Riding the Rising Green Wave of Sustainable Finance Across the Gulf

If someone told you that a country with just 0.1% of the world’s population held one-fifth of the global sustainable bonds, would you believe them?

This is the extent of the leadership role that the UAE has come to play in global ESG finance according to Bashar Al Natoor, Global Head of Islamic Finance and Managing Director at Fitch Ratings.

Investing in green bonds or other ESG-related assets pays clear dividends to investors. Research by EY shows that 70% of companies actively addressing climate change are seeing financial benefits that exceed their initial expectations. Furthermore, those companies that are taking particularly ambitious steps in their climate action strategies are 2.4 times more likely to witness financial returns that are significantly higher than they anticipated.

And global investors are pouring ever larger amounts of capital into climate finance. Average annual climate finance flows reached almost $1.3 trillion in 2021/2022, nearly doubling the amount from just a year before and representing 1% of global GDP. This is significant, considering that few people had even heard of climate finance less than two decades ago, and the world’s first green bond which only came into existence in 2008.

We’ve come a long way since then. Bloomberg data reveals a 10-fold increase in global issuance of sustainable finance products between 2016 and 2021, and markets, such as the GCC, have been at the forefront of dynamic growth in recent years.

The State of Climate Finance in the GCC

Climate finance, which refers to financial investment and funding targeted at climate change mitigation and adaptation projects and initiatives, was one of COP28's themes.

President-designate of COP28, H.E. Dr Sultan Al Jaber, saw climate finance as a “cornerstone” of the conference’s action agenda. In an interview with The National, he pressed leading global institutions to play a greater role to “turn billions into trillions” to fund solutions to combat climate change, underscoring the urgency of such investment.

UAE was the first country in the Middle East to ratify the Paris Agreement and has demonstrated its commitment to climate-focused investment via a series of national and emirate-level initiatives, such as the UAE Green Agenda 2030, the UAE Guiding Principles on Sustainable Finance (2017), and Abu Dhabi Sustainable Finance Declaration (2019), among others.

The numbers are remarkable. The UAE government has pledged an initial investment of $163 billion as part of its national strategy to reach Net Zero by 2050. By the end of 2022, six major UAE banks (FAB, ADCB, ENBD, DIB, Mashreq, and ADIB) had allocated over $51 billion in green financing for projects including renewable energy, waste management, and green technology.

Prominent players from outside of the banking sector are also playing crucial roles. Masdar (Abu Dhabi Future Energy Company), successfully raised $750 million in its debut sale of green bonds in July. The company has developed and invested in renewable energy projects in 40 countries since 2006.

The growth of Masdar City in Abu Dhabi, which has been pioneering sustainable urban development for the past 15 years, paved the way for the formation of the Masdar Green Real Estate Investment Trust (REIT) in 2020. With an initial evaluation of more than $250 million, the first of its kind in the region is today valued at nearly $750 million. It is one of the few REITs worldwide consisting of LEED Platinum and Gold-rated buildings. 

The UAE Central Bank indicates that non-bank institutions contribute approximately 30% of the country's financing dedicated to ESG initiatives. The total ESG financing in the UAE surpassed $6 billion in 2022.

The UAE is not the only country in the GCC aspiring to be a global frontrunner in climate finance.

Like its neighbor, Saudi Arabia has also established a clear national strategy to drive its climate agenda. As part of the Saudi Green Initiative, it has committed to an initial investment of $180 billion to achieve Net Zero emissions by 2060. The Public Investment Fund (PIF) is allocating $40 billion per year towards green investments until 2025, under its Green Finance Framework, to stimulate non-oil economic growth and diversification.

At the Africa Climate Summit two months ago, a group of prominent Emirati investors - including the Abu Dhabi Fund for Development, Etihad CreditInsurance, Masdar, and AMEA Power - committed $4.5 billion to support clean energy projects in Africa. More recently, at the Saudi-Arab-African Economic Conference, the Arab Coordination Group, spearheaded by Saudi Arabia and joined by several GCC-based financial institutions, revealed their big plan to set aside a whopping $50 billion to develop climate-resilient infrastructure in Africa.

Green Sukuk: A New Frontier in Green Financing

The GCC's big push into climate finance is also getting a boost from its solid footing in capital markets, especially in Islamic finance. Take Dubai, for instance – it's one of the world's top spots for listing sukuk (Shariah-compliant bonds). Right now, there's a massive $82 billion worth of sukuk listed there.

Green sukuk, blending eco-friendly investments with Islamic finance principles, has taken off in the last couple of years. In the GCC, there was an impressive issuance of $8.5billion in green bonds and sukuk last year, more than half of which came from Saudi Arabia. This is huge leap – more than 10 times higher than in 2021.

In the past year, companies like Majid Al Futtaim Holding, the Middle East’s biggest mall operator, and Aldar Properties, Dubai’s largest listed developer, have all secured substantial funding via green sukuk issuance.

We’ve also seen the debut of the UAE’s first-ever dirham-denominated green sukuk, issued by the First Abu Dhabi Bank (FAB), which is a significant step in broadening the UAE's financial markets and aligning its institutions more closely with the country's sustainability goals.

This regional surge occurred despite a global downturn, which saw a 14% decline in green bond sales over the same period. According to Bloomberg, this is partly thanks to the back-to-back COPs in the region, which have pivoted green finance into the regional mainstream.

Public Perception of Climate Action

As we've seen, climate finance largely depends on institutions and businesses due to the substantial capital involved. However, this raises a question: What is the perspective of ordinary people?

Concern for the environment is increasingly driving purchasing behaviors. Our research reveals that 60% of UAE residents are willing to spend more on eco-friendly products, and nearly half view helping the environment as a priority in their purchasing decisions.

In Dubai, young people show a particularly strong interest in environmental initiatives. They are 6% more inclined than their peers across the UAE to pay extra for eco-friendly products. Notably, almost one in five say that a company's environmental credentials are the most significant factor influencing their purchasing decisions.

When it comes to everyday actions, the commitment to the environment remains strong among UAE residents. Over a third consistently make an effort to recycle, a trend that spans all age groups. However, it's interesting to note that those in a higher income bracket (earning more than AED 300,000 or $82,000 annually) are 11% more likely to engage in recycling compared to others.

There is then clear public enthusiasm for climate action and individuals take their responsibilities seriously.

Therefore, businesses should seize the opportunity to align their strategies with the growing consumer demand for eco-friendly products, as our research indicates a strong market preference for sustainable practices, particularly among younger demographics in Dubai.

Looking Ahead

It's crucial to recognize the immense potential of sustainable finance in shaping our planet's future. And let’s not forget the impact it can also have in tandem on our economic future. According to a 2023 PwC study, green investments in key GCC industries could dramatically transform the economic landscape by 2030, potentially adding $2 trillion to the region’s GDP, creating over a million jobs, and attracting significant foreign direct investment.

We must align our actions with sustainable goals, driving forward the green wave of finance. In essence, 'Riding the Rising Green Wave of Sustainable Finance' is about actively shaping a resilient, sustainable future for all.

If interested in reading more of Manara Global's fortnightly newsletter, subscribe here.