Insights: How regional banks can help build a greener economy

As the UAE gears up for COP28 in November, the world’s attention will focus on the MENA region and its contribution to global climate change objectives.

Back in February, The London Institute of Banking & Finance MENA published a white paper on why banks in the region need to move beyond reporting on ESG to getting comprehensive data on climate risk.

The paper highlighted the Task Force on Climate-related Financial Disclosures (TCFD) status report of October 2022, which found that just 25 per cent of all firms in the Middle East report on their exposure to climate change – the lowest score globally.

That said, the region’s banks are busy with ESG investments and building green portfolios. The Commercial Bank of Dubai, for example, recently announced its inaugural $500m green bond.

First Abu Dhabi Bank (FAB) issued a five-year $600m bond earlier this year, priced at 95 basis points over US Treasuries and oversubscribed by 2.8x.

The use of proceeds for FAB’s green bonds include investment in renewable energy, terrestrial and aquatic biodiversity and climate change adaptation.

The bottom line is that the MENA region, as a major oil economy, faces both some of the biggest challenges and opportunities on the global path to net zero and its banks are starting to embrace them.

What are the opportunities for banks?

A Gartner survey of CEOs and other senior business executives, conducted in late 2021, put environmental sustainability eighth on the list of global business priorities – the first time it entered the top ten.

The shift in priorities means there are massive opportunities for banks in MENA that are willing to finance sustainable business objectives and help the drive towards net zero and a greener economy. In particular, they have deep expertise in fossil-fuel industries, which should serve them well as they advise on the transition.

How can banks in MENA support the transition to net zero?

The most transformative way that banks can help support climate goals is with ESG-focused financing in the retail and commercial markets. This might involve offering preferential terms for the financing of environmentally conscious purchases, projects or business developments.

Commercial lending promises to make the biggest impact. For example, there is a focus on smart cities and buildings in the MENA region – which means there’s no shortage of opportunities for ESG investing in infrastructure and real estate. Project financing of even larger-scale infrastructure developments is an area in which many banks in the region have particular expertise.

There are also opportunities when it comes to electric vehicles. Banks can work with corporate clients to support the transition of their vehicle fleets to EVs.

This can involve providing financing solutions tailored to fleet requirements, offering fleet management services, and advising on the integration of EVs into existing operations.

In addition, there’s also scope for banks to work with EV manufacturers, dealerships, and relevant stakeholders to promote the adoption of EVs.

Moving away from oil and gasBanks in the MENA region have specific expertise in oil and gas and can leverage this in several ways.

Most significantly, they can provide specialised advisory services to oil and gas companies and clients in related sectors, helping them transition to low-carbon alternatives.

These services might include helping to assess the financial risks and opportunities associated with the energy transition or providing guidance on sustainable business models.

Banks, we shouldn’t forget, are the fundamental conduit for channelling short-term deposits into long-term investments. The decisions they make on ESG will shape the future of the region’s economy.

The role of the regulators

The central role that banks play in capital allocation is why regulators want them to help usher in a new era of green finance.

Several regulators from the MENA region have signed up for the Central Banks and Supervisors Network for Greening the Financial System (NGFS).

The network looks to establish effective approaches to climate-related risk management in the financial sector and explore ways in which mainstream finance can support the transition towards a greener economy.

These include the Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM), the Dubai Financial Services Authority (DFSA) at Dubai International Financial Centre (DIFC), the Financial Regulatory Authority (FRA) Egypt, and the central banks of Egypt, Jordan, and Lebanon.

Membership of NGFS means that regulators in MENA can share ‘best practices’ and help shape the global debate.

Banks, too, will be part of that debate on innovative financial solutions for a sustainable future. And those who act now to adopt greener business models and implement processes to identify, manage and mitigate climate risk, including by transitioning to net zero, will find themselves ahead of the game.

The importance of the ‘G’ in ESG

What makes headlines in ‘ESG’ is the ‘E’ – environmental. People – as they should be – are touched by pictures of snow leopards and endangered wild ostriches. The ‘G’ which stands for governance is less photogenic.

However, I would argue that it is only with adequate governance that banks and financial institutions can be steered towards net zero and other climate change goals.

But the problem is not just that governance is ignored, it’s also that it’s not easy to do well. For example, staff need to be engaged with an organisation’s climate goals and given the necessary skills to play their role – whether that’s through ongoing training and capacity building, or simply by making ESG issues part of their day-to-day working lives.

And ESG cuts right across a bank’s business, both externally and internally. That means that moving forward, banks will need a holistic approach that recognises the synergistic nature of ESG.

Business transformation is challenging, there’s no doubt about it, but, ultimately, the push to net-zero will require just that: a new way of doing business. Climate change is a global crisis that affects us all – and banks in MENA have a key role to play in tackling it.

Read: UAE Carbon Alliance launches; founding members include FAB, TAQA, ACX, Masdar

The writer is managing director, The London Institute of Banking & Finance MENA

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