Shailesh Dash

Opportunities in Sustainable Finance and ESG Investments in MENA Region

Sunset in the mountains

Sustainable finance and ESG (Environmental, Social, and Governance) investments have gained significant traction in recent years due to increased awareness of environmental and social issues, corporate social responsibility, and the emergence of new investment products and strategies.

The global paradigm shift towards sustainability has led to new markets and industries focused on renewable energy, clean technology, and eco-friendly products and services. Investors can capitalize on the growth of these sectors by strategically allocating funds to companies that align with sustainable development goals.

According to Bloomberg, ESG assets are expected to reach $50 trillion by 2025, constituting over 35% of the anticipated $140.5 trillion total global assets under management.

Moreover, the global community has continued ramping up efforts to address climate change. The COP28 (Conference of Parties) in the UAE, convened under the United Nations Framework Convention on Climate Change (UNFCCC), offered the world governments and the public and private sectors an opportunity to collaborate and refine details on national and regional finance frameworks. This collaboration created clarity, which bolstered investors' confidence and interest.

Companies in the Middle East are increasingly demonstrating a heightened commitment to addressing evolving expectations related to climate concerns. There is a growing trend of enhanced openness regarding the environmental impact of their operations, marked by increased public disclosure. Additionally, organizations are restructuring to implement a more systematic approach to handling these initiatives. It includes the incorporation of senior executive positions dedicated to sustainability-focused responsibilities.

Investors increasingly seek opportunities to align their financial goals with values and contribute to a more sustainable world. In 2021, over $500 billion flowed into ESG-integrated funds, contributing to a 55% growth in assets under management in ESG-integrated products.

As per the PwC survey, the percentage of organizations without an ESG strategy has decreased over the past 12 months, with 64% of respondents having implemented a formal approach. 73% of poll participants said they had committed to being carbon neutral or were working toward it. The majority of respondents—two-thirds—want the CEO and board of their company to devote more time to ESG-related matters. Two out of every five respondents are hopeful that COP28 will result in governments enhancing ESG infrastructure and offering incentives to foster green growth.

The latest PwC ESG Middle East report evaluates the region's sustainability advancement this year. Leading up to COP28, businesses actively incorporate ESG initiatives while indicating a requirement for tangible assistance to expedite their progress.

Driving Innovation and Market Opportunities Through Sustainable Finance

Sustainable finance can spur innovation and open up fresh market possibilities for enterprises. Companies that pioneer and provide sustainable solutions, such as renewable energy technologies, sustainable agricultural methods, and circular economy models, stand to access expanding markets and secure a competitive edge. Technology enables innovation in sustainable finance, while government support and regulation create a conducive environment for sustainable investing.

One of the key aspects of sustainable finance and ESG investment growth is the demand from investors. This shift is driven by individual investors and large institutions directing a portion of their portfolios towards sustainable strategies.

1. Sustainable Investment Funds

During the initial six months of 2023, sustainable funds achieved a median return of 6.9%, surpassing the 3.8% return of traditional funds. This marks a reversal of their underperformance in 2022, as indicated by the "Sustainable Reality" report from the Morgan Stanley Institute for Sustainable Investing. Additionally, sustained robust investor demand led to record-high assets under management (AUM) for sustainable funds.

2. Green Bonds

In the initial half of 2023, the issuance of green bonds exceeded $500 billion, propelled by unprecedented levels of green bond issuance, as reported by data compiled by Bloomberg. Sustainable bond issuance from corporate entities and governments experienced an 18.6% increase compared to the corresponding period in 2022. This data suggests that investors actively participate in and support projects aligned with sustainability goals, contributing to green bonds' financial success and attractiveness as a profitable investment avenue.

3. Social Venture Capital

SVC has become an increasingly popular way to invest in social enterprises. In recent years, there have been a growing number of SVC firms and individual investors. This type of impact investing can transform how we address social and environmental problems. Social Venture Capital (SVC) appeals to investors because its investments typically have a distinct social or environmental purpose, providing a more motivating and rewarding aspect than purely financial investments. It offers the potential for above-average financial returns as businesses with a social or environmental mission often access new markets and customers and benefit from a passionate workforce.

Product Strategy

Active and passive managers are using different strategies to offer financial solutions that are environmentally friendly. This can involve anything from developing new ESG-themed investments to incorporating ESG-focused automobiles into an already-existing product framework through screening methods that choose appropriate ESG products.

Managers have a variety of specialized or hybrid methodologies at their disposal when creating an ESG product strategy.

The following are some crucial tactics being used to offer investing options with an ESG theme:

1. Examining assets for features unique to ESG

2. Including ESG investments in their current frameworks

3. Making investments according to specific environmental topics

4. Investing with Impact

5. Impacting corporate behaviour that is ESG-friendly

Potential Growth and Evolution of Sustainable Finance and ESG Investments

Investing in ESG-centered products has been a proven strategy for a while now. Institutional investors have historically shaped their investment strategies based on socially responsible themes like clean air and water, diversity, human rights, and equitable workplace practices. However, sustainable investing has recently gained substantial market traction in its current manifestation, attracting significant inflows into ESG-focused products.

Over the past six years, this has led to an average compound annual growth rate (CAGR) of 27 per cent in global assets under management (AUM).

Middle East and North Africa (MENA) Surges Ahead in Sustainable Finance Initiatives

The United Arab Emirates declared 2023 the "Year of Sustainability," emphasising developing environmental awareness. ADNOC, the TAQA Group, and Mubadala joined in 2022 to become shareholders in Masdar, a renewable energy firm, to establish a world-leading portfolio in sustainable energy. The UAE now possesses three of the world's most extensive solar facilities, including the Mohammed bin Rashid Al Maktoum Solar Park, the world's largest single-site solar park. The government intends to grow its renewable energy capacity to 19.8 GW by 2030. Despite the current global economic situation, MENA countries are making significant progress in sustainable financing.

Global and regional trends, especially in the vital field of sustainability, are the driving forces behind this change.

The collaborative project with the Abu Dhabi Securities Exchange (ADX) culminated in introducing the benchmark index for environmental, social, and governance (ESG) in November. The strategic alliance that this cooperation represents aims to transform the financial landscape. The process of creating a suite of indexes that not only meets but exceeds the changing needs of investors, both domestically and globally, started in 2021.

Middle East Pioneers ESG Commitment with Dubai's Groundbreaking Sustainable Finance Framework

As governments in the Middle East concentrate on net-zero targets, disclosure frameworks, and corporate governance laws, there has been a surge in interest in ESG.

The Dubai International Financial Centre (DIFC) unveiled the Sustainable Finance Framework. S&P Global Ratings has given this framework a favourable Second Party Opinion evaluation. Furthermore, it creates fundraising guidelines for investments in social and environmental projects, promoting sustainable business practices.

The 2030 Agenda for Sustainable Development will require an astounding $3.3–4.5 trillion annually globally. As a result, the market for sustainable debt has emerged and is expanding quickly. Strong investor demand and rising hopes that governments and organizations would live up to their sustainability pledges drive the market's growth.