Financial instruments linked to sustainability goals are helping drive the Middle East’s energy transition.
The Middle East, long a byword for hydrocarbon production and wealth, has a key role to play in the global transition to a carbon-neutral future. Some of the economies built on extracting and processing fossil fuels have to transform by pivoting to renewables and other clean forms of energy, with companies and governments offering support and investment.
Government initiatives are bolstering the transition: the UAE Energy Plan for 2050 targets a mix of renewable, nuclear and clean energy sources and the Government aims to spend around USD160 billion to attain its goals. Saudi Arabia is also investing in becoming carbon neutral1 and wants to derive 100% of its energy consumption from renewables (including natural gas) as well as 50% of its production as part of its Vision 2030.
While both new and traditional industries in the region realise the imperative to change, every company is at a different point in their journey, but some businesses in the Middle East are leading the way.
Often, the markets and sectors that require the most financing to achieve their goals are the ones left out of green finance because they are deemed too traditional.
The Middle East’s transformations, partly driven by global initiatives to tackle climate change and greenhouse gas emissions, will be a litmus test of how well the world is set to meet broader sustainability targets. And they offer opportunities for investors willing to go along on the journey to a greener future.
Across the region, nations and companies are taking up the baton, understanding the urgency to transition2, the requirements from the international community and investors and the advantages of embracing the shift at a relatively early stage.
Investing in the future requires substantial capital, and this is evolving as the theme of transition moves up the agenda. While support and investor demand is there, there are also signs that more needs to be unlocked, with finance cited as a challenge by 80 per cent of executives in the region, in Standard Chartered’s Zeronomics survey, more than the global average of 67 per cent.
To help accelerate the transition to net zero, Standard Chartered has made a commitment to financing in its Transition Finance Imperative, to help clients transition while addressing their specific challenges. It acknowledges the stage that oil and gas is at, and the need to act, while also recognising that the sector remains a critical enabler of economic development and employment.
Companies linked closely to the production or use of fossil fuels have started to embrace the change, assisted by innovative green capital-raising programmes. The United Arab Emirates’ national airline Etihad sold a USD600 million sustainability-linked sukuk3 – a sharia-compliant financial instrument similar to a bond – last year through Standard Chartered, the first-ever issuance of such a security.
An airline securing a loan hinged on a detailed international verification of its sustainability credentials and a link to the United Nations’ Sustainable Development Goals shows how far the region has come as a hub for sustainable expertise and financing.
Etihad is also the first airline in the Middle East to launch a self-funded carbon offset scheme, by signing up to the Carbon Offsetting Scheme for International Aviation (CORSIA).
For companies that are further along the pathway, momentum is gathering, with green sukuks and other instruments attracting a wall of money. Green bonds are those that are used for environmental or climate-oriented projects. The market is expanding, having already grown4 to more than USD225 billion raised in 2019, from just USD 807 million in 2007.
Recent deals in the Middle East show very strong investor demand. Saudi Arabia witnessed a green financing first with the sale by Saudi Electricity Company5 of USD1.3 billion of Islamic bonds. Underscoring the strength of investor demand for such securities, the deal’s orderbook closed at USD 4.7 billion.
Standard Chartered was part of a group of banks that came together to finance a loan agreement for around USD900 million for Dubai Waste Management Company6 to build a waste-to-energy plant in Warsan.
And sovereigns are also getting into green finance, with Egypt pulling in orders7 for nearly five times the USD750 million size of the Middle East and North Africa’s first sovereign green bond.
All this is just for starters. Across the region, solar, wind and nuclear energy projects are already underway.
But the changes aren’t just to the way companies finance their capital structures. Many have also put in place corporate8 policies and restructured their operations to meet the “G” part of the ESG equation – governance. Critical infrastructure such as port facilities are being built to the highest sustainability standards in the region. Developments in green hydrogen are also being considered as important accelerators for the region’s energy transition.
As the region prioritises energy transition, and with businesses and consumers more focused on ESG, an inclusive approach to energy policy and investment decisions is vital. This will help bring more sustainable financing from capital market investors and regional and global issuers, that can help to support the region to achieve its energy transition goals.
