After 2020, Money has never looked greener –Assessing sustainable finance and ESG in the Middle East

The impact of the pandemic is still playing out in all major sectors, none more so than global finance. Sustainability is the order of the day, with green funds worldwide reaping bumper investments throughout 2020. In early 2021, the Middle East finds itself in an interesting position to capitalise on this developing trend.

2020: A landmark year for Sustainable finance

Last year marked a sudden and dramatic shift in global financing towards the expansion of funds and initiatives that had a deliberate focus on boosting environmental and economic sustainability. Specific so-called ‘green funds’ and other sustainable financing ventures enjoyed massive influxes of cash along with a greater trend of capital flowing towards ESG (environmental, social and governance) investing.

As with all global financing trends, this phenomenon is due to a great many interconnected factors. However, industry analysts repeatedly point towards the pandemic as a catalyst for changing investors’ opinions and decision-making processes in favour of ESG investing. The impact of lockdown and its tangible effects on the environment are said to have prompted a greater focus on investing in a way that combines long-term sustainability with performance, rather than purely chasing profits.

In 2020:

  • Europe’s total ESG funds reached $821 billion.
  • The S&P 500 ESG (The index of the largest 500 publicly traded US companies) outperformed its non-ESG counterpart by 1.5%.
  • Global regulators and policymakers pushed for increasingly strict guidelines for investors to publicly disclose their ESG considerations when making investments. The United Nations-backed Principles for Responsible Investment (PRI) now requires signatories to adopt mandatory climate-related financial disclosures or lose their accreditation.
  • The UK’s sustainable financing assets grew by $12.25 billion, more than 4 times that of 2019, reaching over $55.55 billion in total.
  • Major US fund manager Brown Advisory received $5 billion into its sustainable funds investment category.
  • China’s ‘green bond’ market soared to over $164.9 billion in November.

Measuring the impact on Middle Eastern financing

The rush of capital towards more sustainable ventures is of acute importance to the Middle East. Recent trends involving the drying up of foreign investment into the region demonstrate that the hydrocarbon rush is well and truly over, and that the Middle East must pivot towards its latent but emerging strength – developing renewable resources. The World Bank estimates that foreign direct investment into the GCC has dropped by 40% over the last 10 years. However, green finance is predicted to unlock $2 trillion in value by 2030, if the region can develop the right infrastructure and supporting conditions for it to grow.

Solar, wind and green hydrogen are now roughly 2.5 to 3 times cheaper to produce in the GCC, making them a prime vehicle for attracting and promoting green finance. This is in line with the wider economic strategies of individual Middle East states to diversify away from hydrocarbon reliance and build up their capacity for the export of renewable energy resources, knowledge, technologies and expertise.

There is still a long way to go, however, before the region can be said to be a key player in sustainable financing. While the overall green bond market was worth over $230 billion in 2019, only $2 billion of that total came from the Middle East and North Africa. Still, like the rest of the world, last year saw a flurry of announcements regarding new green bonds, sustainable financing ventures and regulatory changes emerging from Middle East countries. Overall, regional green and sustainable bond issuance in 2020 was up by almost 50% compared to 2019. From Majid Al Futtaim issuing $600 million of 10-year green Islamic bonds, to Egypt’s founding of a Regional Centre for Sustainable Finance, the needle is moving perceptibly towards sustainable financing.

Equally important to the level of investment in green funds and ESG investing principles is the rising level of reporting on such activities. In 2020, 51% of the top 100 companies in the UAE were reporting on corporate sustainability activities, up from 44% in 2017. The growing attraction of sustainable financing and ESG-based investment decision making is prompting the region’s biggest and best firms to improve on their reporting and general commitment to this evolving sector of ME and global finance.

Finance is Going Green: A developing culture of sustainable financing in the Middle East

While it’s true that the Middle East has some serious catching up to do if it hopes to draw level with the likes of Europe, the US and China, the region still has plenty of advantages to utilise. Not only are its renewable energy developments drawing global attention and investment, its broadening culture of fusing environmental and economic sustainability into its long-term infrastructural development plans make its leading firms and PPP ventures increasingly sound ESG investment prospects.

The overall figures for specific sustainable funds in the Middle East may be comparatively small at the moment, but their solid growth and increasing presence in the minds of global investors makes the next few years a very exciting time for green finance in this part of the world. As the renewable energy transition accelerates, it seems all but inevitable that sustainable financing investment flows will follow suit.