The MENA region and its contribution to global climate change goals will be in the spotlight as the UAE prepares for COP28 in November 2023. The London Institute of Banking & Finance MENA released a white paper in February this year that discussed the need for banks in the area to go beyond reporting on ESG to obtain thorough data on climate risk.
In its status report from October 2022, the Task Force on Climate-related Financial Disclosures (TCFD) revealed that just 25% of all businesses in the Middle East disclose their exposure to climate change, which is the lowest score internationally.
Nevertheless, the banks in the area are actively developing their green portfolios and making ESG investments. For instance, the Commercial Bank of Dubai recently unveiled its first $500 million green bond. Earlier this year, First Abu Dhabi Bank (FAB) issued a five-year, $600 million bond that was 2.8 times oversubscribed and priced at 95 basis points over US Treasuries.
Investment in renewable energy, conservation of land and aquatic biodiversity, and climate change adaptation are among the uses of the income from FAB’s green bonds. The bottom line is as a key oil-producing region, the MENA region has some of the biggest potential and problems on the global path to net zero, and its banks are beginning to embrace them.
Opportunities for banks
Environmental sustainability was ranked eighth among the top ten global business goals in a late 2021 Gartner survey of CEOs and other senior company executives, marking the first time it had made the top ten.
The change in priorities implies that banks in MENA who are eager to finance sustainable business goals and support the movement towards net zero and a greener economy have a tonne of chances. They have extensive knowledge of the fossil fuel industry in particular, which will be helpful as they offer transition advice.
MENA banks supporting net zero efforts
ESG-focused finance in the retail and commercial markets is the most innovative way that banks can assist climate goals. Offering preferred conditions for the financing of ecologically responsible purchases, projects, or business expansions may be one way to achieve this.
Lending to businesses is expected to have the biggest effect. For instance, there are many prospects for ESG investing in infrastructure and real estate, as there is a focus on smart buildings and cities in the MENA region.
Banks in the area have specific expertise in project financing of larger-scale infrastructure undertakings. Regarding electric vehicles, opportunities galore as well, as banks can collaborate with their client businesses to help them build a fleet of electric vehicles.
This can entail supplying customised financing options for fleet needs, providing fleet management services, and delivering guidance on EV integration into current businesses. In order to encourage the adoption of EVs, banks can also collaborate with EV producers, dealerships, and other relevant parties. Moving away oil and gas banks in the MENA region have specialised knowledge of oil and gas that they can use in a variety of ways.
Most importantly, they can offer expert advice services to clients in associated industries and energy firms, assisting them in making the switch to low-carbon alternatives. These services can include advice on sustainable company strategies or assistance in evaluating the financial risks and opportunities linked to the energy transition.
Experts believe that we must not lose sight of the fact that banks serve as the primary conduit for converting short-term deposits into long-term investments. The future of the region’s economy will be shaped by the choices they make regarding ESG.
Role of the regulators
Banks are crucial to capital allocation, which is why regulators want them to assist in ushering in a new era of green finance. The Central Banks and Supervisors Network for Greening the Financial System (NGFS) has attracted a number of regulators from the MENA region to its membership.
The network seeks to develop practical methods for managing climate-related risks in the financial industry and investigates how conventional finance might aid in the shift to a greener economy.
Among them are the central banks of Egypt, Jordan, and Lebanon as well as the Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM), the Dubai Financial Services Authority (DFSA) at Dubai International Financial Centre (DIFC), and the Financial Regulatory Authority (FRA) Egypt.
Regulators in MENA who are members of NGFS can exchange “best practises” and influence the global discussion. The discussion about creative financial solutions for a sustainable future will also include banks. Those who take immediate action to embrace more environmentally friendly business models and put systems in place to identify, manage, and mitigate climate risk, including by switching to net zero, will find themselves in a better position than others.
Importance of ‘G’ in ESG
The environmental component of “ESG” is what grabs attention. Pictures of endangered wild ostriches and snow leopards move people. Less photogenic is the “G,” which stands for governance. However, experts suggest effective governance is necessary in order to drive banks and financial institutions towards net zero and other climate change objectives.
Moreover, it’s not only that governance is disregarded; it’s also difficult to accomplish well. For instance, employees must be made aware of an organisation’s climate goals and given the skills they need to do their duties, whether through continual training and capacity building or just by incorporating ESG issues into their regular workdays.
ESG also affects a bank’s operations on both an internal and external level. Therefore, going forward, banks will require a comprehensive strategy that acknowledges the synergistic nature of ESG.
There is no denying that business transformation is difficult, but ultimately, the drive towards net zero will necessitate just that—a new approach to conducting business. We are all impacted by the global challenge of climate change, and banks in the MENA region can help to solve it.
UAE’s green growth model
Meanwhile, the UAE wants to set an example for green growth and the circular economy around the world, according to Abdullah bin Touq Al Marri, Minister of Economy. The UAE also wants to expand the markets for its exports, make the national economy more competitive, and create a better business environment.
In his remarks to the Emirates News Agency (WAM) during the “Make it in the Emirates Forum,” Al Marri emphasised that the industrial and manufacturing sector is a priority and a crucial pillar for boosting the soft power of the national economy and its competitiveness in global markets.
He added that the national economy can compete in a variety of markets, including those for aviation, transportation, logistical services, renewable energy, mining, food, petrochemicals, medicines, and other products and services.
Adding that the growth potential of the global economy is tied to expanding investment opportunities in new economic sectors, such as the space industry, food, agriculture, healthcare, transportation, renewable energy, circular economy models, and advanced technology, as well as investing in the development of digital infrastructure and hiring, the UAE aims to attract $160 billion worth of investments in new economic sectors over the next three decades.
Al Marri said that the ministry is working with its strategic partners on a number of initiatives and policies to create investment opportunities in new economies while continuing efforts to create a suitable environment for start-ups and family businesses. This is in reference to the ministry’s efforts to launch projects with a strategic economic impact.
Al Marri also said that there are three fields of green energy. The primary objective of green energy is to encourage the creation and consumption of renewable energy.
Government initiatives to promote green economy investments and to make it easier to produce, import, export, and re-export green goods and technologies are included in the second field.
The third area focuses on creating urban planning regulations that protect the environment and improve the environmental performance of homes and other structures.
As one of the greatest economic growth rates in the world, the UAE had record growth in 2022, with a GDP growth rate of 7.6%, he continued.
According to predictions made by the Central Bank of the UAE, the country’s economy will expand at a rate of 3.9% in 2023, with non-oil output growth expected to increase by 4.2%. The percentages are expected to increase in 2024, reaching 4.3% for GDP and 4.6% for non-oil output, Al Marri concluded.