By Alex Kimani
In recent years, many investors, younger ones in particular, have shown a growing interest in putting their money where their values are. Consequently, brokerage firms and mutual funds have created a family of exchange-traded funds (ETFs) that follow the ESG (Environmental, social and governance) criteria, while robo-advisors like Wealthfront and Betterment now use them widely to appeal to these investors.
Environmentally responsible investment strategies favor companies that act as good stewards of nature and natural resources.
As one might imagine, fossil fuel companies, which take the lion’s share of the blame for climate change, get little love from ESG investors.
Recent news that there’s still massive interest and money following the oil industry is therefore likely to be disconcerting for this plucky sector.
Saudi Aramco, by far the largest energy company in the world, has just completed a record-breaking bond sale that was massively oversubscribed. The oil and gas giant was seeking $12 billion in its first ever international bond sale, but received orders for more than $100 billion, the largest in history for emerging markets bonds.
The sale far surpassed the previous record order book value of $69 billion for Argentina’s $16.5 billion bonds in 2016; $67 billion for Saudi Arabia’s inaugural issue in the same year and $52 billion for Qatar’s $12 billion deal last year.
And then we have the $33-billion Chevron-Anadarko deal that was just announced, catapulting Chevron into the Top 4 and likely prompting a domino-effect of future deals as supergiant competition heats up.
Purely on figures, the Aramco sale was a fantastic endorsement of the oil company, never mind the fact that it’s run by an autocratic regime with a very checkered human rights record. The strong interest is a clear indication that international investors are pouring money back into Saudi Arabia since the killing of Jamal Khashoggi strained ties with Western allies.
The issue attracted interest from a wide range of investors, which is a big plus for Saudi Aramco because its vast profits are likely to put its debt rating in the same league as oil major Exxon Mobil Corp. (NYSE:XOM) and Shell—if sovereign links don’t interfere. According to its first publicly released financial statement, Saudi Aramco booked a net income of $111B.
But it’s not just a windfall for the Saudi oil giant.
U.S. oil majors will be emboldened by the overwhelmingly positive response coming at a time when there’s widespread interest for the trajectory to move away from oil and gas not only from the ESG camp, but also by governments and environmental activists everywhere.
The fossil fuel industry has been gradually weakening, with balance sheets deteriorating and investor sentiment and interest waning.
The odds were clearly stacked against Saudi Aramco, yet investors have chosen to overlook the heightened political risk and ignore the spotty humanitarian record and bet the farm on the company.
There’s little reason to believe they won’t do the same when the likes of Exxon Mobil, Chevron Corp. (NYSE:CVX), Shell, and other big oil players come knocking.
Can sustainable investing go mainstream?
ESG is a huge trend right now, and some large institutional investors have jumped on the bandwagon as well, demanding that their capital be invested in something other than fossil fuel companies.
While nobody can deny that the planet is our most important heirloom and every care should be taken to keep things tidy for the long haul, there are serious doubts regarding the viability and sustainability of ESG in mainstream investing.
That’s because making current benchmarks ESG compliant is still far off. For instance, take the case of an oil company that suffers a serious oil spill that wipes out large swathes of marine life. While the share price of such a company is likely to suffer as a result, not all investors are likely to sell out, and the benchmark indexes that track the company would still remain exposed to the company.
As David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices, has noted for Quartz, it’s going to be a long time before official benchmarks are fully adjusted to be ESG compliant.
According to him, it’s more likely that parallel systems with ESG versions of the official benchmarks will first emerge.
One such system is the S&P 500 ESG Factor Weighted Index, which incorporates an ESG score that takes into account carbon emissions, diversity policies, social responsibility issues, and even political donations.