Sarah Pirzada Usmani is Managing Director, Head of Loan Capital Markets & Sustainable Finance for First Abu Dhabi Bank (FAB). She examines the current green finance landscape and discusses the future outlook for sustainable financing.
Meet the agents of change:
Sarah Pirzada Usmani
What have been the key drivers for banks and lending institutions to adopt sustainable (green) financing strategies, and how has this evolved since the early 2000s?
A number of regional banks have been early adopters of environmental, social, and corporate governance (ESG); reporting annually as part of their corporate sustainability practices and aligning ESG strategy with their financing strategy. This primarily comes from a desire to operate as good corporate and socially responsible citizens. As part of this, these financial institutions have been creating awareness of ESG and Sustainable Finance, engaging with clients and encouraging them to adopt similar practices.
More recently, however, pressure is now coming from external stakeholders such as governments and regulators, who are encouraging institutions to adopt sustainability. Their aim is to enable the journey towards a low-carbon economy and help meet the country’s climate and environmental agenda and commitments to the Paris Agreement.
The push is also from investors demanding ESG best practices, which is becoming a key criterion from an investment point of view with a focus on the use of proceeds.
Investors are keen to channel financing towards ESG-compliant institutions and in support of green assets, which is also indirectly driving the ESG agenda for financial institutions. Additionally, in recent years we have seen our customers enhancing their focus on sustainability and looking for green products and services.
Is green finance now considered mainstream? If not, what needs to be done to engage governments, business, investors, financial institutions, etc.?
The industry continues to evolve and green finance is likely to become more mainstream as there is more awareness, in particular because of the COP28 initiative in the region. If we look at the UAE, the country is a first mover for climate action in the region: the first to sign and ratify the Paris Agreement; the first to commit to net zero by 2050; and lead a historic ‘COP of Action’.
It continues to set and achieve ambitious goals including commitments to initiatives such as a national carbon credit registry, action on a sustainable aviation fuel policy, the protection and rehabilitation of natural ecosystems, decarbonisation of waste, and more.
Several banks have followed the government’s initiatives. According to the UAE Banks Federation (UBF), by the end of 2022, FAB, ADCB, ENBD, DIB, Mashreq, and ADIB collectively allocated over AED 190 billion (US$ 51.8 billion) in green financing for green tech, renewable energy, and waste-to-energy projects.
There are some sophisticated corporate and financial institutions that adopted sustainability in their practices for some time and have been successful in tapping both the bond and loan market. At the same time, some issuers are tapping into the sustainable finance market, both loans and bonds, for the first time. The success in the bond market has primarily been based on the use of proceeds methodology where the underlying assets have been identified as green, social, or sustainable.
On the sustainability-linked side, these structures have been more prevalent in the loan market rather than in the bond market. In the loan market space, it has been a combination of both use of proceeds and sustainability-linked methodologies underpinning the structures.
From inadequate contractual protection for investors and concerns re general transparency, to issuer knowledge, pricing, and greenwashing, how challenging is it for banks and lending institutions to navigate the green finance landscape?
In the absence of standardised reporting requirements globally, it is challenging to align the disclosure policies across sectors and regions. The onus is on the financial institutions to encourage and obtain the necessary information required to review the underlying company from an ESG perspective and determine eligibility for seeking sustainable finance.
Banks need to ensure that the right level of disclosures are made, transactions are structured appropriately and in accordance with International Capital Markets Association’s (ICMA) and Loan Market Association’s (LMA) Green Loan/Bond principles, Social Loan/Bond principles, Sustainable Loan/Bond principles, and Sustainability-Linked Loan/Bond principles; subject to an independent review where required.
While green finance is expanding, there are still significant ‘brown’ book assets. How is the sector striking a balance and is there future reputational risk to consider as decarbonisation momentum and action accelerates?
The Middle East is a unique region which has been dependent on hydrocarbons for the last 100 years. It is not an easy decision for countries like the UAE to sign up to net-zero by 2050. There is a global requirement of US$ 4 trillion annually to fund the energy transition. Given the dependencies, there will be a period of transition which will need to be supported by both the private and the public sector including the financial institutions.
In this region, there will be a lot of focus on the decarbonisation strategies of the hard-to-abate sectors and development of clean energy sources which will help in reduction of CO2 emissions. We acknowledge that the journey will be an evolving process and we are committed to improving our approach as scenarios are updated by international organisations, emergence of new standards, data quality improvements, and our clients’ disclosures of new transition plans.
FAB, specifically, is approaching brown asset abatement with tailor-made baselines by prioritising carbon intensity reduction targets for each sector in line with the Net Zero Banking Alliance’s (NZBA) guidelines. As part of our Wave 1 of target setting, FAB has focused on the three highest-emitting sectors accounting for most of our financed emissions - oil and gas, power generation, and aviation. In Wave 2, we have focused on sectors with high emissions intensity, such as commercial real estate, cement, steel, and aluminium, as well as sectors with wide-ranging and substantial impacts on the environment, like agriculture. Following both waves, we have set targets on 90% of our financed emissions on the initial announcement in March 2023.
What opportunities do you see for sustainable financing?
Sustainable financing provides several opportunities and is a win-win for everyone involved, being fundamental to the region’s growth. Sustainable commitments can greatly improve quality of life in the MENA region and beyond, impacting health, water and food, economies, and livelihoods overall.
Sustainable financing is an avenue for investors to direct their funds towards projects that have a positive environmental or social impact. This opens opportunities for the development and growth of sustainable industries such as renewable energy, clean technology, green infrastructure, and social enterprises.
FAB, for example, has committed to facilitating over AED 500 billion (US$ 135 billion) in sustainable and transition financing by 2030, which accounts for around half of the AED 1 trillion committed by the UAE Banks Federation during COP28.
Other sustainable finance opportunities include risk management. Sustainable financing encourages businesses to assess and manage their environmental and social risks effectively. By integrating sustainability into their operations, companies can enhance their resilience to climate change, resource scarcity, regulatory changes, and reputational risks. This can lead to long-term financial stability and improved performance.
In addition, we cannot overlook the role of innovation and technological advancement. The need for sustainable financing has spurred innovation in various sectors such as the development of new technologies, business models and financial instruments that support sustainable practices. For example, the growth of impact investing has led to the emergence of new investment vehicles focused on generating measurable social and environmental impacts alongside financial returns such as FAB’s pioneering Green Bond issuances. We issued the first Green Bond in the region in 2017, and more than half our issuances are now in a green format.
What are your hopes for COP28 outcomes as we count down to 2030 in respect to green finance?
Green finance was at the forefront of many discussions at COP28, and finance will play a critical role in terms of supporting the energy transition in the region. The nation’s banking sector answered by committing to over AED 1 trillion in sustainable finance by 2030. Financial resources will be directed at scale to deliver impact across the UAE and beyond; and felt across diverse sectors, including the hard-to-abate industries. We also expect to see an increase in capital towards green tech, renewable energy projects, and sustainable infrastructure.
COP28 shone a light on the financing of green-eligible assets. However, there will be significant amounts of financing required for social and sustainable projects, as well as transition assets, to enable the region to achieve net zero in due course - and we plan on evolving our strategies to meet the challenge.