Deloitte & Touche: The Middle East’s Boost From Bank and Corporate Initiatives

The successful issuance of the Abu Dhabi Commercial Bank (ADCB) inaugural green bond in September 2022 is the latest in a series of green finance initiatives that have taken place in the Middle East.

ADCB raised US$500m to support the financing of low-carbon initiatives which assisted it to meet its strategy of supporting the UAE’s ambitions for an inclusive, net-zero economy.

The bond was issued in line with the bank’s ‘Green Bond Framework’, a statement of its intention to mobilise capital for green projects and the parameters for this funding. The bond’s proceeds will finance loans to support projects or companies associated with renewable energy, green buildings, sustainable water and wastewater treatment, clean transportation, energy efficiency, pollution prevention and control.

Globally, the first green bond was issued in 2007 by the European Investment Bank. Known as a Climate Awareness Bond, it was a structured bond with proceeds dedicated to renewable energy and energy efficiency projects. Since then, not only has the number of green bonds rapidly grown, but other green products have also emerged.

Along with Green bonds (bonds with a dedicated environmental benefit), there are also Social bonds (dedicated social benefits), Sustainability Linked Bonds (bonds with coupons linted to entity level sustainability performance targets) and Transition bonds (bonds supporting transition at an activity or entity level). Together with Green Loans, this collection of funding initiatives are examples of ‘Sustainable Finance’: investment decisions that take into account the environmental, social, and governance (ESG) factors of an economic activity or project

In the Middle East, the first green bond was issued by First Abu Dhabi Bank in 2017, with further issuances taking place by the bank a few years later. The Islamic Development Bank and Qatar National Bank have all followed suit.

It is not only banks who have raised green bonds to finance loans, but also corporates such as Majid Al Futtaim, Saudi Electricity Company and Etihad Airways; and as a country, Egypt stepped up with the region’s first sovereign green bond.

Some of these issuance have been in the form of an ESG sukuk bonds, where the issuance proceeds follow the same requirement to be used for environmental, social and/or governance purposes, but the issuance will assume a Shari’a-compliant structure rather than a conventional issuance structure. In line with other Muslim countries such as Malaysia and Indonesia, where such bonds are also emerging, these products demonstrate an interesting convergence of religion, environmentalism and financing.

As products develop, further innovations take place, such as DP World Limited’s execution of a green loan, where the loan pricing was linked to DP World’s carbon emission intensity, thereby creating an incentive for the company to reduce its greenhouse gas emissions.

Significant headlining projects can also attract sustainable finance. The Red Sea Development Co. in Saudi Arabia for example, obtained a green loan facility to develop 16 hotels and 3,000 rooms.

Alongside the variation in sustainable financing products, as well as a continuation of Environmental focused bonds, we may see moves towards Social bonds in the Middle East region, widening the beneficiaries of the bonds’ financed projects; and Transition bonds, assisting the transition of the Middle East economies to low carbon ones.

One area of global concern is that of ‘greenwashing’ or misrepresenting the environmental impacts of financial products. Attempts have been made to define and standardise green bonds and their projects in the form of the Green Bond Principles, the Climate Bond Initiative and the EU Taxonomy. These initiatives have been supported by the development of independent third-party assurance of bond proceeds, to demonstrate where those proceeds have been invested and whether they are aligned to the Green Frameworks presented by the issuers. These arrangements provide some comfort to investors that the proceeds, if not indeed the impact of the financing itself, is in line with the Green Frameworks.

Given the number of countries in the Middle East having made commitments to Net Zero, there are increased opportunities for Sustainable Finance. Having made a commitment to Net Zero by 2050, the UAE, for example, has an ambitious energy strategy of having 44% of the country’s energy mix met by clean energy by 2050. The UAE, and other regional countries in the Middle East, will require significant levels of capital to achieve these targets and Green Bonds and other green financing options provide a way for investors to invest in green assets and assist these countries to meet their goals.

With the increased global interest for investments with positive ESG outcomes, and the need for capital in the Middle East to fund such opportunities, Sustainable Finance products reflecting Middle Eastern characteristics and the ambitious projects in the region, is proving to be a rapidly developing, innovative and eagerly anticipated area of finance.

About the Author

Damian Regan is based in Dubai, UAE, having spent the last five years working across the Middle East and over 20 years in London, UK. He has worked within International Accountancy firms during his career and assists clients understand their contribution to society and the environment. In particular, he assists them in effectively communicating and reporting their sustainability goals, results and impacts. He also works with industry bodies and regulators to help develop standards of sustainable practices, reporting and assurance. He currently leads Deloitte Middle East’s Sustainability Reporting & Assurance practice.

About Deloitte & Touche

Deloitte & Touche (M.E.) LLP (“DME”) is the affiliate for the territories of the Middle East and Cyprus of Deloitte NSE LLP (“NSE”), a UK limited liability partnership and member firm of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”). DME’s presence in the Middle East region is established through its affiliated independent legal entities, which are licensed to operate and to provide services under the applicable laws and regulations of the relevant country. DME’s affiliates and related entities cannot oblige each other and/or DME, and when providing services, each affiliate and related entity engages directly and independently with its own clients and shall only be liable for its own acts or omissions and not those of any other affiliate. DME provides Audit and Assurance, Consulting, Financial Advisory, Risk Advisory and Tax services through 27 offices in 15 countries with more than 5,000 partners, directors and staff. It has also received numerous awards in the last few years which include, Middle East Best Continuity and Resilience provider (2016), World Tax Awards (2017), Best Advisory and Consultancy Firm (2016), the Middle East Training & Development Excellence Award by the Institute of Chartered Accountants in England and Wales (ICAEW), as well as the best CSR integrated organisation.