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Explainer: How is the UAE developing a green finance hub?

With the UAE hosting COP28 in 2023, all eyes are on the Middle East and its place in securing a net zero future

By Silvia Pellegrino

Middle East, UAE, green finance
We’re next! Mohammed bin Zayed Al Nahyan, President of the United Arab Emirates, speaks at Cop27. (Photo by Sean Gallup/Getty Images)
  • The UAE’s Abu Dhabi Global Market has opened up for consultation on its regulatory framework for sustainable funding in the region.
  • It is hoped green finance may speed up the region’s plans for economic diversification and employment creation.
  • There are prospects in other industries. Sustainable tourism, including eco-friendly lodging and environmentally friendly transportation.

With the UAE hosting Cop28 in 2023, all eyes are on the Middle East and its place in securing a net zero future. As a result, it is critical that the UAE is serious about reducing its reliance on oil as an economic crutch. Easier said than done; oil and gas production represent over 40% of GDP in Gulf Cooperation Council (GCC) countries, with the exception of the UAE and Bahrain.

Through various consultation papers, and since the 2016 Paris Agreement, the Middle East regions seem determined to put a plan in place in order to reduce their impact on the climate. A crucial element to that is finance.

With a sustainable funding regulatory framework very much in its infancy that facilitates green bond investments and reaching net zero by 2050, the UAE hopes to get on track in the next few years.

What does the sustainable funding regulatory framework propose?

In Consultation Paper No. 6 of 2022, which was created in advance of Cop28, the Financial Services Regulatory Authority (FSRA) and the Registration Authority (RA) of Abu Dhabi Global Market (ADGM) developed a regulatory framework for sustainable funding. The paper is open for public consultation until 23 January 2023.

The numerous alternatives for attaining more sustainable financing have been discussed ever since the UAE published its Net Zero by 2050 Strategic Initiative in October 2021. The ADGM is important in this context.

But doing so requires a sturdy regulatory framework, which must be in place.

One of the subjects of this framework is investment funds, particularly green funds. These funds, which were established under ADGM, are intended to have positive environmental benefits. Additionally, the latter promoted the creation of an ADGM Green Fund Designation for funds that voluntarily choose to meet the basic standards necessary to win over investors’ confidence about their environmental credentials and, as a consequence, draw in investments:

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  • They have to be resources that follow a green taxonomy.
  • Assets that are a part of or follow a Paris-aligned Benchmark are required (PAB).

The investments do not need to be verified by a third party if they fit these two requirements, but they must be if they fall within the category of public money.

Another goal of the framework is to facilitate early-stage financing of non-green investments while protecting investors from greenwashing. A second fund, the CTF, will be created by ADGM specifically for funds that invest in assets that are currently not green, but have the promise to be.

Assets in a CTF can track an EU Climate Transition Benchmark, be green bonds or sustainability-linked bonds, greening real estate and infrastructure assets, or they can be assets aligned with a Climate Transition Taxonomy.

In conclusion, the framework comprises two different designations: an ADGM Green Bond Designation and an ADGM Sustainability-Linked Bond Designation, in addition to alternatives for green debenture and sustainability-linked debenture issuers. These designations are designed to attract UAE issuers’ attention in particular by enticing investors to meet certain qualification standards.

The ultimate goal would be to use criteria similar to the ICMA Green Bond principles and broaden it to cover transition bonds.

How big is the opportunity for green finance?

For GCC nations (UAE, Bahrain, Saudi Arabia, Oman, Qatar, and Kuwait), where the financial markets are relatively well-developed, there is an influx of significant investments in environmental sustainability.

These investments, made principally by governments and businesses, are a step forward. However, on the other hand, the financial sector has fallen behind. This is why green finance in the GCC is still in its infancy, as it comprises both the financial returns of the various investments and their effects on the environment. 

The GCC region might gain a lot if green financing systems develop correctly going forward. By 2030, there will be $2trn in economic growth and more than a million new jobs, predicts Strategy&, an affiliate of PwC. Additionally, green funding may speed up the region’s plans for economic diversification and employment creation.

There are four priorities in order to reach this goal:

  • Promoting environmental sustainability and strengthening capital markets.
  • Developing standards and transparent reporting mechanisms for environmental performance.
  • Creating a green investment body.

Additionally, there are prospects in other industries. Sustainable tourism includes things like eco-friendly lodging and environmentally friendly transportation. For instance, in Saudi Arabia, the government has been collaborating with the agricultural sector to offer family getaways. 

Therefore, the opportunity for green financing in the GCC, even if promising, is still not completely developed.

What do MENA countries need to do to achieve net zero?

There are three important things to keep in mind in order to accomplish these goals since Cop26, when the UAE, Oman, and Israel pledged to achieve net zero emissions by 2050, Saudi Arabia and Bahrain by 2060, and Egypt and Qatar, among others, amended their Nationally Determined Contributions (NDCs).

The nations must first work together to ensure a fair transition. If they are not effectively communicated, the societal effects of this sustainable transition will be extensive. Particularly in the Middle East, transparency and inclusive social participatory processes are highly desired.

A suitable price must be set for the generation of power. For instance, the government of Egypt has set a goal for the share of renewable energy in the country’s energy mix to be 20% by 2022 and 42% by 2035. By 2021, renewable energy accounted for just 6% of the total.

Jordan and Morocco, by contrast, are embracing a more inclusive transition. For instance, the former has created a new metering system that is supported by the Renewable Energy and Energy Efficiency Fund. This system lends money to small customers in rural areas so they may build a solar PV system, which lowers their energy costs.

Members of the GCC must succeed in achieving their objectives for economic diversification. In Saudi Arabia, there is ongoing controversy about the viability of increasing oil production for export while implementing emission-reducing technologies like carbon capture. To prevent the rest of the GCC countries from diversifying their economies, this simply ensures that oil prices will keep rising.

According to the Grantham Institute (part of the London School of Economics), the GCC should, for this reason, shift to renewables, and this is for three main reasons:

  • The window of opportunity for GCC countries to transition to renewable energy is rapidly closing.
  • GCC countries stand to receive $1.3trn at the current oil price, which will bolster the authority of their sovereign wealth funds to make suitable investments.
  • The UAE has been chosen as a fundraising launchpad due to its uniqueness as a source of extra revenue and the considerable job-creating benefits of investing in renewable energy. 

Because this transition to net zero must benefit both people and the environment, the potential obstacles simply depend on whether or not these governments act on the information at hand.

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