Banks are under scrutiny for underwriting the IPO of Saudi Arabian Oil Co., the world's largest oil company, at a time when many are embarking on policies to reduce exposure to the fossil fuel industry.

While some market observers say this shows banks' double standards on climate change, others say Saudi Aramco's listing could lead to more transparency as it will be subject to greater disclosure as a publicly listed company.

Aramco is the world's largest carbon and methane emitter, accounting for 4.38% of emissions between 1965 and 2017, according to the Climate Accountability Institute, a U.S.-based group that researches oil majors and climate change.

The listing has already proved problematic for both Saudi Arabia and banks. The Saudi government intends to list 1.5% of Aramco's shares on the local Tadawul exchange in early December, down from the originally planned 5%, though the target valuation of between $1.6 trillion and $1.7 trillion would still make it the world's largest company by market capitalization. Initial talk of a listing dates from 2016, but was pushed back. Saudi Arabia has also struggled to attract foreign interest for the IPO, despite a reduced price target. Some investment banks advising on the offering, including JPMorgan Chase & Co., have reportedly been sidelined.

Those difficulties show, in part, the growing importance of environmental, social and governance criteria in investing, according to experts.

"It appears that ESG ... combined with the very high and very overconfident expectations on valuation, have passed the test because there was clearly not enough appetite, and that is why they moved out of international markets," said Andreas Hoepner, professor of operational risk, banking and finance at University College Dublin.

Banks underwriting the deal will likely not get the fees they bargained for, while "putting their reputation on the line," he said. "It's a total fiasco."

Responsible banking

The IPO underwriters include Citigroup Inc., Credit Suisse Group AG, Banco Santander SA, BNP Paribas SA, Deutsche Bank AG, Crédit Agricole SA, Société Générale SA, Mizuho Financial Group Inc., and UBS Group AG, all of which are signatories of the UN framework called the Principles for Responsible Banking. Under the principles, the lenders have agreed to bring their strategy into line with the Paris Agreement on Climate Change, which aims to limit global warning to "well below" 2 degrees C.

UBS and Crédit Agricole declined to comment, while Credit Suisse said its due diligence takes ecological, climatic and social aspects into account, and noted that the IPO is one of many measures Saudi Arabia is taking to reduce its dependence on oil, diversify its economy and develop the public sector.

The other lenders did not respond to a request for comment.

While banks have acknowledged climate change risk, they have faced criticism for continuing to underwrite coal, oil and gas deals.

"You can't be a responsible banker while you are financing billions and billions of dollars in the fossil fuel industry," said Johan Frijns, director of BankTrack, which monitors banks' fossil fuel financing.

Underwriting concerns

While some banks are already offering loans based on a company's ESG score, this has not fed through to their involvement in capital markets, as they continue to underwrite deals, said Georges Ugeux, CEO of U.S.-based consultancy Galileo Capital Group. They are likely to come under increasing shareholder pressure because of this, he said.

If banks signing up to the PRB have decided to participate in the IPO, "without due regard for the climate goal, without due regard for the science or the transition pathway, without due regard for the financial risk, then that's a real problem," said Nathan Fabian, chief responsible investment officer at the Principles for Responsible Investment.

He said the PRI is "very concerned" that there is not enough disclosure about how Aramco would help facilitate an eventual transition away from oil.

"I don't see how it's fulfilling the professional role of the investment bank, the advisory bank that is bringing the deal to market and underwriting it, to not explain how they made these judgments. That is is surely a core part of the obligations."

Aramco's role in climate change is not the only reputational risk for banks dealing with Saudi Arabia, especially after the murder of journalist Jamal Khashoggi, the country's involvement in the Yemen conflict and with regards to gender equality, said Yossi Cadan, global finance campaign manager at 350.org, a renewable energy NGO. Banks have made no response to NGO requests not to get involved in the IPO, he said.

More transparency?

Aramco warns in its prospectus that climate change is a potential risk, for example, in terms of litigation, additional costs and investment but also says it is using technology to lower its carbon impact. It also sets out a number of social projects it has been involved in including pushing for women's right to drive in the Kingdom.

Once Aramco is listed, transparency will be increased, according to some experts.

Company filings have "opened the black box and allowed the world to peer in," said Jim Krane, a researcher in the Middle East energy sector at Rice University in Texas.

Climate change is one of the "motivating factors" for the IPO, he said, given the dependence of the Saudi economy on oil.

"Saudi Aramco is probably getting unfairly tarred by the underperformance of a number of U.S. companies that are producing in much higher-cost conditions," Krane said, as the relatively low carbon intensity of Aramco's production puts it ahead of other oil companies.

Aramco will also be subject to sustainability reporting and questions over whether it will disclose its climate risks under the Task Force on Climate-related Financial Disclosures framework, said Robert Eccles, visiting professor of management practice at Saïd Business School at the University of Oxford.

"Now they are a listed company, there will be increased expectations about transparency," he said.

Ben Meggeson contributed to this story.