The 28th edition of the Conference of Parties (Cop28) is fast approaching and the UAE, as the host nation, and the Middle East more generally are gearing up to show leadership and initiative in effectively tackling climate change issues.
The key question is how Gulf states’ net-zero pledges will be put into action in the coming decade.
A critical piece of the energy transition puzzle is securing adequate funding to implement net-zero targets within the stated timeframe. The low and no-carbon technologies required to transition to clean energy and clean up existing carbon-intensive infrastructure need significant capital to scale up at pace.
In addition, recent regulatory and disclosure requirements that spotlight businesses’ environmental, social and governance (ESG) credentials have led corporate borrowers and lenders to invest in sustainability-linked and green products to demonstrate their ESG commitments.
Sustainable and green finance
Significant funding commitments was an encouraging outcome of Cop27 in Egypt at the end of last year.
The Middle East Green Initiative will see Saudi Arabia commit $2.5bn over the next 10 years. The Arab Coordination Group, an alliance comprised of regional development funds, pledged to provide up to $24bn in finances by 2030 in a bid to combat climate change.
These commitments follow in the steps of the UAE’s sustainable finance framework released in 2021, which reaffirmed the nation’s commitment to the growth of sustainable financing and investment in the UAE.
Sustainable finance transactions have also increased, with Bahrain’s state oil company, Oil and Gas Holding Company (Nogaholding), refinancing a $2.2bn sustainability-linked corporate finance facility last year. Saudi National Bank, Saudi Arabia’s largest commercial bank, issued $750m in its debut sustainable sukuk bonds. Dubai’s Emirates NBD, meanwhile, raised the Gulf region’s first sustainability-linked loan last year to the tune of $1.75bn.
The Public Investment Fund (PIF), Saudi Arabia’s sovereign wealth fund, issued three tranches of green bonds in the aggregate principal amount of $3bn in October 2022, while Abu Dhabi’s sovereign wealth fund Mubadala has set up a standalone ESG unit.
While there is yet to be a market standard approach for green or sustainability-linked terms for debt instruments, the increase in corporates and financiers entering into green or sustainability-linked financing products in the GCC has been assisted by the guiding principles for such products issued by market bodies such as the Loan Markets Association (LMA) and International Capital Markets Association (ICMA).
However, there remain some key financing challenges as we move forward. Certain investment opportunities in energy transition projects will be in markets perceived to be higher risk. Meanwhile, demand has yet to be fully established in some sectors that are key to achieving net zero, such as hydrogen or carbon capture, utilisation and storage (CCUS), which may complicate offtake arrangements and risk assessments.
Given the pace at which the transition needs to take place, many investors may also be concerned about the risk of their conventional power and related assets becoming stranded assets.
Growth of carbon markets
The transition to clean energy and the commitment to reach net zero will continue stimulating the development of voluntary carbon markets and carbon trading mechanisms in the Middle East.
The UAE’s Securities and Commodities Authority announced its collaboration with the Ministry of Climate Change and Environment and other stakeholders to develop a carbon-trading mechanism.
Last year, the Abu Dhabi Global Market announced its plans to set up the “world’s fully integrated” carbon-trading exchange and clearing house in Abu Dhabi. This announcement followed the establishment in October 2022 of a voluntary carbon credits exchange by Saudi Arabia’s PIF and the Saudi Tadawul Group, with carbon credits tradeable on the exchange being Corsia-compliant and Verra-registered.
However, the carbon market will likely see further fragmentation as nations respond to their own net-zero commitments, new market infrastructure develops and a broader group of actors engage with the carbon market at a policy level.
Greenwashing and taxonomies
As the world transitions to net zero and green and sustainability-linked debt products take centre stage, a key concern is tackling greenwashing and scrutinising claims that products or services meet certain environmental criteria.
To do so effectively, countries must develop a consistent narrative around what greenwashing means and disclosures in line with international standards.
While mandatory ESG disclosures are already underway in the UAE, Bahrain, Qatar and Saudi Arabia, countries are looking to put in place more stringent measures as there is a general lack of consistency in ESG ratings. In this regard, a promising step came from Dubai’s Financial Services Authority (DFSA) earlier this year, when it confirmed its intention to strengthen regulatory frameworks to govern aspects such as disclosures and to develop an “ESG taxonomy”.
Similarly, Abu Dhabi Global Markets (ADGM) published a consultation paper in November 2022 on mandatory ESG reporting for ADGM-incorporated companies.
Such initiatives are seen as a step in the right direction, whereby developing accurate and reliable methods of estimating ESG performance will assist in creating products and services that meet investor demands.
The call for global action to tackle the climate change crisis requires each stakeholder to collaborate to achieve meaningful milestones in the sustainability space.
With this year’s Cop28 being pitched as “one of action” and countries striving for a just energy transition, there will continue to be a focus on sustainability-linked products as both the public and private sectors seek opportunities to finance energy transition in the region.
However, its success will depend on overcoming certain immediate financing challenges associated with energy transition projects and developing a comprehensive ESG framework and robust disclosure regimes, which will play an important role in reorientating capital to net zero and energy transition.
Source: Deepika Sriram (Linklaters), Middle East Business Intelligence