For ethical investors, oil isn’t Aramco’s only problem
Social and governance concerns at Saudi Arabia’s state-owned oil and gas giant may scare away buyers focused on sustainability
Can an oil-and-gas company count as a sustainable or ethical investment? In Saudi Aramco’s case, the obvious question of its carbon emissions may not even be the main problem for the increasing numbers of investors who focus on environmental, social and governance (ESG) criteria.
Aramco supplies one-eighth of the world’s oil and has sidelines in gas, chemicals and other petroleum products. These carbon-producing products are exactly what the world—except the U.S.—has committed to cut back on as part of the Paris accord. Last year, the company produced 128 million tons of carbon dioxide in extracting, refining and marketing its products, according to Bernstein estimates, which is the thirdlargest globally behind Russian gas-giant Gazprom and Chinese producer Sinopec.
For some environmentally focused investors, though, this may be offset by a big positive: Aramco’s emissions per barrel are nearly the lowest globally, second only to Norway’s Equinor. Costs are low because the reserves are in favorable geological formations, and the company’s scale and use of high-tech extraction methods also help. Aramco uses less water and flares-off less gas than many rivals and it is undertaking other green initiatives, including planting trees and running some of its facilities on renewable energy.
Yet there are also social and governance criteria to consider, and here the company falls short.
At a social level, the company’s profits fund the regime of Saudi Arabia’s autocratic Crown Prince Mohammed bin Salman, whose reformist credentials were tarnished by the murder of journalistJamal Kashoggi. The kingdom’s rules for women are infamously repressive. Nearly 5% of Aramco’s workforce is female, and it sponsors education for women in scientific subjects—but for socially focused investors this may not be nearly enough.
As for governance, the big risk is the close relationship between the company and the state, even though they are formally separate. Five of the11board directors are government ministers, though another five are independent. The state will hold more than 96% of the shares, will set maximum production levels and can force the company to undertake projects that may not be in its economic interest. The kingdom is the linchpin of the OPEC cartel.
If there is one key governance positive for ESG investors in Aramco’s IPO, it may be that operating information, that was once completely private and opaque, is trickling into the public sphere. The listing will require the company to routinely publish its results, and there is the—admittedly questionable— possibility that institutional investors may be able to push for better ESG performance.
Still, many ethically minded money managers may end up concluding that Aramco—a company the Saudi government is starting to sell down precisely because it wants to take its economy in a more sustainable direction—isn’t worth the questions it will inevitably raise with clients.