© Reuters. FILE PHOTO: A Watching Ceremony was held at the Embassy of Saudi Arabia for Journalist Jamal Khashoggi
By Simon Jessop, Tom Arnold and Karin Strohecker
LONDON (Reuters) – When Saudi journalist Jamal Khashoggi was killed in 2018, London-based hedge fund director Dominic Armstrong made a bet that investors would be disqualified and that the kingdom’s debt would defeated.
His fund, Horatius Capital, had bet millions of dollars through credit default swaps – or sovereign anti-default insurance – that Saudi Arabia’s bonds would be hit.
But investors are largely stuck with Saudi Arabia’s debt.
When the United States declassified an intelligence report last month stating the fact that the Saudi leader, Crown Prince Mohammed bin Salman approved the campaign to capture or kill Khashoggi, Armstrong once again thought the leaders private will act.
“I was expecting to see the investors very quietly voting with their feet,” Armstrong told Reuters. “People just holding their noses are not enough. But I think the mood has changed. What will happen now are actions to support that.”
However, he is still waiting.
In fact, demand for Saudi Arabia’s euro bonds soared last month that investors paid money to lend money to the kingdom.
Riyadh denied the US report as false, while the crown prince denied involvement in Khashoggi’s murder. Saudi Arabia nonetheless has been the focus of criticism from campaign groups and some Western politicians over its record of human rights and civil liberties.
However, the world’s largest oil exporter, which has issued about $ 80 billion in international bonds since 2016, has an A-minus credit rating and pays higher yields than peers. , making it difficult for investors to stay away.
For all the hype and the billions of dollars globally poured into investment based on environmental, social, and governance (ESG) factors, it’s a niche game in the bond market. permission.
Some investors say that the grounded stance on sovereign debt and financial sanctions against countries for their filings on issues like human rights could backfire by limiting current modernization.
Marcin Adamczyk, head of emerging market debt NN (NASDAQ 🙂 Investment partner, managed 300 billion euros ($ 358 billion).
Adamczyk did not change Saudi debt holdings soon after the US report was released.
Some of the biggest names in investing in ESG, including BlackRock Inc (NYSE :), PIMCO and Ashmore, hold a total of nearly $ 1 billion in Saudi debt, based on the latest data for the year. 2020. They declined to comment when Reuters contacted the impact of the Khashoggi report.
A spokesperson for Saudi Arabia’s Finance Ministry told Reuters the kingdom “is undergoing a significant transition that offers many opportunities for investors around the world”.
“Investors are still expressing a strong interest in Saudi Arabia, seeing the recent issuance of Eurobond with negative interest rates, in which many asset managers have placed strong interest,” he said. Saudi Arabia’s debt issue to their ESG fund.
He added that Saudi Arabia is developing regulations and laws to improve ease of doing business, increase transparency, and support its commitment to the United Nations Sustainable Development Goals as part in an effort to improve ESG.
BOND MARKET SHEET CARDS
State debt is part of the fixed income universe, which is a laggard in the ESG game.
ESG fixed income funds operating on a $ 130 trillion debt market have just under $ 300 billion under management; In contrast, ESG funds globally worth $ 88 trillion command close to $ 1 trillion, Morningstar data shows.
China, an A + rated large sovereign market with a 3% yield, is another country where the West’s increased investment in sovereign debt seems contradictory to criticism. of Europe and the US on the human rights violation, which is denied by Beijing.
Foreign investors hold more than 2 trillion yuan (CGBs) of Chinese government bonds for the first time, with a record holding of 2.06 trillion yuan (318.7). billion USD) at the end of February. That was a 3.1% increase from the previous month, the slowest increase since last June.
The Chinese Foreign Ministry did not respond to a Reuters request for comment.
In a survey last month with investors dedicated to emerging markets, JPMorgan (NYSE 🙂 analysts found that while most agreed that engagement with institutional emitters Practice is a key principle in any ESG strategy, more than half of those surveyed did not do so with corresponding debt management bureaus.
However, some investors said they could hold their stance. For example, a group of fund managers in recent months warned the Brazilian government that they would divest their investment unless it stopped destroying the Amazon rainforest (NASDAQ :).
Brazilian Foreign Minister Ernesto Araujo admitted this month that illegal deforestation happened, but said his government is against it and opens the door to international cooperation on sustainable investment in Amazon. .
Brazilian Vice President Hamilton Mourao said in December that the government had deployed troops to combat deforestation and that further measures had been planned, adding that the government had to operate under budget conditions. narrow books.
Realism, on the other hand, dominates investors; The United States is one of the world’s biggest polluting countries and has withdrew from the Paris Climate Agreement under the Trump administration but is also the world’s largest issuer of debt, making fixed income funds difficult to avoid. out.
‘REAL ESTATE OF GEOGRAPHY’
Adding to the complex picture, some investors report that ESG’s “S” and “G” factors are more difficult to measure and act in a sovereign bond than in corporate bonds or stocks.
Some investors also say that focusing on social and governance considerations is much more beneficial to richer countries, which tend to rank higher than poorer countries because of these signals. are stronger in their political stability, educational standards, poverty rates and labor markets.
“In terms of risk assessment, the environmental aspect is a pretty easy part,” said Eric Ollom, head of corporate debt strategy in emerging markets at Citi. “Other parts – Social and Governance – get tough.”
“Society will be political freedom, freedom of the press and social welfare,” he added. “These problems become more difficult to measure and they also penetrate the geopolitical realm.”
Fund managers apply their own weights to calculate a country’s ESG score but also factor in the ratings of others. For example, the JPMorgan ESG fixed index uses the score of Sustainability Analysis for part of its rating.
Sustainability analysts ranked Saudi Arabia, an absolute monarchy with limited freedom of religion, sexuality and several other rights, ranked 159 out of 172 countries on the ESG scoreboard. It was included in the 2018 Khashoggi murder, which it lists as an example of “State Suppression,” prior to the publication of the US report.
European wealth manager Candriam does not have Saudi Arabia in its 882 million euro sustainable emerging markets fund, which is primarily focused on the environment because of the kingdom’s carbon footprint.
But it told Reuters that even significant improvements in the environmental aspect would not change their stance as the country scored the second percentage point on the Human Rights and Civil Liberties component of the analysis. of the fund, is even lower than the greenhouse gas emission point.
IMAGE: CDS and Saudi oil – https://fingfx.thomsonreuters.com/gfx/mkt/oakverkwkpr/Saudi%20CDS%20and%20oil.PNG