In June 2024, Saudi Arabia and the oil giant Saudi Aramco announced the sale of 1.55 billion shares, marking the largest stock market transaction in the Middle East since the company’s IPO in 2019. The sale was supported by more than 20 financial institutions, including BNP Paribas, HSBC, and UBS. The funds raised will go to the Saudi government and not directly into Saudi Aramco’s pockets. While this transaction may be regrettable, it is not comparable with primary market share issuances, which—along with bond issues and loans—must be urgently banned for any energy company that has not ended fossil fuel expansion.
Companies have several options when seeking finance: taking out a loan, issuing bonds, or issuing shares. A Primary Share Offering (PSO) is one of the two types of share offerings, not to be confused with Secondary Share Offerings (SSO). In a PSO, the company issues new shares and sells them on the market to investors. In an SSO, one or more of the company’s existing shareholders sells all or part of their shares to other investors. Therefore, an SSO does not bring additional capital to the company. The recent sale of Saudi Aramco shares falls into this category. An SSO differs from the usual buying and selling of shares on the secondary market because it is a much more structured process.
Refuse to Issue Shares for Fossil Fuel Developers
Companies can resort to a PSO during their initial public offering (IPO) (1) as well as during subsequent operations (Secondary Offerings, SO). Whether it is a young growing company or a well-established private company, deciding to go public allows a company to change size by raising capital for expansion or financing potential acquisitions, or reducing debt (2). The services provided by financial institutions as part of a PSO (coordination, bookkeeping, allocation, advice…) are not insignificant. Their assistance is essential for these operations. Like support for issuing bonds, support for a PSO must be excluded for companies developing new fossil fuel projects.
For years, climate scientists have issued warnings about the risks associated with developing new fossil fuel projects. The International Energy Agency’s (IEA) Net Zero Emissions (NZE) scenario projects a halt to the development of new oil and gas fields approved after 2021 and the cessation of new liquefied natural gas (LNG) terminal projects. Therefore, financial institutions should renounce all refinancing that could be used to support the development of such oil and gas projects. This includes support dedicated to specific projects as well as general services and financing provided at the company level, as long as the company has not abandoned oil and gas expansion.
Avoid Selling Fossil Fuel Developers’ Shares
Saudi Aramco is the company developing the most new oil and gas projects which is strictly incompatible with a trajectory aiming to limit warming to a maximum of 1.5°C (3). It would therefore be prudent to stay away from any transaction involving Saudi Aramco. However, in this case, the sale of Saudi Aramco shares by Saudi Arabia is not the same as a PSO. It is an SSO, initiated within a Secondary Offering (SO), as the company has been listed since 2019 (4). Specifically, the Saudi kingdom, the company’s principal shareholder, is selling some of its shares to other investors.
Through this transaction, which has been supported by several banks including BNP Paribas, the Saudi kingdom is acquiring capital that should contribute to financing the country’s economic diversification. Although the kingdom maintains a majority control of Saudi Aramco, the money from the sale should not go towards financing fossil fuel expansion. However, when a bank acts as a bookrunner, whether in a PSO or an SSO, it is promoting a fossil fuel company’s stock so as to entice its clients to buy it. In the case of an SSO, while it is financially neutral for the company in question as the money goes to the shareholder selling their shares, it remains inherently problematic because it contributes to increasing the attractiveness of oil and gas stocks on financial markets.
It is important to distinguish between transactions that directly benefit fossil fuel companies, notably by providing them with new money (through a loan or a PSO, for example), and operations that primarily benefit their shareholders (such as an SSO). Despite having a more indirect impact, it is still preferable for financial actors to refrain from participating in structuring, advising, and allocating shares through an SSO for a fossil fuel developer. An exception could however be made when supporting an investor in their strategy to exit fossil fuel expansion.
