PIF has, as AFII discussed in ‘Marfrig-BRF merger and PIF green bond deforestation engagement opportunity’, gradually built a stake in a number of deforestation-exposed companies, and gained associated power to drive a substantive re/deforestation policy in their supply chains. PIF also has a 16% stake in Saudi Aramco (ticker ARAMCO), worth approximately 30% of the fund’s total AUM. Aramco is the world’s lowest marginal cost producer of oil and gas among the majors and is generally acknowledged to be the ‘last man standing’ in terms of hydrocarbon production.
PIF’s stake in Aramco, valued at around USD 300-400bn, is bigger than the market cap of many of the other oil super majors, and its exposure to the global carbon budget — as well as its responsibility for climate change mitigation — may be bigger than any other single fund entity in the world.
For PIF, the most meaningful environmental impact it could have would be to leverage its role as a significant owner of Saudi Aramco to halt production of hydrocarbons.
Based on current statements, this appears unlikely. However, one path to a less greenhouse-gas intensive hydrocarbon business model would be to focus on deforestation. A major oil producer like Aramco — and by extension PIF — would also be one of the biggest economic beneficiaries of carbon sinks. Indeed, the bigger the carbon sinks, the longer the harm from anthropogenic climate change could be held back. This would in turn allow the final hydrocarbon producer to be in business longer than would otherwise be possible (ceteris paribus). Therefore, we argue that creating and retaining carbon sinks such as tropical rainforests is firmly in the economic interest of PIF.
The Marfrig-BRF merger prompted reflections at AFII on what a collapse of the Amazon and its carbon sequestration capabilities would have on Aramco, and subsequently PIF. One potential consequence is that intensifying climate change is likely to drive a more rapid switch away from fossil fuels than otherwise would be the case. On the flipside, retaining, and even increasing, the Amazon’s carbon sequestration capacity could increase the value of the PIF total portfolio versus a collapse scenario.
We provide some estimated numbers for PIF’s exposure, both in terms of liabilities (expected emissions from Aramco) and ‘assets’ (potential CO2 mitigation through a re/deforestation policy focused on Brazil) with the headline numbers/orders of magnitudes in the following bullets.[1]
- PIF’s carbon liability due to Aramco stake 8.6 GT CO2e (share of equity) – 46.6 GT CO2e (share of ‘free float’)
- Potential Brazil forest policy impact 1.625 GT CO2e
- Forest policy share of carbon liability 18.9% (share of equity) – 3.5% (share of ‘free float’)
The wide range in the liability estimate reflects differing interpretations of PIF’s ownership of Aramco’s emissions. If PIF is seen as owning 16% of the company directly, its associated emissions are significantly lower than if it is viewed as controlling 87% of Aramco’s non-government-held shares. The calculation decision clearly has a major impact on how significant a Brazil forest policy would appear as a mitigation asset.
The numbers only reflect exposures to Brazilian Amazon deforestation. An active PIF re/deforestation policy is likely to have global repercussions, and affect global deforestation numbers, which could provide a six-fold multiplier. Notably, the absolute number of 1.625GT of CO2e is something that is hard to find anywhere in terms of carbon emission reduction on one balance sheet. For example, Aramco is looking to sequester 11mn tonnes of CO2 per annum through CCUS (carbon capture, utilisation, and storage) in 2035, which we estimate would aggregate to around 0.28GT of CO2e over 2025-2050.
What about the cost of delivering a re/deforestation policy? Few universal asset owners have the power that PIF does to work across an entire sector and prevent a race to the bottom, where competition to become the lowest-cost producer drives further deforestation. If such a race is avoided, costs for re/deforestation policies can be lodged with end-consumers and would only marginally impact PIF’s bottom line, while mitigating the potential negative economic effects for local stakeholders.
Thus, assuming a re/deforestation strategy would be low cost for PIF relative to the potential beneficial impact on its stake in Aramco, it should be in the fund’s economic self-interest to actively help protect the Amazon and other important global forest carbon sinks. Arguably, the fund has the economic power already, since it is a key shareholder and financier in many of the food production companies with deforestation exposure. PIF’s financiers, in turn — especially its green bond investors — should be natural partners in this.
[1] Full details on these calculations can be found in the Appendix of the attached document.
