Green Investment Funds Ended Up In The Hands Of A Saudi Arabian Oil Company



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.

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.

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