Money invested in environmental, social and governance (ESG)-sensitive investment funds inadvertently found its way into the coffers of a major Saudi Arabian state-owned oil company, Bloomberg News reported Wednesday.
Saudi Aramco, the world’s largest oil company, utilized a web of subsidiaries to raise a combined $28 billion to finance major pipeline construction projects, with some of the financing coming from bonds issued by subsidiaries of western investment consortiums led by BlackRock and institutional energy investor EIG Partners, according to Bloomberg News. The complex web of subsidiaries unintentionally obscured the bonds’ connection to Saudi Aramco, which would have significantly diminished the ESG ratings attached to the bonds if detected on account of Saudi Aramco’s oil-reliant business model.
Saudi Aramco first created two subsidiary companies to facilitate its fundraising for pipeline construction in 2021, according to Bloomberg News. The two western investment consortiums then took out bridge loans to make investments in the Saudi Aramco pipeline subsidiaries.
From there, the consortiums created their own Luxembourg-based special purpose vehicles (SPVs) to issue bonds designed to allow the consortiums to repay their initial bank loans, according to Bloomberg News. These SPV bonds ended up receiving above-par ESG ratings from a widely-used JPMorgan sustainability screening derived from third-party ESG ratings, since the securities were several steps removed from Saudi Aramco.
The securities then wound up in JPMorgan’s ESG indexes, which are tracked by approximately $40 billion in assets under management, according to Bloomberg News. Prominent institutional investors in the SPV bonds include the investment arm of HSBC and LGIM, according to Bloomberg News. (RELATED: EXCLUSIVE: Jim Jordan, House Republicans Launch Investigation Into BlackRock, Vanguard, Others Over ESG Practices)
In the absence of regulatory intervention, Saudi Aramco may be able to continue utilizing complicated financial arrangements to camouflage their association with financial products in western markets increasingly sensitive to investors’ ESG preferences, according to Bloomberg News. Morgan Stanley analysts estimate that the two Luxembourg-based holding companies still need to issue approximately $15 billion in bond debt to keep financing the Saudi Aramco pipelines.
.@GovRonDeSantis: “Biden stood with…Blackrock over hardworking pensioners…He’s pursuing ideology over the best interests of their retirements…
That is wrong.”
Definitely wrong, but not exactly shocking. pic.twitter.com/iaex9KgwAo
— Daily Caller (@DailyCaller) May 2, 2023
Saudi Aramco financial products typically receive “severe” ESG scores, which place them below 95% of other entities tracked by the screening systems, according to Bloomberg News. Saudi Aramco is the world’s largest oil company, according to Standard & Poors.
The Saudi Arabian “regime relies on pervasive surveillance, the criminalization of dissent, appeals to sectarianism and ethnicity and public spending supported by oil revenues to maintain power,” according to Freedom House, which has assigned the country the lowest categorical designation for civil freedoms. Public executions are known to occur under the Saudi Arabian justice system, according to The Associated Press.
“Some ESG investors have invested in these package deals, even though it seems unlikely that they would have bought the oil and gas companies’ bonds on a stand-alone basis,” said Ulf Erlandsson, founder and CEO of the Anthropocene Fixed Income Institute, according to Bloomberg News.
LGIM and HSBC didn’t respond to the Daily Caller News Foundation’s requests for comment. Saudi Aramco, JPMorgan, EIG Partners and BlackRock declined to comment.
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