New EIG/Aramco bonds in ESG indices: EOM flow risks

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The new EIGPRL USD benchmark bonds have been snapped up by ESG investors as they are included in the JPMorgan ESG CEMBI index.

We opine that this is an error with regards to investor expectations on the index as EIGPRL effectively is Aramco exposure. This could lead to divestment flows once ESG ratings are produced.

Several major players have initiated large lending positions to EIGPRL as they mechanically follow the bond index rules. Those loans will, in our opinion, effectively provide financing to an entity which MSCI indicates as having an “over 4C implied temperature rise.” MSCI’s projection reflects that Aramco emissions will rise from 2.2Gt CO2e today to 3.0Gt in 2050.

As a background on the structure, the EIGPRL bonds come from an SPV issuer that owns a minority stake in the Saudi Arabian Pipeline Company. Aramco own the remaining 51% of that company and is the ultimate controlling owner of the actual pipelines, as well as having a permanent full operational responsibility for them.

To our knowledge, EIGPRL does not have any other investments or activities. The bond proceeds from EIGPRL sale will be used to pay the upfront to Aramco for the Pipeline Company’s 25-year lease of Aramco’s oil pipeline network, via bank bridge loans.