Middle East green finance to see further boost from COP28
January 2023 Al-Monitor PRO Trend Report
It is estimated that the Arab World requires some$230 billion worth of annual funding to invest in green transformation and meet the United Nations’ Sustainable Development Goals (SDGs), and the region is increasingly realizing the role green finance can play in mobilizing both public and private sources of finance to that end.
Raising capital dedicated to green transformation on financial markets is a crucial element in meeting these funding requirements. Jamil Wyne, Founder of the Climate Tech Bootcamp and Adjunct Professor at George Washington University, told Al-Monitorthat this is because “countries will need enormous amounts of climate and green finance to fund their climate mitigation and adaptation efforts […] it is hard to picture any other way for countries, including in the Middle East and North Africa (MENA), to meet their climate objectives.” Furthermore, according to the global consultancy firm Strategy&, engaging with green finance could unlock $2 trillion in green economic growth for members of the Gulf Cooperation Council (GCC) by 2030.
The Royal Institute of Chartered Surveyors (RICS) note that green financing worldwide has increased “by a factor of more than 200 in the past decade.” Global issuances of green bonds reached $511.5 billion in 2021 – up from a modest $2.3 billion in 2012 – while the entire green finance space surpassed a value of $720 billion.
In 2020, only $1.2 billion worth of climate finance commitments were destined for MENA. However, the region has been experiencing rapid growth in recent years. The volume of green funding in the first six months of the year topped the amount raised in the whole of 2020. MENA green and sustainability debt issuance stood at$18.64 billion in 2021, up over 300% from the $4.5 billion issued in 2020. As the amount of green capital available increases significantly, Abu Dhabi Commercial Bank, Emirates NBD, and Mashreq Bank are just some of the MENA financial institutions to have issued large sustainability-linked loans in 2022.
While MENA’s green finance space is growing rapidly, it remains relatively small compared to the biggest markets such as China, the United States, and Europe. Dr Ahmed Tahiri Jouti, Managing Partner at the Toronto-based sustainability consultancy firm Green for South, told Al-Monitorthat this is mainly “a matter of awareness.”
Indeed, while MENA accounted for just 0.3% of global green bond issuances in 2021, the global green finance space is still at an early stage. Jessica Robinson, MENA Sustainable Finance Leader at EY-Parthenon in Dubai, also noted to Al-Monitor that “globally the green bond market remains proportionally small and, while the boom in green bond issuances has been exciting, it is still fairly nascent – for MENA even more so.”
“That said, this does not mean the green bond market will stay small – there is so much potential. In fixed income, we need to see governments and large corporates get behind green issuances to build market confidence – both domestically but also internationally, in terms of what is happening on the ground in the region,” Robinson added.
As market confidence in MENA grows – and governments, financial institutions, and consumers take a greater interest in green finance – the region is well-poised to become a much more significant player in the green finance space. With the GCC in particular recognizing the geopolitical need to diversify away from fossil fuels, there’s every reason to expect more green finance activity across MENA.
1. Green Finance in MENA: State of Play
The United Arab Emirates (UAE) has been at the forefront of green finance innovation in MENA. In 2016, First Abu Dhabi Bank (FAB), the largest bank in the UAE by assets, became thehttps://www.morganlewis.com/pubs/2021/09/the-middle-east-an-oasis-of-green-financefirst bank in the GCC to commit to lending and investing $10 billion in sustainable projects across the region within ten years. In 2017, FAB also issued the first green bond in MENA, priced at $587 million. This bond was used to finance projects in sustainable initiatives, including renewable energy and climate change adaptation projects. The UAE is also the largest green finance market in the region, with its market for green bonds growing to reach a value ofalmost $17 billion in 2022. As it prepares to host COP28 in Dubai, the country is working hard to position itself as a financial and political leader in the region for the cause of green finance.
Saudi Arabia’s sovereign wealth fund, the Public Investment Fund (PIF), issued a sizable debut green bond in 2022 that attracted more than $3 billion of orders. The bond was controversial, owing to claims of greenwashing and suspicions that one of the country’s first major forays into green finance was a marketing stunt. However, Charlene Cranny, sustainable finance specialist at Volans, a London-based think tank that advises on green transformation, told Al-Monitor that the Kingdom’s 2030 Vision “aims to make the country more resilient over the long term by diversifying away from its 75% dependency on exhaustible oil exports for its budget.” PIF’s entry into debt capital markets suggests at least an awareness on the part of the Middle East’s largest economy that green finance will need to be part of this vision.
In 2020, Egypt became the first MENA country to issue a sovereign green bond, which was more than seven times oversubscribed and reached a size of $750 million. Since then, Cairo has tried to further its green credentials in the region. While also hosting the COP27 conference in Sharm-el-Sheikh, Egypt has cooperated with the European Bank for Reconstruction (EBRD) to enhance its green finance capacities. In September 2022, EBRD loaned Banque Misr $100 million so the Egyptian bank can on-lend to local small and medium-sized enterprises (SMEs), with the funds earmarked for investment in climate change mitigation and sustainability-related technology. HSBC has also chosen Egypt as one of its key destinations for green finance funding as the international bank seeks to support sustainable development. As part of HSBC’s $100 million Climate Solutions Partnership, for example, the bank has committed funding to a coastal ecosystem in Egypt. The intention is to increase carbon sequestration, while also creating jobs and business opportunities through the project. Preliminary data from 2022 suggests that, partly because of such measures, Egypt is on track to achieve its target of increasing the proportion of green projects in its investment budget from 14% in 2020 to 30% in 2022.
Turkey is looking to follow Egypt in issuing a sovereign green bond, with the government reportedly working to develop a legal framework that would facilitate the issuance of green debt. However, Turkey’s private sector entities have been issuing green bonds as far back as May 2016, when the Industrial Bank of Turkey (TSKB) issued a $300 million green bond, the first in Turkey. Supported by the International Finance Corporation, TSKB used the proceeds to invest in a range of projects related to renewable energy, energy efficiency, and others aimed at reducing greenhouse gas emissions. Since then, several green bonds have been issued in increasing volumes, while Turkey has also taken steps to develop other green financial instruments. In April 2022, for example, the EBRD announced it had established a new green financing facility in Turkey, co-financed by the Clean Technology Fund (CTF) and in partnership with TSKB. Under this arrangement, TSKB will receive a green loan of up to €53.5 million, which the bank will use to extend credit lines to companies aiming to enhance their green credentials. In June 2020, Turkey also took its first steps in exploring the synergy between green finance and Islamic finance, when Zorlu Energy issued the country’s first green sukuk at a valuation of ₺450 million ($65.2 million).
Qatar has also made important strides in aligning the principles of green finance with those of Islamic finance. In September 2020, the Qatar National Bank (QNB) issued its first green sukuk at a valuation of $600 million. In March 2022, the Qatar Financial Centre (QFC) announced the GCC’s first Sustainable Sukuk and Bonds Framework (SSBF), which sought to integrate internationally accepted green bond standards with local Islamic finance principles. Shortly after, in April 2022, Qatari Islamic bank Masraf Al Rayan launched its own sustainability financing framework, in line with SSBF, which achieved a “strong” ESG rating from international ratings agency Standard & Poor. Other moves in a similar vein have included a commitment on behalf of Dukhan Bank at COP27 to work with the Gulf Organisation for Research and Development (GORD) to promote sustainable building practices and Shariah-compliant green finance solutions. In February 2022, Qatar National Bank also launched a green energy-focused financing instrument with HSBC. This instrument works by the Qatari bank loaning cash to HSBC and receiving green bonds in return. HSBC will then take the green bond purchase price and allocate an equivalent amount to sustainable projects.
In line with Bahrain’s Vision 2030 plan, which emphasizes sustainability as one of the country’s guiding economic principles, the Bahrain Association of Banks and the Bahrain Stock Exchange have been exploring sustainable finance initiatives. In 2020, for example, the Bahrain Bourse issued ESG guidelines for listed companies in a bid to drive sustainability in Bahrain’s capital markets. However, the reporting was entirely voluntary, meaning there is no legal obligation for the listed companies to comply. In March 2022, Bahrain-based Infracorp, an investment firm that specializes in the infrastructure and sustainability development sector, listed a $900 million green sukuk on the London Stock Exchange. However, a green sukuk is yet to be issued in Bahrain itself, despite the fact that in 2020 Refinitiv’s Islamic Finance Development Indicator rated Bahrain as the third-largest country for Islamic finance in the world. A report commissioned by HSBC suggests that this is partly because Bahrain lacks a green sukuk framework, such as the one developed by Qatar.
In March 2022, the National Bank of Kuwait launched its Sustainable Financing Framework. The Bank announced that it plans to issue three types of new financial products: green financing instruments, social financing instruments, and sustainability financing instruments. While the green framework is largely now in place, Kuwait is still waiting to enter green markets. The Jordan Kuwait Bank has announced plans to issue a green bond worth $50 million, which may come to market in 2023.
Morocco first issued a green bond back in 2016, and since then, the green finance market has grown to stand at a sizable $450 million. Future growth could be driven by green infrastructure bonds. The first was issued in July 2022 by National Railways Office (ONCF), the country’s rail operator, raising Dh1 billion ($270 million) to electrify the line linking Tangiers and Casablanca. Partly because of its successes with green finance, Morocco has been able to expand its renewable energy sector significantly in recent years. Indeed, Morocco is seen as an example for other countries which have yet to embrace green finance. In March 2022,Oman sought to leverage Morocco’s experience as it too looks to unlock the economic potential of green finance. Morocco’s Capital Markets Authorities were invited to Oman to inform policymakers on regulations related to green finance.
In October 2021, Bank Hapoalim became the first bank in Israel to issue a green bond, listing the $1 billion bond on the Tel Aviv Stock Exchange. After Israel’s Finance Ministry published a framework for green bonds in November 2022, the country issued its first sovereign green bond in January 2023, which raised $2 billion for green projects. Israel has also been the beneficiary of other green financial instruments, including green loans. In December 2022, the European Investment Bank (EIB) announced the establishment of a €500 million facility aimed at financing Israeli small and medium sized enterprises (SMEs) and midcaps in their green transitions.
2. Green Finance in MENA: Breakdown by Product
Definitions of what constitutes “green” finance vary – not least because MENA, and indeed global markets, lack taxonomies outlining the relevant standards. This uncertainty has given rise to claims of “greenwashing,” as demonstrated by the controversy surrounding PIF’s green bond.
However, the World Economic Forum (WEF) has offered a broad explanation. The WEF says “green finance is any structured financial activity – a product or service – that’s been created to ensure a better environmental outcome. It includes an array of loans, debt mechanisms, and investments that are used to encourage the development of green projects or minimize the impact on the climate of more regular projects.”
Robinson added that “green finance is critical for countries in the MENA region to achieve their climate targets, especially in those countries that have made net zero commitments.”
“It goes without saying that the scale of capital required calls for a fundamental shift in the way we think about finance in the Middle East. [Green finance] is not just about climate risk or decarbonization of lending books or portfolios. Rather, it is about banking institutions recognizing – and seizing – the huge opportunities associated with the transition and seizing on changing client demands,” she told Al-Monitor.
Wyne also explained that “by and large, the main role of green finance is to help countries mitigate the effects of climate change through various greenhouse gas reduction and removal strategies, as well as to adapt to these effects, which means ensuring that infrastructure, ecosystems, and economies are resilient in the face of it.” There are several green finance instruments which can help raise the capital required for such projects.
Green bonds are fixed income, debt securities whose proceeds are designated to fund environmental projects. MENA remains a relatively small market for green bonds: no MENA country features in the top twenty issuers. However, within the region, the UAE’s largest lender, First Abu Dhabi Bank, has been a particularly important player in issuing green bonds – having done so in both Swiss Franc (CHF) and Chinese Yuan (CNY) to cater for international demand. Green debt in MENA has been used for projects including long-term green infrastructure and sustainable property development. Some Gulf states have issued green bonds to further their long-term economic visions, in which sustainability and diversification away from oil often play a significant role. In April, FAB priced a 200 million CHF green bond, with the proceeds dedicated to financing climate projects that further the UAE’s goal of being net zero by 2050. When bringing their green bond to market, PIF also noted that “to achieve Saudi Arabia’s Vision 2030, PIF is responsible for developing new opportunities for non-oil GDP growth.”
Green sukukare growing in prominence across the Muslim World. These instruments share many characteristics with green bonds, except they are also Shariah compliant and adhere to Islamic principles. The issuance of green sukuk began to gain momentum in 2019, when major regional players such as Dubai-based Majid Al Futtaim (MAF) and the Islamic Development Bank (IsDB) in Jeddah issued their first green sukuk. This was followed in 2020 by issuances from the Saudi Electricity Company, Qatar National Bank, and the Egyptian government. As with green bonds, green sukuk have helped fund environmental projects in the region. For example, Egypt’s green sukuk was used to finance or refinance initiatives including clean transportation, renewable energy, pollution prevention, and sustainable water management.
According to the World Bank, a green loan is “a form of financing that enables borrowers to use the proceeds to exclusively fund projects that make a substantial contribution to an environmental objective.” Such loans are similar to green bonds as they share the same purpose: to raise capital for eligible green projects. However, loans tend to be smaller in value and are done in a private capacity rather than on public markets. While generally smaller, more green loans were issued than green bonds in MENA in 2021 – totaling $6.95 billion and $1.6 billion respectively. Recent significant green loans include Saudi Electricity’s $500 million loan from the Japan Bank for International Cooperation (JBIC) in July 2021 and the $1.5 billion in funding Egypt secured in February 2022 from a range of international banks, including FAB and Emirates NBD.
3. Green Finance in MENA: 2023 Outlook
• The issuance of green bonds, both globally and in MENA, slowed in 2022. Having grown an average of 70% annually since 2019, activity decelerated in the first half of 2022. Wyne believes that “part of the slowdown can be explained by lingering questions around the impact that green bonds have had. This skepticism means that investors, particularly those who place a high premium on climate impact, are likely waiting to see what best practices emerge and how to correct the remaining implementation challenges.”
However, Wyne is “confident that 2023 will be a stronger year for green finance as a whole. First, because we need to rapidly increase climate funding, and second, we’re improving our ability to create and identify investment opportunities, which is in turn incentivizing more people to build mitigation and adaptation solutions.”
• According to the Arab Petroleum Investments Corporation (APIC), an energy-focused multilateral financial institution, there could be further collaboration between state enterprises and private sector companies in 2023. APIC believes this could come in the form of more public-private partnerships (PPPs) and the floating of companies related to sustainability, particularly those working on clean energy.
• In the private sector, Wyne “would not be surprised if we see in 2023 smaller ticket sized investments – such as early stage venture capital – going towards climate start-ups in MENA.” He told Al-Monitorthat this “climate tech is still nascent in MENA, though there are more and more examples of deals being done, which could require cross-border investment.”
• Jeffrey Beyer, Founder and Director at Zest Associates, a sustainability-focused consultancy firm based in Dubai, told Al-Monitorthat he believes we could see the continued rise of sustainability-linked instruments as opposed to those strictly focused on “green.” Beyer argued that these have a broader definition than green bonds and therefore “are helping to bring companies into the conversation that don’t traditionally associate themselves with climate or sustainability.” Beyer pointed out that sustainability-linked tools are “growing fast [and that] in 2021, sustainability-linked bonds and loans hit $189 billion and $700 billion respectively.” This growth could continue into 2023.
• As China seeks a greater geopolitical presence in the region, we can expect greater Chinese involvement in the MENA green finance area. Tobias Zumbrägel, a researcher in environmental sustainability at CARPO-Bonn, a German think-tank that researches sustainability in the Near and Middle East, told Al-Monitor that “China is getting more active and dominant in the whole region.” China has already committed to financing several sustainable projects in MENA, such as acquiring 49% of Saudi Arabia’s ACWA Renewable Energy Holding in May 2020. Zumbrägel suggested similar moves could occur in 2023.
• Zumbrägel also argued that the Gulf monarchies see green finance and climate-related investments as “a geopolitical instrument [that can be used] to influence the whole region and make it more [financially] dependent on the Gulf states by creating a new kind of green gravity center.” He noted that “the UAE and Saudi Arabia are planning on financing solar plants in Iraq,” and the UAE has “even made some statements on building plants in Iran.”
• Robinson believes that we could see progress on the development of green taxonomies in the region. “Strong and clear regulation is key to promoting green finance and developing the right ecosystem to support market growth. While the MENA region has sometimes been behind the curve in terms of ESG and sustainable finance regulation, this is now actually an advantage for regulators in the region because they can observe lessons learned as well as international leading practices. These can then be understood and tailored to regional needs and context,” she said. “I have noticed that MENA’s regulators are starting to recognize the strategic imperative of supporting the sustainable finance market – in part because this is also closely aligned with broader sustainable development and economic growth targets. We are seeing progress, but it needs to be sped up because ambitious net zero targets will not be achieved without massive shifts of capital, and regulators play a role in driving this.”
• Similarly, Sara Benedetti Michelangeli, an official at the green finance and taxonomy unit of the European Commission, believes that states accused of greenwashing, such as Saudi Arabia, have taken note of the market and public backlash. “MENA administrations will work further on standards and transparent reporting mechanisms to shape credibility around the world,” she told Al-Monitor.
4. Green Finance in MENA: The Role of Islamic Finance
In 2021, the entire MENA region accounted for just 0.3% of global green bond issuances. However, the industry is growing rapidly. An important factor helping to drive this upward trend is the interplay between green finance and Islamic finance, which has a natural home in MENA. Beyer told Al-Monitorthat “there is a real synergy between green finance and Islamic finance.” Michelangeli added that “Shariah finance contains a well-rooted ethical framework, highly sensitive to the environment and the protection of inhabitants.” Indeed, the shared basic principle underpinning both green and Islamic finance is to do no harm.
But on a practical level, too, Beyer noted that the two financial instruments share several similarities – both in terms of their construction and their intended consequences. “Both require frameworks that ensure investments adhere to either green or Islamic principles. Both require an additional level of scrutiny to ensure money is invested as it’s intended. Both aim to support equitable and sustainable economic development,” he said. Because of these shared frameworks, more MENA institutions are looking to issue green sukuk – Islamic bonds where the proceeds are used to fund green projects.
However, Faisal Siddique, a c-suite executive operating in Saudi Arabia’s financial sector, noted that some issues on taxonomy remain. “The general sukuk is an Islamic finance product with a clear set of definitions and parameters with little room for ambiguity, with a majority of scholars agreeing on a common framework and taxonomy for Islamic finance,” he told Al-Monitor. “The definition for green sukuk is still not well-defined and is based on principles with gray areas that are not yet fully agreed upon.”
Several MENA regulators are currently considering how this might be resolved. The Bahrain-based Shariah Review Bureau has actively been looking at how to merge regulatory frameworks for green and Islamic finance products. Oman is considering legislation to facilitate the issuance of green sukuk. Egypt is reportedly looking at how green sukuk could be used to finance the government’s sustainable transformation projects. And other MENA-based entities have already sought to put these ideas into practice. The Saudi National Bank issued its debut green sukuk in January 2022, raising $750 million. Riyad Bank issued a green sukuk of the same size in February. Bahrain’s Infracorp listed its $900 million green sukuk abroad on the London Stock Exchange in March.
Momentum for green bonds is slowing amid economic uncertainty. Globally, the issuance of green and sustainable bonds grew by an average of 70% annually between 2017 and 2021. However, issuance slowed in the first quarter of 2022, dropping by 18% year-on-year. This was partly because rising interest rates increased financing costs for issuers and made the market more difficult for investors.
However, at the same time the growth of green bonds slowed, the issuance of green and sustainable sukuk continued to gain momentum. Following a record issuance of $6.1 billion in 2021, the first half of 2022 saw $4.4 billion worth of issuances. While non-MENA majority Muslim countries, such as Indonesia and Malaysia, continue to be major players in this activity, GCC-based entities now dominate the market, representing 59% of global issuance between 2018 and the first quarter of 2022.
While there is certainly a strong overlap between green finance and Islamic finance, Wyne does not “think this linkage along will make MENA a hub for green financing.” He told Al-Monitorthat “there is no game-plan to build a hub, but one important element to that process is incentivizing entrepreneurs, project developers, and others, to actively create new companies and projects that help address different elements of the climate agenda.” While green sukuk may play a role in funding this, Wyne argued that “the region has vast adaptation needs, which will require a mixture of different funding instruments.”
Given that governments and corporates across MENA are increasingly integrating green principles into their business practices, and that financial institutions are under more pressure from foreign investors to offer green instruments, it is likely that MENA will continue to grow as a hub for green sukuk. “The Middle East has an advantage in capitalizing on this relationship between green and Islamic finance,” Beyer told Al-Monitor. This could play a significant role in MENA’s attempts to finance its green transformation, though the amount of capital required means that other green financial instruments will also need to be leveraged.
5. Green Finance in MENA: Key Takeaways
⮕ The International Monetary Fund (IMF) estimates that the Middle East is in line for a budget windfall of around $1.3 trillion in 2023 because of higher oil and gas revenues. Wyne thinks that is it “not outside the realm of possibility for there to be some trickling down [to green projects],” but adds that “we’ll need substantially more funding to meet climate goals across the region than any trickling down can offer.”
⮕ Should green finance in MENA regain momentum in 2023 as Wyne expects, after a slower 2022 globally, he thinks that “we will see countries such as Saudi Arabia, the UAE, and Qatar having the bulk of domestically supplied climate finance activity, given the available funding in those countries and the scale of projects taking place in them. That said, this is an opportune moment for MENA countries across the board to become more active in the climate finance space, including [in the issuance of] green bonds.”
⮕ Jouti also believes that Morocco, Egypt, and Turkey could prove to be “very attractive markets” this year. “These markets are evolving in the correct way and are home to many green, climate change, and energy transition projects,” Jouti said. “There are so many opportunities there and, in these countries, if you want to build something like a solar field or wind plant, you can get financing easily.”
⮕ Zumbrägel believes that cross-border green finance activity and investment could be driven by the Gulf states as each seeks “to expand their role in the region.” Siddique also said that “the UAE, Saudi Arabia, and Qatar are the main regional powerhouses with the capital to invest within their own countries, as well as foreign countries such as Egypt and Jordan.”
⮕ A regional leader in green finance already, Beyer suggests that the UAE could become a hub for green funds because of recent moves made by the Abu Dhabi Global Market (ADGM), an international finance center and free zone. In November 2022, the authority launched a public consultation on developing its green taxonomy. “Funds that want to be designated as green funds can initially select from any published, credible, and independent green taxonomy as a reference against which to choose its green assets,” Beyer told Al-Monitor. “It’s a smart move on the UAE’s part because it kickstarts the establishment of green funds in the UAE by giving managers this flexibility, while the UAE finalizes its own taxonomy and overcomes some of the challenges around harmonizing fiscal standards. This also helps the UAE establish itself as a regional and even global hub for green funds.”
⮕ Robinson believes that COP28 in Dubai could be a significant moment for green finance in MENA, with financial institutions potentially using the opportunity to explore a wider range of green financial instruments. “The fact that both COP27 and COP28 are held in the MENA region is hugely significant, and all eyes are on the UAE this year for COP28,” she said. “This is a good thing because regional financial institutions are starting to take sustainable finance seriously. There is a lot of talk about green bonds, but we should think more innovatively when it comes to green finance and look across the broad spectrum of potential financial instruments. For example, there is a role for carbon markets in MENA – either nationally or regionally – and I believe that in turn this will facilitate the unlocking of capital through carbon finance.”
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