Pressure group Market Forces has criticised the role of HSBC and Standard Chartered in an upcoming US$10bn revolving credit facility for Saudi Arabian oil giant Saudi Aramco, which it describes as the "world’s biggest polluter", highlighting the increasing pressure on banks’ fossil fuel exposure.
It described the two banks’ involvement as "hypocrisy" and out of line with their commitments to meet net-zero emissions targets by 2050, particularly as Aramco is planning to expand its oil and gas operations by the equivalent of 27bn tonnes of CO2 by 2030.
Market Forces said that this was incompatible with the International Energy Agency’s "Net Zero by 2050" report, which said no new coal mines, coal plants or oil and gas fields can be built if the world is to meet the goals of the Paris Agreement to limit global warming to 1.5 degrees.
“The fact that HSBC and Standard Chartered are in line to finance Saudi Aramco shows us just how hollow their ‘net zero’ commitments are,” said Mia Watanabe, UK campaigner at Market Forces.
Aramco is tracking towards more than four degrees, according to MSCI’s Implied Temperature Rise tool, which describes the company as "lagging". The oil giant has committed to achieving net zero on direct Scope 1 and 2 emissions by 2050, but indirect Scope 3 emissions are the oil and gas industry’s biggest problem.
Aramco’s expansion plans are equal to 4.7% of the world’s carbon budget to stay under 1.5 degrees of global warming, Market Forces said. Aramco did not respond to requests for comment.
Rolling over?
The new US$10bn loan refinances an existing facility that was agreed in 2015 and matures in March. There are 27 banks on the deal, led by global coordinators HSBC, JP Morgan and Riyad Bank. Standard Chartered is expected to be a joint bookrunner.
The new loan is not a sustainability-linked facility and for many banks, it is business as usual for a longstanding and lucrative client that more than comfortably fits their traditional credit risk and return criteria.
“Aramco has this revolver which has never been drawn in 20 or so years. It will not be used to fund a new oil site or for drilling. It would be crazy for us to just shut down the relationship and not provide the financing,” a loan banker said.
But even conventional deals are running into ESG questions as banks increasingly consider whether clients’ carbon reduction plans are in line with their own net-zero pledges as interim 2030 targets loom, and some bankers are calling for ESG provisions to be added into the facility.
“It is very likely that some basic ESG-related representations would need to be made on the refinancing. The original loan did not have any,” a second loan banker said.
Banks are expected to announce a raft of new targets this year similar to Citigroup’s commitment in January for emissions in its energy loan portfolio to drop 29% by 2030 from 2020 levels, and SEB’s pledge in November to reduce fossil fuel in its energy portfolio by 45% to 60% by 2030 from 2019 levels.
HSBC said it was planning to publish targets in its annual report on February 22 to align its financing for the oil and gas and power and utilities sectors with the Paris Agreement. StanChart declined to comment.
Squeaking through
High-emitting borrowers may be able to complete conventional medium-term loans without ESG criteria for now, but this is expected to become increasingly difficult in the next two to three years and may not be possible in the next refinancing round.
Aramco’s loan is expected to have a maturity of at least five years, but the maturities of five-year deals with up to two extension options are becoming uncomfortably close to banks’ 2030 interim targets.
“Maybe this is the last hurrah for certain sectors and clients to do deals without some really onerous ESG targets on them as the next refinancing will go beyond these strategic objectives that banks have committed to,” a third loan banker said.
Some signs of duration risk on longer-dated Gulf debt that exceeds 2030 targets is starting to emerge as oil-rich economies transition amid rising carbon prices and the Middle East faces increasing physical risk from extreme heat.
A dual-tranche 2036 and 2046 bond offering that refinanced debt backing EIG Pearl Holdings’ acquisition of a 49% stake in Aramco Oil Pipelines in June raised US$2.5bn in mid-January, short of a US$3.5bn–$4.4bn target.
Saudi has billions of dollars of financing ahead. Aramco is also arranging a US$12bn–$14bn loan for its gas pipeline sale, a refinancing of a US$16bn loan for the Ministry of Finance that matures in 2023 and potentially a refinancing of a US$15bn loan for its Public Investment Fund that matures in May.
For now, all eyes remain on the kingdom’s upcoming sustainable financing framework, which will support its pledge to reach net-zero emissions by 2050. HSBC and JP Morgan are working on the framework, which is expected to lead to a green or sustainable bond this year.