Green financing gathers pace

At the start of 2023, we identified green financing as one of the key economic themes to watch during the year. The sector did indeed build momentum, including a more than doubling in the issuance of green bonds and sukuk in the Middle East to $24bn, the majority coming from the UAE and Saudi Arabia (see graph).

The issuance spanned a wide range of entities including banks (Dubai Islamic Bank, Abu Dhabi Commercial Bank, Al Rajhi), corporates (Saudi Electricity Company, DP World, Masdar, RAQA, Aldar), sovereign wealth funds (Mubadala and PIF) and the GCC’s first sovereign sustainable bond from Sharjah. There was a broader range of issuers in the UAE, but Saudi Arabia is catching up.

Green bonds and sukuk in GCC in 2023 ($bn)

Source: market and media reports

The most notable regional issuance was Egypt’s Green Panda Bond, the first from the region issued in China, which raised RMB3.5bn (US$479m) to finance public transit projects. In another first, this bond received a partial guarantee from the Asian Infrastructure Investment Bank, helping to reduce the cost of borrowing after Egypt complained that its debut green bond in 2020 was more expensive than a conventional one. This raises questions about whether green debt offers a cheaper financing option. Masdar’s CEO stated in September that he is “not convinced that people are paying that greenium right now”. Despite this, the UAE renewables firm still plans to issue a second green bond next year. Elsewhere, Jordan Kuwait Bank issued Jordan’s first green bond, which included blended financing through the IFC.

Milestones

A significant development was NEOM’s green hydrogen plant achieving its US$8bn financial close, making it the largest-ever green project funded in the region and the first of this type. During the year, significant progress was also made towards other green hydrogen projects in the region, particularly in Oman, and some of them may move into the financing phase during 2024.

There were also important regulatory developments, including Abu Dhabi Global Market issuing its sustainable finance regulatory framework, similar to those released by others such as Qatar Financial Centre. The importance of green financing was highlighted by multilaterals. The IMF published a paper on the topic as part of its UAE Article IV mission, in which it praised the UAE’s framework as the most advanced in the region but also noted that there was much to be done including improving disclosure, corporate governance and the taxonomy of eligible green projects to help unlock the estimated $163bn in financing it estimates that the UAE requires. The Arab Monetary Fund and its partners also published a guidance note on sovereign green issuance.

COP28 and beyond

There were some notable outcomes for green financing at COP28. The most substantial one was the announcement of ALTÉRRA, a new climate investment fund to which the UAE has committed $30bn. The fund is located in Abu Dhabi Global Market and aims to mobilise $250bn in private financing by 2030, particularly into emerging markets, including in the Middle East. The fund made substantial initial commitments in partnership with BlackRock, RPG and Brookfield, with plans to roll out more financing during 2024.

The green financing trend in the Middle East is continuing in 2024, with Sharjah issuing its second sustainable bond in February. In addition, Oman published a Sustainable Finance Framework, and Qatar’s finance minister said at Davos that its debut green bond would be coming soon. Saudi Arabia is also thought to be contemplating a sovereign green issuance, on top of the large sums raised by PIF , and it has just launched its Green Financing Framework, which sets out its approach to financing climate commitments. The massive investment underway across the GCC in renewable energy, green hydrogen and other sustainable projects requires substantial amounts of financing, both debt and equity, which suggests that the sector will continue to grow in the coming years.