HSBC is seeing growth in the demand for sustainable finance in the Middle East North Africa and Turkey (Menat) markets with the British banking giant executing about $1 billion (Dh3.67bn) in green financing deals since 2017, a senior HSBC executive said.
HSBC, which two years ago committed to provide and facilitate $100bn of sustainable financing and investments by 2025, has so far achieved a total of $28.5bn in green funding. The lender reached $11bn in transactions in 2017 and added another $17.5bn last year, a 159 per cent year-on-year growth, said Zoë Knight, managing director and group head of the HSBC’s Centre of Sustainable Finance.
The deals in MENAT accounted for about 3 per cent of the bank’s total global sustainable finance transactions by the end of 2018.
“This shows us that there is significant untapped potential to work with our clients in the region as they begin to transition to a low-carbon economy,” said Ms Knight. “We have a growing number of sustainable finance deals in the Menat region, including both executed deals and in our pipeline … we are seeing the opportunities grow as the issue of sustainability rises in importance across the region.
HSBC defines sustainable finance as any form of financial service which integrates environmental, social and governance criteria into a business or investment decision. It covers both the financing and the investment activities needed to support the UN Sustainable Development Goals, with particular focus on combating climate change.
Sustainable finance, which includes instruments such as green bonds, SDG bonds and social bonds accounted for about 1 per cent of the total global bond market last year, according to data provided by HSBC. Overall bond issuance in 2018, including sovereigns and sub-sovereign issuances in all currencies, reached about $19.4 trillion. Green bonds reached a total of $167bn during the period, a 3 per cent year-on-year growth, while social bonds came in at $35bn at the end of last year, data showed.
Sustainability is very high on the agenda of the oil-fuelled economies of Middle East, especially, the six-member economic bloc of GCC which accounts for about a third of the world’s proven oil reserves.
There are opportunities for local and international lenders in the green finance space with the rise in renewables energy capacity deployment, especially in the region’s two biggest economies - Saudi Arabia and the UAE. The kingdom, the world’s largest oil exporter, has in particular tapped its sovereign investment fund, the Public Investment Fund (PIF), to develop around 70 per cent of all renewable projects in the country. Around 9.5 Gigawatts of solar and wind capacities have been earmarked for development by 2023 alone, as Saudi Arabia looks to move away from fossil fuel based-sources of power generation.
The UAE is leading the charge in Menat to enforce the low-carbon economic agenda. At emirate level, Dubai’s Clean Energy Strategy 2050 calls for lowest carbon footprint in the world with clean energy accounting for 75 per cent of its total needs by 2050. Dubai Electricity and Water Authority also launched in 2016 a Dh100bn Green Fund, with capital contributions from founding investors from Dubai, and investment from the private sector, international banks and large investment companies. First Abu Dhabi Bank, the biggest lender in the UAE by assets, was the first among the regional lenders to launch a $587 million green bond in 2017.
“Given the ambitions and policy developments on renewable energy and sustainability by the UAE government at both federal and emirate-levels, it makes sense that sustainable bonds [FAB green bond] and funds [Dubai Green Fund] were first developed in the UAE,” Ms Knight said. “As other countries in the region advance on their own green agendas, we expect to see an uptick in demand for similar financing instruments.”
Central banks are now worried about capital adequacy in the face of extreme climate-related risks, physical risks and transition risks and are asking more questions about how risk teams at the banks are approaching the subject, she noted.
“There’s an initiative of network for Greening Financial System which is central banks led. It started out with European players, some 7 central banks, and now has 34. Asia is quite actively engaged in these discussions,” she said.
Investments in green assets by the region’s sovereign wealth funds such as Saudi Arabia’s PIF, Kuwait Investment Authority and Abu Dhabi Investment Authority, which hold assets worth hundreds of billions in dollars, will also prove to be a big boost for green investments and financing in the region.
Green investments of about 5 per cent of the "total assets held by the sovereign wealth funds would be a big driver in the region for development of green finance," she said.
“We are already seeing some signs of this. I think the sovereign wealth funds are already looking at how they should be doing it.”
