ESG Investing? Behold Saudi Aramco

Friday, 4/19/2019 09:01

A good time to be a baddie...

SOCIALLY responsible investing is all the rage these days, writes MoneyWeek's executive editor John Stepek in his free daily investment email Money Morning.

The modern investor is an enlightened sort, so we're told by trend watchers and marketing consultants.

This investor doesn't put profit first. Instead, they want their money to go to well-run companies with the best interests of all their stakeholders at heart.

They care about the environment. They care about social justice and corporate pay. They aspire to veganism. And companies have to move with the times.

So when the world's biggest oil company, which happens to be owned by a state that views basic human rights as optional extras, and notions of gender equality as laughable, tries to borrow money in international capital markets, well, we can guess what happens next, can't we?

It gets shunned by this, the "wokest" market in history. Right? Am I right?

(Stop sniggering at the back there.)

I'll admit it, there are investments out there that are less ethical than lending money to Saudi Arabia's biggest oil company. Private prisons and tobacco companies might be higher on the list.

But it's never going to pass anyone's "dark green" screen (that's one of the terms we used to use about ethical investing back in the olden days – I get it's all "ESG" (environmental, social and governance) and "engagement" now, but humour me).

So take a wild guess as to how much demand there was when Saudi Arabia's state-owned oil giant, Aramco, came to the market looking for a $10bn loan.

Bear in mind that this is the state that less than a year ago, rather blatantly murdered a high-profile journalist, on foreign soil, then made a half-hearted attempt to deny all knowledge of the deed. A lot of bankers went out of their way to be seen to be avoiding being seen at any Saudi shindigs in the wake of that incident, notably the high-profile "Davos in the Desert" in Riyadh.

Add in the fact that this is just the tip of an extraordinarily unpleasant iceberg. Oh yes, and of course, it's oil – the "stranded asset" du jour. Who wants dirty old oil these days?

Go on. Take a wild guess.

$85bn-worth of bids, so far. That's what happened when this "pariah" state decided to go looking for a loan. The deal is what is known as "massively oversubscribed". Investors lapped it up.

No wonder. Jamie Dimon – chief executive of J.P.Morgan Chase, and arguably the most important investment banker in the world – personally helped to market the deal, reports Bloomberg. (Dimon was one of the guys who made sure that he was seen to be avoiding going to "Davos in the Desert" last year.)

Indeed, investors have proved so keen to lend to Aramco that it now looks as though the Saudis might decide to borrow $15bn instead of $10bn. And it also looks as though the company might actually be able to borrow at a lower rate than the Saudi government itself. (We'll get all those details confirmed this afternoon.)

As Tracy Alloway points out on Bloomberg, that seems odd. Sure, Aramco is the most profitable company in the world (that's what happens when you can pump oil at a bit less than $3 a barrel). So there's no real credit risk there.

However, the company is effectively at the beck and call of the Saudi state. So there's a very real risk of government interference, or Aramco being called on to fund public spending should the government run into public disorder.

And after all, the point of raising this money is to fund the state's move from being a one-trick oil-producing pony to having a wider range of income streams. Aramco will use the money to buy a majority stake in Sadic, a petrochemical company owned by the Saudi sovereign wealth fund. In other words, the money is going "from one pocket of the state to another" as Bloomberg puts it.

The original plan (and I suspect it is still to come – it might even mark the top of the market) was to list Aramco on the stock exchange and raise the money that way.

But as Alloway's fellow Bloomberg columnist (and occasional MoneyWeek contributor) Marcus Ashworth notes, this debt does at least give investors a "more direct claim on the oil company's assets than they do with the sovereign," and I take his point. I'm just not sure I'd want to have to test it in court.

Anyway, moving away from all the hypocrisy for a moment, it's a good time to be raising money off the back of an oil-backed balance sheet.

Oil prices (as measured by Brent) have moved back above the $70 a barrel mark, and hit a five-month high yesterday. Oil in general has had an extraordinarily strong start to the year. Brent has risen by 40% in the year to date.

You can sit and count off all the "fundamental" reasons for this on the fingers of both hands, and you might even have to start on your toes. Venezuela's meltdown. Opec production cuts. Scepticism over US shale longevity. Turmoil in Libya (that's the latest one).

But the reality is that oil is going up for the same reason that most risk assets are going up. Central banks are easing monetary policy again, and when they do that, asset prices bounce. It's now a Pavlovian reaction.

Is it likely to continue? That sort of pace is hard to keep up, so the straight answer is – I don't know. That said, I don't feel that a big oil crash is likely either right now. So I certainly wouldn't want to sell your good old-fashioned, publicly-listed oil holdings right now.

Oh, and going back to the ESG stuff – believe it or not, hardened capitalist that I am, I think it's a good idea to take account of corporate governance and what a company does before you decide to back it with your money.

If you think a company's activities are toxic or that it couldn't care less about its employees and customers, then chances are it's not a great company. That doesn't mean that it won't make money. But being able to sleep at night is important too, and when it comes to investment, there are plenty of fish in the sea. You don't have to own anything you don't approve of.

All I'd point out to you is that you can't easily outsource this task to anyone else. Like it or not, for many asset managers, ESG is just another marketing pitch to try to differentiate their funds from someone else's.

Like ducking out of Davos in the Desert, it's all about how things look, not how things really are. So if you really want to be an ethical investor, you'd better start learning how to do it yourself.