cash

Should a trillion-dollar Saudi oil company be allowed to raise money on the public markets?

By Alexi Mostrous

It is already the world’s most profitable company – and its most polluting. Next month Saudi Aramco, the giant state-owned oil company, will sell a sliver of itself on the Riyadh stock market and add another string to its bow: it will become the most valuable corporation on the planet.

The public listing of just 1.5% of Aramco’s shares will release around $25 billion into the coffers of Crown Prince Mohammed bin Salman, who hopes to wean Saudi Arabia off its oil addiction by funding projects such as Neom, a futuristic robot-controlled city planned for the Red Sea coast.

Yet the Aramco float raises serious questions for UK-based pension funds and asset managers, which will soon have the option to purchase shares. Should a company which pumps four times more crude than both Shell and BP –  and is responsible for nearly 5 per cent of all global emissions of the last 50 years – be allowed to raise money on the public markets, especially from pension funds who give little clue where their money is going?

Participants in Tortoise’s CEO climate summit last week had a clear answer to this question: no.

“There’s only one way we can do this,” said Professor Bobby Banerjee of the CASS Business school. “Some kind of law that says it is forbidden for fossil fuel companies to raise money from capital markets. That’s the only thing that’s going to solve it.”

Mark Campanale, the founder of the Carbon Tracker Initiative, a financial think tank focusing on climate change, said the appetite to invest in the Saudi IPO was “bizarre” given global moves to cut carbon emissions.

“The Saudis offload their risk to European pension schemes,” he said. “The total stock of capital invested in fossil fuels is $25 trillion. To meet the goals of the Paris Agreement we’re going to have to write down half of that over the next decade. We expect markets to move against the fossil fuel companies… because of the vulnerability of their balance sheets.”

In practice, the risk of UK institutional investors piling into the Aramco IPO has been ameliorated by two events: the Saudi government’s decision not to list the company in London and its more recent choice not to market the sale in Europe or America.

The addition of Aramco on the London stock exchange would have led to dozens of funds buying shares in the oil company. Many passively ‘track’ the FTSE 100, buying stock in every company on the index. Listing the company on the Tadawul, as Saudi Arabia’s domestic stock market is known, has limited UK exposure because far fewer funds track that particular exchange.

Second, the humiliating decision this week to cancel investor roadshows in Europe and the US means that, initially at least, the Aramco IPO will rely almost exclusively on local investors. The cancellation is hugely embarrassing for Prince Mohammed, who had initially demanded an international listing to raise as much as $100 billion for the kingdom’s sovereign wealth fund.

The climbdown in both scope and scale is just the latest blow for MBS, as the prince is known, and follows on the heels of the assassination of the Saudi journalist Jamal Khashoggi last year, the drone attack in September which devastated Aramco’s oil processing facilities and last month’s WeWork IPO debacle, which saw the Saudi-backed real estate company’s valuation plummet from $47 billion to $12 billion.

Even with these two caveats, however, fund managers told me that British employees and individual investors could still end up indirectly owning Aramco shares – often without their knowledge.

“Wittingly or unwittingly, they could find themselves with exposure,” said Russ Mould, investment director at broker AJ Bell. “Anyone who has chosen to invest in an emerging markets fund or a global fund could find themselves investing in Aramco. Or anyone with a company pension scheme could find their scheme selecting that [investment] on their behalf.”

Saudi Aramco announcing its IPO in Dhahran, Saudi Arabia

Mould sent me data identifying 52 funds that invest in Saudi listed companies, with a total value of £61 billion. Such funds will attract money from all over the world, including Britain. Two were run by HSBC.

The majority are so-called passive funds, a fast-growing type of fund which slavishly track the performance of a particular market or index. When Aramco shares are listed on the Saudi exchange they will be picked up by at least some of these tracker funds, Mould said. In practice it won’t be easy for investors – or pension members – to opt out of these decisions on ethical grounds.

“You click the button that says ‘default investment’ and you will be invested in countries in which you might have very little sympathy,” Mould said. “Post [Neil] Woodford, people will be more aware of where their money is going.”

In addition to passive tracker funds, fund managers might actively choose to invest in Aramco after the company is listed, especially if it chooses to raise more money in further tranches. Major asset managers, such as Aviva investors, declined to comment.

After years of ignoring environmental concerns, some asset managers and pension groups are starting to push corporate polluters to tackle climate change. Groups such as the Church of England Pensions Board, which overseas the retirement pot for Anglican clergy, are credited for pushing Shell into promising to halve its carbon footprint by 2050, for example.

But the primary motivating factor for action by big-name investors appears to financial, rather than ethical. Oil and gas companies are under unprecedented scrutiny. If governments continue to cut emissions to meet targets set in Paris in 2015, a huge number of such projects will become uneconomic.

“There’s a growing awareness of the risk that you could end up owning stranded assets,” Mould told me. “More and more funds are aware of the risk posed by Paris and the public awareness around carbon neutralising. There was a growing fear that Aramco’s 60 odd billion barrels of oil could be left in the ground.”

Which pension funds have invested in Aramco will become clear in the coming weeks, Mould said. Watch this space.