Greener pastures for green finance in the MENA region

    02 Sep 2021

    Out of the 12 MENA green and sustainability-linked debts issuances, four deals from Saudi Arabia account for almost 63% of the region’s total volume, with the UAE holding the remaining 37%

    Let’s check the article written by Benjamin Grolimund, the Middle East and Africa regional manager, Financial Products – Bloomberg LP.

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    Green finance is proliferating in the MENA region. In H1 2021, green and sustainability-linked debt issuance reached approximately $6.4 billion, while MENA issuances rose to 38 percent on full-year 2020 totals in comparison to a 12 percent global increase, according to Bloomberg’s H1 league tables.

    This growth is attributed to the emergence of opportunities in renewable energy as well as carbon capture and utilisation – which are greatly sought-after in the region. Traditional hydrocarbon-based projects, as expected, have become less desirable in terms of attracting green finance.

    However, the dynamics and infrastructure behind green financing in the MENA region are different to those in the rest of the world.

    Definite trends emerging in the Middle East investment landscape

    In the MENA region there is a concentration of key players involved, typically a relatively small group of banks who finance mega projects. This handful of major banks target the green finance market, while on the other hand, smaller banks lack the specialism and sophistication to participate.

    Recently we’ve seen Al-Rajhi Banking & Investment Corp, Riyad Bank, Banque Saudi Fransi, Saudi National Bank, and Emirates NBD PJSC emerge as the region’s biggest green lenders. Moreover, the average deal size stands at $583m in MENA compared to $300m in the rest of the world. Out of the 12 MENA green and sustainability-linked debts issuances, four deals from Saudi Arabia account for almost 63 percent of the region’s total volume, with the UAE holding the remaining 37 percent.

    When we turn our attention to other regions, the picture is markedly different – here we are witnessing a herd effect with major banks following the green financing trend. The difference here is a reflection of the greater levels of liquidity in these markets and their level of sophistication.

    Another interesting dynamic in the MENA region is the limited visibility on the disclosure of green finance data, with the market still defining which activities are considered ESG compliant and which are not.

    At present, most of the MENA region’s Islamic banks have yet to participate in the green financing market. So far, we’ve only witnessed one sustainability linked issuance; this was by the Islamic Development Bank for $2.5bn in March 2021.

    The dynamics and infrastructure behind green financing in the MENA region are different to those in the rest of the world.

    This limited participation is partly because Islamic banks have yet to build the capabilities to engage with green finance. But also because they are still finalising the standardisation, documentation, and frameworks needed to conduct transactions. If this were to change, it could potentially be a gamechanger and that would likely shift the fundamentals of green financing across the region.

    What is also significant is that sustainability is a core pillar of the strategic transformation ‘Visions’, such as Saudi Vision 2030 or Abu Dhabi Vision 2030. In MENA, and the Gulf in particular, economic development and diversification initiatives are heavily tied to green investment. As we look ahead, these transformation agendas will serve as catalysts to push transactions higher to meet their objectives.

    As an example, the UAE’s Energy Strategy 2050 aims to cut carbon dioxide emissions of power generation by 70%. It seeks to increase the contribution of clean energy in the total energy mix from 25% to 50% and improve the consumption efficiency of households and corporates by 40 percent by 2050.

    Such a transition will unlock vast opportunities over the next 29 years. But this will require substantial investment – and this is precisely where MENA’s banks will come into play.

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