From building prototype green cities1 to investing in clean energy2, the United Arab Emirates has made a clear commitment to sustainability for its future. In 2015, the government implemented the UAE Green Agenda 2015-2030, an ambitious strategy to transition to a low-carbon green economy in 15 years. This was swiftly followed by the National Climate Change Plan 2050, adopted in 2017 as a framework for climate change mitigation and adaptation and a roadmap for its Paris Agreement commitments.
The UAE Energy Plan 2050, announced earlier the same year, aims to increase the share of clean energy in the country’s energy mix to 50 per cent by 2050, with 44 per cent generated from renewable sources. The strategy also hopes to cut the nation’s power generation carbon footprint by 70 per cent in the same timeframe and reduce residential energy consumption by 40 per cent.
This strong official leadership in sustainability is clearly felt across industries in the UAE, including finance. Our survey of 180 issuers and investors shows that commitment to sustainability is strongly felt and challenges in pursuing Environmental, Social and Governance (ESG) investment are beginning to fall away. There is no doubt that both issuers and investors are deeply concerned with the impacts of climate change and hope to change the economy’s reliance on fossil fuels. However, after a difficult 2020, investors are concerned about risk, despite the opportunities they also acknowledge.
Understanding risks and opportunities
The volatility across global markets in 2020 in the wake of the Covid-19 pandemic has affected investors everywhere, including the UAE. In such a climate, it is natural that many investors lose their appetite for risk, particularly new forms of financing.
In our survey, fewer than one in five investors believe that they understand the risks and opportunities of the transition to a low-carbon economy sufficiently to be able to act on it and almost half say these are unclear or unknown. As green finance grows and expands in complexity, risk-averse investors may be put off by these unknowns.
When asked what the major obstacle to investing in the UAE’s green and sustainable economy was, investors identified risk as the main challenge. However, there is also a sense that challenges as a whole are receding. In the 2019 Global Survey, 77 per cent of investors saw obstacles to ESG investing. This year, in our deep dive, that proportion has dropped to 58 per cent. Moreover, 66 per cent of investors state that sustainability issues are important to their organisation.
Even factoring in caution in the face of risk, it’s clear that the UAE is embracing green finance. At the end of 2019, Majid Al Futtaim issued the world’s first Islamic green corporate bond, with HSBC as the sole green structuring advisor. This year, HSBC played a key role in issuing the world’s first transition sukuk – an instrument aimed at supporting companies as they work to cut carbon emissions in line with goals set in the Paris Agreement on climate change. The USD600 million sukuk issued to Etihad Airways will be used for research and development into energy-efficient aircraft and sustainable aviation fuel – a first for global aviation3.
Our survey seems to further confirm that these are not unique occurrences, indicating instead that issuers are increasingly allocating capital towards positive environmental and social outcomes. In last year’s Global Survey, 80 per cent of UAE issuers expected to be reallocating capital towards these outcomes to a substantial or noticeable extent in the next five years. In 2020, that number has jumped to 91 per cent.
As the examples above also show, issuers are highly interested in the growing field of sustainability-linked loans, even more so than green bonds. In our survey, they said they want banks to develop the emerging sustainability-linked loans field further by linking the price of lending more directly to borrowers’ or projects’ sustainability credentials.
Even factoring in caution in the face of risk, it’s clear that the UAE is embracing green finance
Transparency in decision-making
In fact, banks have a key role to play in boosting the data and transparency around ESG investing in the UAE. Just over half of issuers (52 per cent) said that they want advice on what ESG factors investors are seeking exposure to and how to best tell their sustainability stories. And 61 per cent want banks to take into account how sustainable companies are when making lending decisions — suggesting companies want their efforts to be rewarded.
Unlike investors, who may worry about risk and returns, issuers in the UAE are not put off by these factors. Only 7 per cent said that returns were inadequate and just 12 per cent said it was too risky. What worries issuers when considering green finance is a lack of in-house skills (50 per cent) and restrictive mandates or policies (43 per cent).
This concern about skills and understanding was echoed by investors, although their major concerns are around risks. Among investors, 57 per cent see obstacles to investing in the UAE’s sustainable economy. Their key challenges were risk, which was the main obstacle for 55 per cent, and the long-term commitment necessary, another risk parameter chosen by 49 per cent. But 51 per cent said their organisations lack the skills and understanding required for effective sustainable investing.
Here again, advice from banks and official guidance can help bolster the growing green finance sector. When asked what services banks can offer in this field, 56 per cent of investors said they need advice or research on which companies are sustainable, while 48 per cent want help collecting and analysing ESG data on their portfolios, including climate data.
Clearly, challenges remain, but more encouragingly, 56 per cent of investors also said that a key service from banks would include bringing them new sustainable investment opportunities. Just under half of investors (47 per cent) were looking for attractive ESG investment approaches or funds and 27 per cent want banks to bring more green bonds to market.
As in many other parts of the world we surveyed, the priorities for both issuers and investors have changed as well, with more focus on social good. The Covid-19 pandemic has brought sharp focus onto economic inequality, education and health in countries across the world and made market participants keenly aware that the S in ESG has often been the lowest priority.
For both issuers and investors in the UAE, the new priority for greater attention is the nation’s health, picked by 46 per cent of all respondents. But interestingly, 39 per cent said that economic opportunity for the poorest in society should become more important and 37 per cent want to see more support for disadvantaged groups’ access to education.
Global events have reshaped investor attitude to risk and changed priorities for everyone. But the opportunities that respondents rank highly are more influenced at a national level. The modern UAE economy has been driven by fossil fuels, although the country has done much in the last 20 years to diversify. However, with an extensive motorway infrastructure, the UAE also has a wide culture of car ownership.
These factors are in clear evidence in the opportunity UAE market participants see in clean technologies. Of 25 investment opportunities, they rated electric cars and charging infrastructure as the largest and most attractive, closely followed by carbon capture technology to make fossil fuels cleaner.
However, the nation goes somewhat against the trend of the region on water desalination and sustainable water management, which only drew lukewarm support. Across the Middle East, investors said that water and wastewater was their top infrastructure pick in our 2020 Global Survey.
These opportunities also reflect the concerns of UAE investors and issuers who are particularly worried about the country’s reliance on fossil fuels and the impact of climate change. Only 12 per cent of respondents believe enough investment is going into reducing the country’s fossil fuel exposure, while just 18 per cent say investment in mitigating climate change is adequate. A striking 42 per cent overall (and 44 per cent of investors) are ‘very worried’ about climate change and believe it will be difficult to avoid its impacts, even if the country now invests heavily in mitigation.
It is a combination of this growing awareness of environmental and social considerations, along with decisive leadership from government that is, in the end, outweighing challenges for the UAE’s green finance market. While 2020 may dent investor appetite for risk, it is clear that ESG investing will be a key part of future strategy, as fewer investors report obstacles and more than nine in ten UAE issuers reallocate capital towards activities that promote positive environmental and social outcomes.
2“UAE to double renewable energy portfolio in next ten years: ADNOC” Reuters, January 13, 2020 https://uk.reuters.com/article/us-emirates-energy/uae-to-double-renewable-energy-portfolio-in-next-ten-years-adnoc-idUKKBN1ZC0IB
3“Transition finance takes off in the UAE”, HSBC, October 30, 2020, https://www.hsbc.com/who-we-are/hsbc-news/transition-finance-takes-off-in-the-uae