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Wednesday, April 24, 2024

Green bonds accelerate GCC sustainability agenda: BCG


Green bonds in the region grew 38% between 2016 and 2020, with Middle Eastern governments driving 97% of green bonds in 2020 alone, up from four years earlier, global management consultancy BCG said in a new report. This proportion is only 13%.

Issuance of green and sustainable debt has been growing rapidly in the Middle East despite the relative lack of regulation of green financial instruments, according to a Boston Consulting Group (BCG) BCG report titled “Financing Net Zero Middle East”.

In 2021, total issuance of green and sustainability-related debt in the region is more than four times higher than in 2020. In the early stages of the climate transition, industry investments desperately need patient, high-risk capital. Their path to decarbonization relies on technologies that are still in their early stages of development, such as steel, heavy road transport, and shipping.

The report shows that while climate change poses a range of risks to banks’ portfolios, regulatory pressure in most Middle Eastern countries has not been strong enough to compel banks to take immediate action on climate issues. Large banks in fossil fuel exporting countries typically have significant exposure to the oil and gas industry and other high-emissions sectors of the economy such as transport, buildings and infrastructure, and shipping.

Shelly Trench, managing director and partner at Boston Consulting Group and co-author of the report, said: “The Middle East banking industry has an opportunity to move from the oil and gas industry and other strategically important industries to cleaner, more sustainable industries. continuous technology.

“Regulators and policymakers can address this challenge by establishing carbon prices that adequately represent the cost of greenhouse gases and are consistent with international carbon price levels. In addition, they can create fiscal and other incentives to support decarbonization and Environmental and Industrial Policy for Climate Objectives.”

Considering that development banks and funds play a key role in supporting green investment, the BCG report makes three core recommendations to meet the above requirements:

1. Provide financing for non-financial green projects with low risk-adjusted returns or high investment risks, such as supporting the research and development of innovative technologies such as renewable energy and CCUS.
2. Mobilize private capital to invest in green projects and improve risk-adjusted returns through various risk mitigation tools.
3. Use their expertise to support and advise policymakers and regulators on the reforms needed to scale up climate finance.

Regional banking alliances, such as the Net Zero Banking Alliance (NZBA) and the Science-Based Targets Initiative (SBTi), are proving key to achieving this, as well as joining working groups such as the Carbon Accounting Finance Partnership to influence global standards – setters.

The report further identifies the need for key regulatory interventions to drive climate action through climate reporting and disclosure, followed by the creation of a taxonomy of sustainable activities. The Network on Greening the Financial System (NGFS), an association of central banks and regulators, is an important forum for coordinating these efforts and exchanging best practice among regulators.

At present, a number of financial service regulators in the Middle East have joined NGFS, including Abu Dhabi Financial Services Authority, Dubai Financial Services Authority, Egyptian Financial Supervisory Authority, and the central banks of Egypt, Jordan, Lebanon, Morocco and other countries. and Tunisia.

The report highlights another potential intervention, such as establishing a carbon pricing structure, which could stimulate demand for investment in renewable energy and low-carbon technologies, while reducing subsidies for high-carbon projects, leveling the playing field and enabling clean Projects are more economically attractive. For example, Abu Dhabi Global Market (ADGM), one of the UAE’s international financial centers, is developing the regulatory framework for the first-ever regulated voluntary carbon market and supporting the UAE’s transition to net-zero greenhouse gas emissions.

Emmanuel Givanakis, CEO of ADGM Financial Services Regulatory Authority, said: “ADGM Financial Services Regulatory Authority is facilitating the creation of the world’s first regulated voluntary carbon trading and clearing house, carbon offsetting Treated as a regulated financial instrument when traded and settled as a physical commodity.

“ADGM and the Authority are committed to fostering a sustainable financial ecosystem. We have the ability to provide financial products and services that will have a positive impact on the UAE’s and global efforts to achieve net-zero emissions.”

In the initial phase, the roles of regulators and development finance will be key, with the former setting the policies and regulations needed to stimulate climate finance demand in the region, while development finance institutions can help attract private sector investment by de-risking investments through blended financing solutions. Get involved in climate projects.

Aytech Pseunokov, project leader at Boston Consulting Group, said: “Over time, as climate finance regulations are introduced and green projects become more bankable, banks and financial institutions will become the main source of financing for climate transition.

“Until then, Middle Eastern banks would benefit from reviewing the impact of transition risks on their portfolios and preparing for the future by announcing portfolio reduction targets and joining global coalitions to exchange best practice. Doing nothing means Their portfolios will be increasingly exposed to the impacts of climate change—a riskier choice.” – trade arab news agency


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