The Future of
Sustainable Finance
and Green Economies
in the MENA Region

Introduction

There can be little doubt that the world is moving towards the end of the hydrocarbon era, though the pace and nature of the energy transition are still playing out. From a climate perspective, the transition cannot happen soon enough. While the weight of global public opinion seems in favour of rapid, almost overnight, change, the mechanics of bringing about that change will be both timely and complex.

Hydrocarbon consuming and producing countries are introducing and implementing a range of policies to cut greenhouse gas (GHG) emissions in line with Net Zero commitments made at successive Conference of Parties (COP) Summits, while making considerable efforts to ‘green’ their economies . Naturally, the approaches to cutting emissions differ between producing and consuming countries, especially when the former economies are highly dependent upon hydrocarbon revenues. Despite efforts to diversify, Gulf Arab state economies remain reliant upon exports of oil and gas and this will continue to be the main source of revenue for decades to come.

As noted below, definitions of a green economy remain fluid and can often change, according to the particulars of each given context. At best, it is an all-encompassing concept and pervades essential aspects of a country’s economy. Countries and regions have differing definitions of “green economies” as well as various elements that have been included under their green economy strategies. SRMG THINK has conducted an extensive review of the strategies launched in the countries covered in this report. We have concluded the most efficient and accurate way to define “green economies” is through looking at two key components: sustainable finance and sustainable infrastructure.

Section one: Green economies

The United Nations Environment Programme (UNEP) defines a green economy as low carbon, resource efficient and socially inclusive. It generates prosperity while maintaining the natural systems that sustain humanity , moving away from production and consumption behaviours that disproportionately burden the environment. The concept has been adopted as a strategic priority for governments and organisations around the world, as leaders – and societies – recognise that current economic systems and processes are incompatible with long-term development goals.

The green economy agenda straddles environment and economy and sits in tandem with sustainable development. It focuses on using targeted public expenditure, policy reforms, and changes to taxation and regulations to support green investment which, in turn, enables sustainable economic growth. Hence, the terms green and sustainable are often used interchangeably by policymakers, analysts and practitioners.

There are multiple definitions of and frameworks for a green economy; however, it is broadly agreed that a green economy prioritises the development of economic activities, infrastructure, and assets – through both public and private investment – that enables lower carbon emissions and pollution; greater energy and resource efficiency; and the preservation of biodiversity and ecosystems to ensure that natural capital remains in place for future generations . There is also consensus that green economies emphasise skills, employment, and the positive social impact of the environment, as well as the importance of people’s well-being.

SRMG THINK has focused on two key elements of green economies: finance and infrastructure. Greening economies require significant capital to finance technological developments, such as smart electrical grids, renewable energy sources, electrification of transport and resource-efficient buildings. These economies also require an innovative approach to develop new, and to adapt existing, infrastructure to serve the changing needs of societies. As noted above, Gulf Arab states are suitably positioned to green their economies and manage energy transition, but the pace and sequencing of both processes will be critical to achieving success. One area in which they have begun to make progress is sustainable finance.

Section two: Sustainable finance

Green bonds are a key facet of sustainable finance. They fund projects that support energy development, sustainable resource management, clean transport and climate change adaptation. They also finance projects linked to biodiversity conservation and pollution prevention or mitigation. Investors looking to improve their environmental credentials can purchase these bonds with the proceeds tied directly to specific green or social projects.

Similar types of green bonds and loans include sustainability linked bonds (SLBs), green loans and sustainability linked loans (SLLs). SLBs are aimed at sustainable practices, and their proceeds are directed to general corporate capacity for achieving climate or sustainability goals rather than being earmarked for specific sustainability linked projects. SLBs are also a combination of social and green bonds, with social bond proceeds financing projects that directly address specific social issues or advance social causes.

SLLs are pro-ESG debt mechanisms where the loan is granted with the aim of incentivising the borrower to improve its sustainable practices. These loans are tied to sustainability performance targets (SPTs), which are determined at the outset by the lender and borrower. The borrower’s sustainability performance is measured over the course of the loan with interest rates reducing if the borrower’s predetermined SPTs are met or if their ESG rating improves.

While green bonds, green loans, SLBs and SLLs have taken off globally, this sector is still relatively new and requires additional development and regulation. There is need for greater transparency for investors in ensuring that the funds are utilised for green projects. The success rate and actual impact of green and social schemes are also under question. A final constraint is setting clearly defined and meaningful SPTs and designing an accurate metric for their success and implementation, which is examined via external review. However, this process remains a work in progress and parties have yet to reach meaningful consensus.

Since the European Investment Bank issued the first green bond in 2007, valued at $807 million, the green bond market has expanded; it was estimated to be worth $1.1 trillion by the end of 2021. Nearly 1500 issuers were registered at the end of 2021, a 50% increase on end-2020, at which point the market was valued at only $290 billion. This exponential growth demonstrates significant investor and corporate interest in supporting ESG-friendly initiatives.

Sustainable finance in the Middle East and North Africa (MENA)

Interest in green investment and financing across the Middle East region is growing in line with global trends. Its success, however, will be dependent on the fostering of an enabling environment; this will be shaped by factors such as national sustainability pledges, finance strategies, reporting standards, financial disclosure of climate risk standards, and standards for sustainable investment products.

Growth in sustainable finance in the MENA region in recent years has been impressive, as this report details below. However, Figure 2 illustrates the extent to which sustainable finance in countries such as the US, China, Germany and France has advanced, in comparison to which the Gulf region lags behind. For example, in 2021, France issued $52,730m in sustainable bonds compared to the GCC region’s $10,030m. The largest deal in Germany was valued at $7,292m, where the largest deal in the GCC was worth $2,500m.

Figure 2: Global sustainable bond issuance 2021 (billion US$)

Source: Environmental Finance, Sustainable Bonds Insight 2022; and Environmental Finance Data, https://efdata.org/

Issuers of bonds agree to allocate funds raised to finance or refinance eligible projects or assets according to specific categories. Sustainable bond UoPs are often categorised as green, social or blue. Green bonds are committed to environmental or climate projects, such as investing in renewable energy. Social bonds are committed to social impact projects, such as investing in low-cost housing. Blue bonds are committed to marine or water projects, such as investing in the transition to sustainable fish stock. Finally, sustainability bonds are committed to a mix of social and green impact projects. These projects are often aligned with the UN Sustainable Development Goals (SDGs).

Figure 6 gives a very clear indication that UoPs in total bonds issued since 2017 have been committed to all four categories, but mostly concentrated in environmental and climate projects (89%) in the form of renewables, energy efficiency and pollution prevention and control. Social bond UoPs - which include projects in socioeconomic advancement and empowerment; access to essential services; affordable housing; affordable bank infrastructure; and employment generation through the potential effect of SME financing and microfinance - amount to an 11% spread, while blue and sustainability bond UoPs score just a meager 1%.

Since the mid-2000s, regional governments have announced and introduced a series of major initiatives intended to help diversify their economies and tackle the intensifying challenge of climate change. As such, we can discern a trend towards an increase in the number and scope of major sustainable projects. Figure 11 shows that the number of initiatives increased from 11 between 2005-2009, to 18 for the period 2015-2019. This trend has strengthened since 2020 in response to the increase in the frequency and intensity of climate events, the Covid-19 pandemic and COP26. Given that Egypt and the UAE will host COP27 and COP28 respectively, green initiatives will be at the forefront of regional policies at a critical moment in the international community’s response to the climate crisis.

Another discernible trend has been the broadening scope of green initiatives, which started with relatively modest ambition most likely guided by economic rather than environmental factors. For example, in 2008, Abu Dhabi Urban Planning Council launched Estidama with the goal of achieving national sustainability by targeting residential areas and buildings, governmental entities, and commerce. In 2011, Dubai Municipality’s Green Buildings Specifications became mandatory for new government buildings. And in 2012, Sheikh Mohammed bin Rashid al-Maktoum launched Dubai’s Green Initiative. Since 2015, the ambitions of regional states have grown significantly, reflecting the urgency of climate change and their own increasing prominence within the issue on the global stage. For example, in 2021, Qatar Energy launched its new Sustainability Strategy which establishes several targets in line with the goals of the Paris Agreement. The strategy stipulates deploying dedicated Carbon Capture and Storage (CCS) facilities to capture more than 7 million tons per annum (mtpa) of CO2 in Qatar. It sets a clear direction towards reducing the emissions intensity of Qatar’s LNG facilities by 25% and of its upstream facilities by at least 15%; and reducing flare intensity across upstream facilities by more than 75%. Furthermore, it sets out a target to eliminate routine flaring by 2030 and limit fugitive methane emissions along the gas value chain by setting a methane intensity target of 0.2% across all facilities by 2025.

Saudi Arabia in November 2021 announced the Saudi Green Initiative (SGI) and the Middle East Green Initiative. These are pledged to reduce emissions, plant 50 billion trees, and protect the land and sea. For example, the SGI will see the rehabilitation of 40 million hectares of degraded land and increase the percentage of protected areas across the kingdom to more than 30% of the total land area. The first wave of more than 60 initiatives announced under SGI, which was unveiled at the October 2021 Saudi Green Initiative Forum, represent over SAR 700 billion (US$ 186.6) investment to contribute to the growth of the green economy. These initiatives include the following:

In March 2022, PIF announced that five Saudi businesses (Saudia; Saudi Aramoco; Maaden; Acwa Power and NEOM) would become the first partners of the MENA region’s voluntary carbon market.

The region began establishing sustainable projects in 2006, one of the most notable of which is Masdar City in Abu Dhabi. This comprises a growing clean-tech cluster, business free zone and residential neighbourhood with restaurants, shops and public green spaces. Masdar has invested over $1.7 billion of equity across projects in the city, focusing on mature technologies in solar and wind power, with a total value over $6.4 billion. Elsewhere, Kuwait developed the 20 hectare Al Shaheed park in four successive stages (2013-17), reclaiming and revamping a portion of the former Green Belt, a series of gardens built from 1961-64 between the old city of Kuwait and its expansion. Oman’s first wind-based power project, Dhofar Wind farm – which has generation capacity of 50 MW - commenced commercial operation in 2019. In Saudi Arabia, King Salman Park was launched in 2019 and on completion, it will be the largest urban park in the world, covering an area of 13.3 square kilometres on the grounds of the old airport in Riyadh.