The case for a GCC Common Sustainable Finance Framework

A GCC CSSF must consider establishing a delicate equilibrium between financial instruments addressing social and economic risks, while also taking into account the impact on broader environmental challenges. There have been various financial instruments employed across the GCC region that take into consideration the balance of risks, such as blended finance, as demonstrated by the UAE’s public-private partnership of Mohammed bin Rashid Al Maktoum Solar Park. This is the largest single-site solar park in the world with a capacity of up to 5,000 megawatts (MW).⁴ Blended finance has also been leveraged in Saudi Arabia through public-private partnerships, such as the $500 million Dumat Al Jandal Wind Farm, which was developed by France-based EDF Renewables and Abu Dhabi’s renewable energy company Masdar which became operational in 2022.⁵

Additionally, another important consideration involves the promotion and establishment of specialised financial sector products that are solely dedicated to advancing sustainable finance practices. In recent years, the region has seen an increase in the adoption of green bonds and sukuk in Oman, the UAE and KSA. Moreover, the banking sector in the region is playing a growing role in contributing to promoting sustainable finance through green financing commitments.

In the UAE, six major banks - FAB, ADCB, ENBD, DIB, Mashreq and ADIB - have collectively dedicated over Dhs190 billion (US$51.8 billion) in green financing for various projects in renewable energy, waste-to-energy and green technology.⁶ In Qatar, the Clean Energy and Eco-Friendly Financing scheme provides finance for 85% of the cost for businesses adding technological solutions or environment-friendly operations and 80% of the cost for companies producing green products with a positive and sustainable environmental impact.⁷

As seen in part one of our sustainable finance series, opportunities for the GCC to strengthen the sustainable finance ecosystem, there has been a remarkable increase in the issuance of the total value of green and sustainable bonds and sukuk, which grew to more than US$8.5 billion in 2022 - a significant leap from a mere US$605 million in 2021.⁸

The Sultanate of Oman received huge demand for its issuing of US$1.75 billion of sukuk in June 2021,⁹ while the Saudi Public Investment Fund completed its second green bond issuance, which raised US$5.5 billion in 2023.¹⁰ Future opportunities for the region's sukuk can utilise the existing governance of monitoring and verification frameworks required to ensure sharia compliance of sukuk as these can be extended to include green criteria on a regional level. Financial instruments dedicated to promoting sustainable finance practices can serve as pivotal mechanisms for channelling investment and resources towards environmentally and socially responsible endeavours, reinforcing the framework’s effectiveness in driving sustainable outcomes.

To enable the effective deployment of sustainable finance instruments, a common framework can play a key role in guiding policymakers in the GCC on the available financial instruments and public incentives - such as de-risking mechanisms - which include blended finance, to meet the region’s investments needs. This framework can also enable stock exchanges to play a crucial role through providing added capabilities for market participants in existing green segments. It also facilitates robust guidelines for new and emerging financial products, such as carbon credits, to grow the green finance market in line with the framework. Standardising criteria, frameworks and reporting obligations within the framework can enable investors to distinguish their portfolios and demonstrate their commitment to sustainability.

To leverage finance for a sustainable future, the GCC CSFF must embrace innovative financial instruments – from green bonds to blended finance – to mobilise investments that balance economic risks.

Sustainability-related fintech solutions, such as green digital banking platforms, blockchain technology, AI and ‘big data’, play a critical role in enhancing transparency and efficiency within financial systems. By leveraging these technologies, investors and small and medium-sized enterprises (SMEs) can access digital sustainable finance tools, which facilitate investment and improve understanding of the impacts of sustainable finance products.

Innovative technologies have already begun taking off in the region, with the financial sector employing digital tools to advance sustainable finance. For example, Mashreq Bank, in partnership with Visa and Ecolytiq,¹¹ has launched a pioneering climate banking platform - the first of its kind in the UAE and the broader MENA region. It allows customers to track their carbon footprint and make more sustainable financial decisions.

Blockchain technology also plays a significant role - as demonstrated by the Dubai International Financial Centre's (DIFC) groundbreaking Digital Assets Law - which provides legal clarity for digital assets such as cryptocurrencies, NFTs and security tokens. This regulatory framework aims at enhancing investor confidence and fostering innovation. Additionally, the DIFC’s Law of Security regime complements this initiative by strengthening legal protections for secured transactions, ensuring transparency and accountability within the evolving landscape of financial markets.¹²

The adoption of, and investment in, low-carbon technologies such as solar and wind power, hydrogen production and smart grids will contribute to the achievement of global net zero ambitions, promote energy security and economic diversification in the GCC.

For example, the US$500 million Dumat Al Jandal Wind Farm, the first and largest of its kind in Saudi Arabia, became operational in 2022 with 99 turbines and a total capacity of 400 MW.¹³ Capable of supplying electricity to approximately 70,000 homes, it supports the Kingdom's efforts to reduce reliance on oil and carbon emissions, representing a significant step towards diversifying the energy mix and promoting sustainability. 

The outcomes of COP28 in the UAE have emphasised the urgent need for investment in low-carbon technologies to combat climate change. The UAE Consensus¹⁴ from COP28 called for tripling global renewable energy capacity and doubling the global average annual rate of energy efficiency improvements by 2030. Another key outcome was the emphasis on the need to accelerate the adoption of zero and low emissions technologies, including renewables, nuclear, carbon capture utilisation and storage (CCUS), and low-carbon hydrogen production.¹⁵

To accelerate technological innovation and promote sustainable growth in the region, the GCC CSFF should implement a multifaceted approach. This includes:

• Introducing financial incentives to reduce the initial cost barriers for adopting new technologies; 
  
• Developing regulatory sandboxes to provide a controlled environment for fintech companies to test innovative solutions and refine them before broader implementation; 
  
• Enhancing collaboration between financial institutions, technology firms and government bodies through public-private partnerships; and 
  
• Supporting research and development (R&D) initiatives focused on the development of new technologies that support sustainable finance which leads to the discovery of more efficient and impactful solutions. 
  

This strategy will promote the adoption of sustainable and low-carbon technologies, drive innovation, align financial practices with environmental goals, and ultimately contribute to a more resilient and sustainable financial system in the region. By creating a supportive environment for technological advancements, the GCC CSFF can play a crucial role in promoting sustainable finance and driving long-term growth.¹⁶

Embracing technological innovation across the GCC can propel the framework into the digital age, empowering investors, and stakeholders to leverage FinTech solutions and promote further investment in low-carbon technologies to advance sustainable finance.

The integration of sustainability practices into the GCC financial systems must consider international sustainability standards and examples of best practices, such as the EU green bond standard,¹⁷ to ensure that national policies are aligned with international standards. In this context, the GCC’s increased engagement with international policy forums on sustainable finance will allow the region to influence international policy.

These efforts are key to achieving global credibility, market integration and regulatory consistency, and, in turn, facilitate greater access to global capital. Additionally, these efforts will contribute to the GCC region's efforts towards the Paris Agreement and sustainable development goals (SDGs). Efforts to increase international collaboration can include alignment on key global priorities for sustainable finance, which include disclosure standards, environmental, social, and governance (ESG) data and ratings, taxonomies and net zero and transition plans.

In the GCC, there have been efforts to align with some international standards relating to sustainable finance, such as the UAE Sustainable Finance Framework 2021-2031, which recommends establishing guidance on ESG and climate-related reporting and disclosure, in alignment with global initiatives, such as the Task Force on Climate-related Financial Disclosures (TCFD).¹⁸ However, unlike other parts of the world, TCFD reporting is voluntary across the GCC and firms in the region publish climate-related disclosures as per the TCFD framework, on a voluntary basis.

Institutions in Qatar, such as the Qatar Investment Authority, have pledged their support for the recommendations of the TCFD.¹⁹ In Bahrain, the Bahrain Bourse has taken several steps to align with international policy, including taking up voluntary signatory to the United Nations Sustainable Stock Exchanges initiative and the UN Women Empowerment Principles, to demonstrate its voluntary commitment to promoting sustainable and transparent capital markets.²⁰

The international alignment pillar of the framework is essential to facilitate a clear understanding of global initiatives across markets, organisations and governments in order to foster an efficient model. The presence of GCC countries in the G20 and other forums, and the presence of the UAE (and potentially Saudi Arabia) in the BRICS will enable policymakers in the GCC to contribute to global policy dialogues on sustainable finance and take part in exchanging best practices and to draw on the expertise of the participating countries. This will be key in creating an enabling environment to foster the regional adoption of best practices in the global sustainable finance sphere. It will also ensure that the GCC region is in line with international policy standards when it comes to sustainable finance, while at the same time, impacting the formulation of international policy standards and strengthening its position as a key player in this space.

Aligning with international standards is the key to credibility, market access and progress toward global climate goals in the GCC.

Capacity building is crucial for the ecosystem of sustainable finance and is vital to ensure its ability to respond to the ever-evolving changes in sustainable finance frameworks, as well as and changes in policy and regulation. Accordingly, capacity building will also be an important aspect of this framework. In the UAE, there have been numerous initiatives to build capacity in sustainable finance. The HSBC Middle East ESG Academy offers seminars which cover a range of sustainability topics, initiatives and practices from economists, experts and industry leaders. In the Abu Dhabi Global Market (ADGM), the ADGM Academy delivers the Executive Programme in ESG,²¹ and the Dubai Financial Market released an ESG Reporting Guide.²² In Bahrain, the Bahrain Bourse has sought to build capacity by releasing an ESG Voluntary Reporting Guideline for listed companies, which was rolled out in 2020.²³

Similarly, in Oman, the Muscat Stock Exchange issued guidelines in September 2023 for listed companies to report their ESG performance on the electronic platform of the Omani bourse.²⁴

These efforts are instrumental in expanding opportunities for citizens, financial institutions, and corporations by equipping them with the necessary skills to actively shape and contribute to sustainable finance. Furthermore, it is vital to recognise the transformative potential of digital tools in this context, which can act as an enabler to improve statistical capabilities facilitating integrated reporting and the creation of a comprehensive ESG data space.

Additionally, the creation of a framework can further develop existing relationships with international organisations in the region to leverage capacity building efforts and technical assistance. For example, Saudi Arabia²⁵, Qatar²⁶ and Kuwait²⁷ have received technical assistance through the Global Environment Facility to support their ability to develop their national communications and biennial update reports to the United Nations Framework Convention on Climate Change (UNFCCC) to comply with reporting requirements, while responding to national development goals.

To effectively nurture an enabling environment for capacity building in the GCC region, the framework should prioritise two key areas of consideration.

• First, it should champion measures geared towards mobilising retail investors, such as providing extensive guidance to financial advisors and promoting financial literacy among citizens and professionals. 
  
• Second, the framework should promote knowledge sharing and facilitate best practice exchanges across countries in the GCC. This will require leveraging existing GCC coordination platforms and the alignment with a wider group of stakeholders locally in order to showcase the achievement and bring out actionable insights to promote the shared objectives of sustainable finance.
  

By adopting this approach, the framework can empower individuals and institutions alike to actively participate in and support sustainable finance initiatives, fostering a more inclusive and informed financial landscape in the region.

The GCC CSFF can catalyse the expansion of knowledge and digital innovation. By educating and empowering the region, the framework can foster inclusivity and innovation.