Middle East governments must innovate to unlock green investment in region, study advises

Governments in the Middle East and North Africa need to adopt new tools and policies and collaborate to accelerate the shift to a low-carbon economy, according to a new report.

It was was published by the Mohammed bin Rashid School of Government in Dubai and co-authored by Jeffrey Beyer, managing director of Zest Associates, a UAE-based sustainability consultancy.

“The MENA (Middle East and North Africa) region has an opportunity to capitalize on its resources, create jobs and tackle climate change, but this will require much greater investment from the private sector,” said Beyer.

“There are actions governments can take now that are low-cost, relatively easy to implement and would have a big impact in making the Middle East a more attractive environment for green investment.”

The report, titled “Financing a Green Transition in MENA,” was funded by HSBC, the largest and most widely represented international banking organization in the region. It focuses on how the region might finance a post-COVID green recovery, and examines green finance activities in Saudi Arabia, the UAE, Bahrain, Egypt, Kuwait, Iraq, Oman and Qatar.

It offers a series of regional and country-level recommendations for ways in which governments can mobilize the $230 billion annual funding needed for the Arab world to achieve the UN Sustainable Development Goals, a key measure of the transition to net-zero emissions.

“HSBC is playing a leading role in mobilizing the transition to a global net-zero economy, not just by financing it but by helping to shape and influence the global policy agenda,” said Sabrin Rahman, HSBC’s managing director, head of sustainability for Europe, the Middle East, North Africa and Turkey.

“This report sets out measures the Middle East region can implement to ensure competitiveness and connectivity but also to stimulate new sectors, employment and business models to attract international investment flows.”

Governments in the MENA region are well-positioned to shape the ways in which green finance can be raised and channeled, according to the report. Government expenditure as a percentage of gross domestic product is high in many of the countries examined, averaging 20 percent of GDP and reaching 28 percent in Saudi Arabia, compared with a global average of 17 percent.

The MENA region is also home to some of the world’s largest sovereign wealth funds, alongside many powerful state-owned enterprises.

“There are many success stories from across the Middle East that show how government action can create the conditions for green investment to flow. For example, the UAE Sustainable Finance Working Group is establishing common standards that will channel finance toward the UAE’s sustainability goals,” said Beyer.

“In Saudi Arabia, the Saudi Electric Company has developed a green sukuk framework that has allowed it to tap into capital markets using a traditional Islamic finance instrument. Initiatives like these can be adapted to mobilize green finance in other countries in the region.”

According to the report, there are two main ways countries in MENA can increase green investments from the private sector. One is taking steps to improve the “enabling environment,” conditions that affect the viability of sustainable investments, including policy and governance frameworks, as well as programs or initiatives that help finance flow. For example, countries could launch Green Investment Banks, establish entities to facilitate energy-efficiency markets, and develop a common green taxonomy.

The other is by adopting specific financial and economic tools to raise and deploy capital, manage risks, and mobilize private-sector investment. For example, countries could issue green bonds or green sukuk, tap into international climate finance, and use sovereign wealth funds and state-owned enterprises to finance and operate new, low-carbon industries.

The national recommendations reflect unique domestic circumstances and focus on areas in which action is currently limited or completely absent, rather than suggesting that existing initiatives be enhanced or scaled up.

The regional recommendations target areas in which collaboration would deliver stronger returns than if the measures were implemented by each country individually.

“There are areas where collaboration among countries in MENA has the potential to be a game changer in the transition to net zero,” said Beyer.

“For example, establishing a MENA carbon market would be a cost-effective way of lowering carbon emissions whilst remaining regionally competitive, and creating a standard definition or ‘taxonomy’ for what counts as ‘green’ would bring clarity to investors, unlock sustainable finance and avoid greenwashing.”

The findings of the report were presented by Beyer during a panel on green finance at the Arab Green Summit in Dubai on June 21-22. Its authors hope it will be a resource for governments in the MENA region as they attempt to attract investment for renewable-energy projects, energy-efficiency improvements, low-carbon transport, and green buildings.