The Middle East and North Africa (MENA) is a region vulnerable to environmental challenges. According to a report by the World Economic Forum, temperatures here rise twice as fast as the global average. This reality calls for an urgent pivot to sustainable practices, which extend well into the finance space.
Back in early 2023, PwC identified green financing as a key economic theme to watch. Green finance focuses on raising funds to tackle environmental problems, such as reducing emissions, climate change, and restoring biodiversity. It’s part of sustainable finance, a broader approach that entails considering environmental, social, and governance (ESG) factors in investment decisions.
There are several kinds of green finance instruments. Issued by governments or private companies, a green bond is a type of loan created to fund projects that help the environment. Green sukuk is similar to a green bond, only that it complies with Islamic law.
MENA turns to green finance
OECD data from 2020 shows that since 2012, the region has consistently received between $2 and $3 billion each year in climate finance.
While the inflow of climate finance has been steady, it falls short of meeting the region’s demands, prompting several MENA countries to innovate and expand their green finance mechanisms. After all, green finance offers vital opportunities for the region, especially those belonging to the Gulf Cooperation Council (GCC).
An analysis by Strategy& revealed that by 2030, green investments in six major GCC industries could significantly boost the economy. These investments could contribute up to $2 trillion to the cumulative GDP, generate over 1 million jobs, and attract foreign direct investment (FDI).
Closing the financial gap in MENA’s transition toward a more sustainable economy, various governments have begun enacting laws and regulations driven by sustainability goals.
For instance, in the UAE, the Securities and Commodities Authority mandates that public joint-stock companies on the Abu Dhabi Exchange or Dubai Financial Markets issue an annual sustainability report. Such an initiative aims to boost investor confidence and ensure companies disclose and manage important ESG factors effectively.
Green finance milestones
Empowered by these robust frameworks, 2023 marked a significant upsurge in green social, sustainable, and sustainability-linked bonds (GSSB) issuances in the region. Total sales reached a new high of $24 billion. This is equivalent to a 155 percent increase from the previous year.
Leading the way are the UAE (the host of last year’s COP28) and Saudi Arabia. Together, these two powerhouses accounted for 77 percent of the total issuances in MENA.
The UAE, in particular, had green bond sales nearing $10.7 billion. This accounts for about 45 percent of the region’s total green bond sales. It also marks a staggering 170 percent increase from previous figures.
Egypt has also made a mark with the Green Panda Bond, the first from the region to be issued in China. It raised RMB 3.5 billion ($479 million) to fund public transit projects and received a partial guarantee from the Asian Infrastructure Investment Bank (AIIB).
“Being the first African sovereign to issue Sustainable Panda Bonds is a historical move not just for the country but for the entire continent,” expressed Ahmed Kouchouk, AIIB director and vice minister of the Ministry of Finance of Egypt.
2023 was also a landmark year for green sukuk in the MENA region, as Islamic issuances made up more than a quarter of the total regional output for the first time. MENA also dominated the global market in green sukuk, achieving sales of around $6.5 billion.
Continuing the momentum
This year, MENA continues to solidify its position in the global green finance market.
In January, Oman introduced a sustainable finance framework. This initiative allows for the issuance of various financial instruments, including green bonds and sukuk, to fund renewable energy projects.
Meanwhile, March saw the Saudi Ministry of Finance unveil its Green Financing Framework, a detailed plan supporting projects across clean transportation, renewable energy, and climate change adaptation.
Earlier in May, Fitch Ratings projected that ESG sukuk would exceed $50 billion globally within two years. The end of the first quarter in 2024 marked a significant milestone, with ESG sukuk reaching $40 billion, demonstrating a year-on-year growth of 60.3 percent.
Saudi Arabia and the UAE are at the forefront of this growth, holding the largest shares of Fitch-rated ESG sukuk — 45 percent and 33 percent, respectively.
Financing a sustainable future
As green and sustainable finance gains pace, the growing scale and complexity of these initiatives underscore the urgent need for an overarching regulatory framework.
London-based Clifford Chance, one of the world’s largest law firms, has called for a country-level, if not GCC-level, framework that could “provide certainty to ESG issuers/borrowers, avoid regulatory ‘fatigue’ and reduce compliance costs, while ensuring the transparency and comparability of information made available to investors, lenders and other stakeholders.”
Speaking at COP28, H.E. Shayma Al Awadhi, assistant undersecretary for Communication and International Relations at the Ministry of Human Resources and Emiratization (MoHRE), also pointed out the importance of adopting a suite of climate, economic, and social policy measures.
“More environment-friendly and sustainable production and consumption practices will mean that some sectors will decline while others grow and transform. At the same time, the adoption of a comprehensive package of climate, economic, and social policy measures has the potential to increase economic prosperity, create more jobs, and increase employment rates,” she remarked.
Green sovereign wealth funds
Meanwhile, Strategy& argues that the creation of a green sovereign wealth fund (SWF) for each GCC country can help entice investors, global and local alike.
“Establishing a green sovereign wealth fund will unlock substantial benefits to all stakeholders, including the public sector, investors, developers, and the general public. Most importantly, this green sovereign wealth fund should act as a credible minority partner attracting international and local private investors, rather than keeping them out,” stated the PwC’s strategy consulting business unit in a report.
“The right approach is akin to seed capital — governments that create the right environment for green finance can invest a small slice of the required capital and attract the remainder from institutional investors and other players from around the world,” it added.
Globally, SWFs collectively held $26 billion in green investments in 2023. This is more than twice the amount of black investments or funding for carbon-based fossil fuels and mining.
