- Sustainability is a growing focus for Egypt’s largest banks; setting of Scope 3 emissions targets is not far off.
- Egyptian lenders expect the central bank to bring in a 20% green finance lending target.
- One of Egypt’s biggest banks, CIB, is keen to establish an African taxonomy for green activities.
Egypt’s policymakers are driving a busy agenda of green energy projects in the run-up to the Cop27 climate summit in November. At the heart of facilitating the capital needed to help meet the government’s Sustainable Development Strategy 2030, and newly launched National Strategy for Climate Change 2050, is the country’s banking sector.
Like many of the world’s banks, Egypt’s lenders are grappling with the challenges and opportunities of climate change. From painstaking assessments of the impact of their lending on people and the environment, to the launch of a sweep of new products such as green and sustainability linked-bonds to help finance a greener world, climate change and sustainability are changing the way banks interact with clients, lend and do business.
To discuss these and related issues, Capital Monitor convened the heads of sustainability at four Egyptian banks that make up roughly 80% of the sector’s assets in the country. CIB and QNB are the two largest privately owned banks in Egypt, with market capitalisations of $6.4bn and $2.2bn, respectively, at the end of 2021. National Bank of Egypt and Banque Misr are two of the country’s largest state-owned lenders.
These groups play a key role in supporting the Egyptian government’s development and mega projects and are backstopped by large retail deposit bases. They are also key to financing the country’s private sector, the growth of which is a strategic focus for the government. In February 2021, the Central Bank of Egypt directed commercial banks to increase to 25% the share of their lending to small businesses.
Dalia Abdel Kader, chief sustainability officer, Commercial International Bank (CIB)
Suzan Hamdy, chief financial inclusion and business development officer, Banque Misr
Sally Hamdalla, head of financial institutions and correspondent banking, QNB Alahli
Nevien Mohamed, head of sustainability, QNB Alahli
Maha Hasebou, head of strategic sustainability (ESG), National Bank of Egypt
Capital Monitor: How will the banking sector support the Egyptian government’s role at Cop27?
Dalia Abdel Kader: Our challenge is to create a pipeline of investable, green projects. That’s the key for Cop27. We have to have a clear map of opportunities for sustainable green projects, not only for Egypt, but for Africa.
Once we have identified the priority sectors for Egypt, we’re going to designate which banks will do what, which sector they will focus on and then which financial instruments you may need to innovate beyond green bond and sustainability-linked loans – blended finance, leasing products, for example.
And there’s another face of Africa that has to shine during Cop27. Resources-wise, youth-wise, Africa has [large growth potential]. Firstly, we need an African finance taxonomy – like the EU Taxonomy – to support that growth. A top priority is to lobby for it to be developed.
Maha Hasebou: We have raised the notion of a social taxonomy because you cannot make change without people. And the social aspect is critical to start any change. I think the EU Taxonomy is very interesting, and it’s comprehensive, but I cannot actually say that we will follow a certain taxonomy until there is universal standardisation [within Africa].
Are Egypt’s banks ready to play a new, sustainable role?
Hasebou: Addressing climate change is a global mission – strategic alignments and partnerships create a great opportunity for it to happen. The intention and commitment are already there. We just need to put it all together to ensure we have a global impact.
Kader: As chair of the Sustainable Finance Committee for the Federation of Egyptian Banks, all banks are eager to move [but have] different degrees of maturity. Talking to the largest banks in Egypt, sustainability is becoming core to their systems. There could be some gaps, like capacity and bankable projects, and the demand side has to be crystallised, but the main challenge is time, which is against us.
Where does Egyptian regulation and policy stand currently?
Kader: The Central Bank of Egypt [CBE] and the Financial Regulatory Authority [FRA] issued the guidelines on sustainable finance in 2021 and made TCFD [Task Force on Climate-Related Financial Disclosures] reporting mandatory from 2022 for companies listed on the Egyptian Exchange. So you can see the dynamism and progressive attitude of the regulators.
The Federation of Egyptian Banks has put in place a strategic action plan that addresses the systemic transformation of all banks from a sustainability, governance, risk and product development perspective. It will ensure a level playing field across the banks.
How are Egypt’s banks using ESG disclosure reporting to direct lending away from less harmful activities?
Hasebou: We’re following the TCFD framework, although we’re not members yet. We started by measuring our ecological footprint, specifically our water consumption and our Scope 1 and 2 carbon emissions. Very soon we’ll be publishing the ecological report and setting the internal targets. On the portfolio side, we are mapping all our economic sectors so that we can start implementing Scope 3 and put in some targets.
We conducted a materiality exercise to understand what we mean by ESG, how we classify it and how sometimes the E and S are interconnected. This exercise is helping us to build a strategy internally for sustainability. We were the first bank in Egypt to structure sustainability as a core strategic pillar.
Suzan Hamdy: [At Banque Misr], we’ve been Global Reporting Initiative-compliant for seven years and were one of the earliest banks in Egypt to join the UN Principles of Responsible Banking, in 2019. We’re doing deep dives into sectors and sub-sectors and mapping our whole portfolio because this is the only way to change your credit policies and procedures.
You really have to know where the credit risk is and then enable the credit officers and decision makers to take a proper decision. We now have a board committee of non-executives and a steering committee to overlook our ESG strategies and policies. We established a sustainability and ESG department… and, as we progress, we will join more frameworks like TCFD and the Net-Zero Banking Alliance.
Nevien Mohamed: We [at QNB Alahli] measure our carbon footprint for Scope 1 and Scope 2, of which we are on track to meet our ambitions. We have yet to start measuring Scope 3. We do not yet report carbon emissions data on a standalone basis, but we do measure it and is included in our group’s sustainability reports.
On a group-wide basis, we have started an initiative to integrate climate risk-related criteria into our overall credit decision making framework. For this, we are currently undergoing an exercise to understand the full impact of carbon-related emissions on our overall portfolio. Once, we understand the impact, we [will] define, develop and set necessary measures to provide direction and guidelines for our overall green lending activities.
Kader: Being part of the Principles for Responsible Banking, the notion of impact is very important. In our impact assessment report, we cover the double materiality – the impact of the environment on our portfolio… but also the impact of our funding on the environment itself.
What portion of your lending book is green and sustainable and how are you growing that?
Kader: I don’t think we are in a position to know that yet. But I will tell you that the $100m of green bonds we issued [in August 2020] was covered in a six-month period. That was a very important message to our corporate team – that the business case is there. And there is a waiting list.
Hamdy: The CBE is putting sustainability at the heart of the business models and business strategies of all banks now. In the run-up to Cop27, I expect there will be a lending target set for green finance, like that for SMEs [small and medium-sized enterprises], of 20% of the portfolio. And it will be mandatory.
Have you faced resistance within your bank about your increased focus on sustainability, particularly if it leads to turning down deals?
Kader: At the beginning, as the sustainability affairs department, we faced resistance from the risk department and from the corporate department and others, who said: “You’ve turned off clients.” These were stressful times.
But very soon they started to see the business case. They saw that we were protecting [the bank’s] risk and saw the untapped opportunities in green.
Hasebou: The biggest challenge was governance. There was always this misperception that it is about donations and philanthropy, about doing good and being a good corporate citizen. We started by raising awareness to over 24,000 employees in a campaign – that was the first of its kind internally – to start correcting this misperception. This helped to change the perception that sustainability is a “nice-to-have” to a business case.
How do you encourage clients who are resistant to change?
Hamdy: You have to understand where the opportunity lies to incentivise them.
It’s not only lower interest rates, but also building the ecosystem, giving assistance for ESG disclosures, and getting them a consultant.
We can see [this] with the SMEs when they tried to export to Europe and were rejected because they didn’t meet the [sustainability] criteria. They came to us and asked what they could do. You have to raise their awareness, give them training. And it’s going to take a lot of patience and collaboration.
Hasebou: Education is very critical. Our clients have a varying level of maturity on sustainability. We have some success stories on climate change finance – financing the transition of buses to be eco-friendly, for example. Maybe there are some cultural barriers, but they eventually do see the benefit.
What’s being done specifically for SMEs, which make up the bulk of the Egyptian economy?
Hasebou: We have developed platforms to educate our clients on how sustainability impacts their business and their access to finance.
Hamdy: The CBE has set up initiatives to promote a green economy and made available specific amounts for banks to use to grant credit facilities at low interest rates to customers – like for the E£15bn [$784m] modern irrigation initiative; to replace car engines powered by fossil fuels with dual-fuel engines; to establish natural gas stations; and to convert bakeries to work on gas. Until now, the government has financed the major green projects.
Digitalisation is a very important part of this. We have [launched a] ‘digital express loan’ for SMEs. We also have the women’s programme for SME loans. We’re also working on a new digital bank, for which we expect the CBE to soon issue a licence.
Sally Hamdalla: Recently, [at QNB Alahli] we enabled a female-led SME initiative, such as a farm outside Cairo that produced several crops for export.
We took the female entrepreneur on a journey of learning on how to farm sustainably, how to save on power and water, and how to integrate this in her business model. We then helped her to build the business case and develop a feasibility study. Finally, we provided the finance
s to implement the required capex so her farm would be sustainable and have more export potential.
How do banks in Egypt integrate ESG risk analysis into their credit decisions?
Hamdalla: Our bank has recently launched an environmental and social risk management policy, in line with our group and in response to the CBE sustainable finance guidelines to integrate these elements within our credit analysis and credit granting process. The objective is to categorise lending opportunities into high, medium and low-risk categories to understand the impact of the lending opportunity on the environmental and social side. If potential loans come in under the high-risk category [for example], it might impact our credit decision process or come with a strict action plan and follow-up mechanism.
Hamdy: We’re starting this now. We’re raising awareness across the bank because a lot of employees don’t know what the definition of sustainability is. Is it CSR [corporate social responsibility], is it only green financing, for example? We’re not doing this alone and are getting technical assistance from banks that have done this before.
Are credit officers incentivised to think about sustainability?
Hamdy: Eventually, their bonuses will be linked to ESG targets and there will be targets very soon for each portfolio.
Kader: It is already in our policy. KPIs [key performance indicators] are related to economic, environmental, social and governance [EESG] performance. It is a very progressive and aggressive sustainable finance policy.
Do you link the cost of lending to better environmental practices?
Hasebou: We offer grants and incentive schemes to develop the mindset and build the capacity, bringing the financial benefits and non-financial benefits and the relation with the client together. It is a win-win because we want to make sure that our portfolio is safe and is growing.
Kader: Personally, I’m very much against incentives because you kill the business case. We can give technical assistance or advisory work; show them that changing their business model will make them become globally competitive, that energy saving and better waste management that lower expenses are a profitable investment. What we are actually doing is showing them how to change their business model.
Hamdy: But it’s a matter of time. I can see where [Kader] is coming from. However, if you want to accelerate, you have to give them incentives because they will not buy in from the first time and it will take you much more time to convince them to get on board.
Hamdalla: One option is to give cashback grants. The project has to be proven to be profitable and valuable on a standalone basis. The purpose of the incentive is to remove temporary hindrances, such as the high initial cost, or bridge the gap during the installation and completion phase.
What products are you developing to meet sustainable financing needs in the Egyptian market?
Hamdalla: Under our green programme, we have several products and sub-products, like energy efficiency loans, water efficiency loans, [and loans linked to] waste management, recycling and irrigation systems. We are even digging into the individual segments, such as green housing and solar TVs, and even energy-efficient household equipment, consumer durables, cars and motorcycles.
Hasebou: We need to understand the scope and scalability of green finance to decide which products are the best fit for [our market], especially as we realise it’s not only about green – it’s sustainability linked, it’s ESG linked, it could be socially linked.
We joined the United Nations Environment Programme Finance Initiative earlier this year. This helps gain exposure to other banks globally, and gain ideas we can then tailor to the Egyptian market.
Kader: We have seven sustainable finance products, including for clean energy and solar, and are targeting 14 other programmes, including [ones] for the blue economy and green transportation.
Note: CIB is considering sustainability-linked loans with preferential rates and risk adjusted returns but Kader says the bank is focused on demonstrating to clients that environmental loans bring material savings and improve client’s bottom lines.
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