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Why are the world’s biggest oil-producing countries selling green bonds?

Saudi Aramco's Ras Tanura oil refinery and oil terminal in Saudi Arabia
Ahmed Jadallah / Reuters
Saudi Aramco’s Ras Tanura oil refinery and oil terminal in Saudi Arabia.
  • Samanth Subramanian
By Samanth Subramanian

Looking into the Future of Capitalism

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On the one hand, Saudi Arabia’s government and sovereign wealth fund are preparing to issue green bonds, to drum up investment for renewable energy and other sustainable projects. On the other, Saudi Arabia, the world’s biggest oil producer, plans to boost production of crude oil from 12 million barrels a day to 13 million barrels a day by 2027.

If that feels like a paradox, it isn’t the only one. This year, the UAE’s biggest bank, controlled by the government, issued at least $1.36 billion in green debt; this year also, the UAE government’s oil company ADNOC said it would increase oil output by 25%, aiming to produce 5 billion barrels a day by 2030. In October, Reuters revealed that Qatar Energy, a state-owned oil company, is planning a green bond issue worth several billions of dollars, even as it invests in African oilfields and builds the world’s largest liquified natural gas (LNG) terminal.

The market for green bonds is booming; in 2020, governments and companies issued green bonds worth $297 billion, and forecasts for this year and next run to $500 billion and $1 trillion respectively. Not surprisingly, oil-producing nations and their state-owned companies and wealth funds want to surf this wave of new financing. What isn’t clear, though, is how seriously investors can take these green bonds when the entities issuing them continue in parallel to make profits from fossil fuels that carbonize the climate.

Will Saudi Arabia’s green bonds be legit—or will they be greenwashing?

If oil economies are to wean themselves off the black stuff, they’ll need money for the transition, said Julian Havers, head of public banks at E3G, a London-based climate think tank. To close the financing gap needed to keep global warming to 1.5°C, Havers said, the world will need trillions of dollars of investment in renewable energy, green steel, and other projects. The green bond market is where that financing can be found, Havers added. “For Saudi Arabia to come to this market is a major move, and shows they’ve come a long way,” he said. “It isn’t done lightly.”

Havers cited Saudi Arabia’s mission to build the world’s largest green hydrogen plant in Neom, in the country’s north, as an example of the kind of project that can be financed by green bonds. European investors, with their increasingly strict Environmental-Social-Corporate Governance (or ESG) goals, are likely to turn away from many parts of the Saudi economy that are tied in some way to the petroleum industry. Saudi Arabia can attract their money to Neom’s hydrogen plant, though, if it can show the project to be completely delinked from the oil-producing economy. In Havers’ words, “they’ll have to give Neom different rules and regulations.”

But investors, particularly those with ESG mandates, will wonder if they ought to proceed with caution. Already the green bond market is fraught with dubious issues and uncertain legal territory. A study by NN Investment Partners, a Dutch asset manager, found that 15% of all green bond issues “are from companies involved in controversial practices that contravene environmental standards.” Contracts don’t always contain legally enforceable language to guarantee that investments will be used for climate-friendly projects. In 2016-17, the Mexican government raised $6 billion via green bonds to build an energy-efficient airport. The following year, the airport was scrapped, and although $1.8 billion worth of bonds were bought back, investors had to simply trust that the remainder would be spent on green projects.

When a green bond is not a green bond

Perhaps the very idea that a country can partition its economy into green and non-green segments is tenuous. Investors have discovered this to their dismay. Last year, for instance, the French asset manager Amundi had to threaten to withdraw its exposure to the State Bank of India’s green bonds after it emerged that the state-owned bank was financing a coal mine in Australia. Drawing clean lines between pools of money and their expenditure calls for a degree of transparency that countries like Saudi Arabia and Qatar aren’t known for.

Havers gave a hypothetical example of how an oil-producing country might violate the environmental spirit of green bonds. “If you’re producing hydrogen, you need a source of power for that—and if you use fossil fuels to generate that hydrogen, then it isn’t really green hydrogen. It’s what’s known as blue hydrogen,” Havers said. “In an integrated economy, the risk is out there that blue hydrogen gets mislabeled as green hydrogen. That would be something a lot of German investors, say, would react allergically to. So there’s a real need to develop standards and criteria, with high granularity, as this market escalates.”

Will rich countries crowd out the green bond market?

The moral question of whether Saudi Arabia should even be selling green bonds to fund its energy transition is also a valid one. Aramco, Saudi Arabia’s state-owned oil company, is one of the most profitable businesses in the world; in 2019 alone, it made a $111.1 billion profit, more than Apple but also more than Shell and Exxon Mobil combined. Having made money for decades off a product that precipitated the climate crisis, one might argue, Saudi Arabia could at least put some of those proceeds to work on its own green transition. As Ulf Erlandsson, the CEO of the non-profit Anthropocene Fixed Income Institute, pointed out, “money is fungible.” Just as green-bond proceeds might discreetly fund a blue hydrogen plant, with no one the wiser, oil profits can also pay for a green hydrogen plant, to everyone’s benefit.

And while it may seem, at the moment, that the appetite for green bonds is voracious, it isn’t unlimited. Saudi Arabia’s green bonds to finance projects it can fund out of pocket can potentially crowd out green bond issues by less wealthy countries. A study by Imperial College London revealed in March that emerging economies are already lagging in the race to attract green financing—a blow to the effort to launch the world into its great green transition, and to limit the planet’s warming to 1.5°C.

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