Financial institutions hold key to helping Mideast reach net-zero, says report
As Middle Eastern countries are set to face funding gaps in achieving their energy transition goals, regional regulators, development banks, and financial institutions hold the key to reaching net zero in the region, noted Boston Consulting Group in its latest sustainability report.
The group said out of the six Gulf Cooperation Council countries only Saudi Arabia, the UAE and Bahrain have made clear decarbonization commitments, but even they face funding gaps as the amount needed to achieve national net-zero goals is “enormous.”
Giving an example of the UAE, Boston Consulting said the emirate has already committed $163 billion to its net-zero pledges, but independent analysis suggests that the total investment needed is $680 billion, leaving a gap of more than $500 billion.
Shelly Trench, managing director and partner at BCG and co-author of the report, said: “The Middle East banking sector has an opportunity to benefit significantly from financing the transition of the oil and gas industry and other strategically important sectors to cleaner, more sustainable technologies.”
Even though the climate crisis poses a significant threat to banks’ portfolios, Boston Consulting said the regulatory pressure in most of the region is not yet strong enough to push banks into taking immediate action. The comparative lack of regulation of green financial instruments in the Middle East poses a significant challenge in seizing its potential for growth.
Trench noted that regulators and policymakers could address this challenge by establishing carbon prices that adequately represent the cost of greenhouse gases and are aligned with international carbon price levels. “In addition, they could create financial and other incentives to support decarbonization and develop environmental and industrial policies that align with climate objectives,” she added.
The report noted that overall issuance of green and sustainability-linked debt in the region quadrupled in 2021 compared to the four years prior and continues to grow despite the lack of regulation of financing instruments in the region.
Governments in the region drove 97 percent of green bonds in 2020 compared to only 13 percent in 2016, showed the report.
“With time, as climate finance regulation is rolled out and green projects become more bankable, banks and financial institutions will become the key source of funding for the climate transition,” stated Aytech Pseunokov, project leader at BCG.
He explained that financial institutions must take the necessary steps toward becoming the key funding sources, or else put their portfolios at risk.
He added that until they are suited to be the main source of funding, “Middle Eastern banks would benefit from reviewing the impact of transition risk on their portfolios and preparing themselves for the future by declaring portfolio emissions reduction targets and joining global alliances to exchange best practices.”
Giving an example of the UAE, Boston Consulting said the emirate has already committed $163 billion to its net-zero pledges, but independent analysis suggests that the total investment needed is $680 billion, leaving a gap of more than $500 billion.
Shelly Trench, managing director and partner at BCG and co-author of the report, said: “The Middle East banking sector has an opportunity to benefit significantly from financing the transition of the oil and gas industry and other strategically important sectors to cleaner, more sustainable technologies.”
Even though the climate crisis poses a significant threat to banks’ portfolios, Boston Consulting said the regulatory pressure in most of the region is not yet strong enough to push banks into taking immediate action. The comparative lack of regulation of green financial instruments in the Middle East poses a significant challenge in seizing its potential for growth.
Trench noted that regulators and policymakers could address this challenge by establishing carbon prices that adequately represent the cost of greenhouse gases and are aligned with international carbon price levels. “In addition, they could create financial and other incentives to support decarbonization and develop environmental and industrial policies that align with climate objectives,” she added.
The report noted that overall issuance of green and sustainability-linked debt in the region quadrupled in 2021 compared to the four years prior and continues to grow despite the lack of regulation of financing instruments in the region.
Governments in the region drove 97 percent of green bonds in 2020 compared to only 13 percent in 2016, showed the report.
“With time, as climate finance regulation is rolled out and green projects become more bankable, banks and financial institutions will become the key source of funding for the climate transition,” stated Aytech Pseunokov, project leader at BCG.
He explained that financial institutions must take the necessary steps toward becoming the key funding sources, or else put their portfolios at risk.
He added that until they are suited to be the main source of funding, “Middle Eastern banks would benefit from reviewing the impact of transition risk on their portfolios and preparing themselves for the future by declaring portfolio emissions reduction targets and joining global alliances to exchange best practices.”
