INVESTMENTS

from #228 March 2020

CAPITAL MARKETS

42 The ROI in sustainability

Several countries in the region such as Egypt, Kuwait and the UAE, have SDGs embedded in policy planning within their institutional development frameworks and governance structures

Since the founding of the World Economic Forum (WEF) by Klaus Schwab in 1971, for the first time on record, environmental risks occupied the group’s top five long-term concerns, with corporate executives saying that they are increasingly concerned about environmental issues.

The appearance of Greta Thunberg, the 17-year old Swedish climate activist, and her message at Davos was a striking sign that the debate on how to stop global warming has become a legitimate concern in business circles. The debate on climate change is forcing decision makers from all kinds of sectors to respond to demands to stop carbon dioxide and other greenhouse gas emissions.

A report by Oliver Wyman, A Decade of Action: Delivering Sustainable Development Goals in the Gulf, pointed out that Gulf countries must accelerate their efforts if they were to meet the 2030 Agenda for Sustainable Development Goals (SDGs).

The SDGs provide governments with an organised and unified structure to address interconnected developmental issues such as poverty, economic inequality, education, the climate crisis, peace, justice, and responsible consumption and production.

For over 20 years since the adoption of 17 United Nations SDGs globally, governments are coming together to discuss issues like climate change, their impact on the planet and how to address it.

“GREEN SUKUK ISSUANCE TO INCREASE IN 2020 AS MORE INVESTORS COMMIT TO RESPONSIBLE INVESTMENT AND THE STRUCTURES AND BENEFITS BECOME MORE APPARENT.”

— S&P Global

FIVE BUILDING BLOCKS OF THE SDGs IMPLEMENTATION FRAMEWORK

Small and Medium Enterprise

Data Policy Financing Private Sector SMEs

Data

Private Sector

Policy

Exhibit 5: DFA analytical framework DFA ANALYTICAL FRAMEWORK

PUBLIC

Domestic International PRIVATE

Domestic International

Integrated planning and financing

Public-private collaboration

Transparency & accountability

Source: Oliver Wyman

The signing of the Paris Accord in 2016—which is rooted in SDG 13 (climate action)—marked a watershed moment on governments’ approach and ambition, demonstrating their ability andto convene and commit to driving real change.

PwC has pointed out that the primary responsibility for achieving the SDGs lies with governments, but it is also now widely recognised that they will not be able to make the dramatic level of change without the help of businesses.

SUSTAINABLE FINANCING The Oliver Wyman report found that the use of Islamic finance has become an increasingly important source of development funding globally. Islamic finance is rapidly becoming a part of the mainstream financial market on the back of healthy growth in the market.

S&P Global expects green Sukuk issuance to increase in 2020 as more investors commit to responsible investment and the structures and benefits become more apparent. Several core Islamic finance countries like Malaysia and the GCC have committed to diversifying their energy mix with a significant contribution from green energy generation.

As GCC countries begin their transition towards less carbon-intensive economies, green projects are set to flourish and some of these projects will likely be funded via the Sukuk market, said PwC.

Last year, the Dubai Financial Market (DFM) and the Dubai International Finance Centre (DIFC) launched the Dubai Sustainable Finance Working Group, which is mandated to work towards achieving the UAE’s nationally determined contributions to the UN’s Sustainable Development Goals and the strategic objectives of Dubai Plan 2021.

Similarlythe Dubai Islamic Economy Development Centre also partnered with the DIFC to promote green Sukuk issuance in the UAE, in addition to developing the standards of certification for green Sukuk in line with the Climate Bonds Standard and Certification Scheme.

“AS GCC COUNTRIES BEGIN THEIR TRANSITION TOWARDS LESS CARBON-INTENSIVE ECONOMIES, GREEN PROJECTS ARE SET TO FLOURISH AND SOME OF THESE PROJECTS WILL LIKELY BE FUNDED VIA THE SUKUK MARKET.”

Monitoring review

Sustainable debt tools, both conventional and Islamic, are a potential way for companies to fund transition activities towards a more environmentally and socially sustainable future.

UAE-based developer and shopping mall operator, Majid Al Futtaim, issued Middle East’s first corporate green Sukuk valued at $600 million in May 2019 to finance and refinance the company’s existing, and future green projects such as green buildings, renewable energy, sustainable water management, and energy efficiency. Green bonds are a growing category of fixed-income securities and green Sukuk could further widen the appeal of Islamic bonds beyond traditional markets in South Asia and the Middle East to include ethical investors in Western countries.

Saudi-based Islamic Development Bank is also considering issuing its debut green Sukuk, having finalised a Sustainable Finance Framework to help issue such bonds that will be used for green projects in the lender’s member countries.

In keeping with the global trend, Islamic finance has emerged as a critical component of the financial markets in the Gulf, where the market share of Islamic banking assets, for example, has almost reached 35 per cent of all banking assets, said Oliver Wyman.

This underscores the importance of Islamic financing in the context of policymaking and implementation as GCC economies move to accomplish their SDGs objectives in time. Islamic sustainable finance offers significant potential as it meets Shari’ah objectives (and as a result the requirements of a wide variety of investors).

COLLECTIVE GOODWILL Several countries in the region such as Egypt, Kuwait and the UAE, have SDGs embedded in policy planning within their institutional development frameworks and governance structures.

There are new models of collaborative and multi-stakeholder partnerships emerging, across agents from both public and private sectors. Oliver Wyman said that a similar public-private alliance model could be emulated in the Arabian Gulf states.

Both the private sector and stateowned entities across the Middle East are increasingly getting involved in conversations around sustainable development, putting environmental, social and governance matters (ESG) in their investment charters.

The UAE and the Netherlands are examples of countries incorporated the SDGs into their foreign humanitarian aid strategy, and this is a model that the other Gulf countries can replicate, said Oliver Wyman.

The UAE recently allocated $2 billion in investment, development projects and soft loans for Mauritania—a sum that equals roughly a third of the West African country’s GDP.

Given the scrutiny that is on corporates globally and the pressure they are facing to take more responsibility for socioeconomic problems, this is a good time for governments to engage them more coherently and actively to foster greater participation.

Last month, Abu Dhabi National Oil Company (ADNOC) signed an agreement with Italy’s Eni to explore new opportunities for collaboration in carbon capture utilisation and storage (CCUS) and additional opportunities in research and development (R&D) across the oil and gas value chain.

ADNOC plans to decrease its greenhouse gas emissions intensity by 25 per cent by 2030. According to the International Association of Oil & Gas Producers (IOGP), the company currently ranks top five for the lowest GHG emitters in the oil and gas industry and has one of the lowest methane intensities of 0.01 per cent.

Additionally, Abu Dhabi’s Masdar, the renewable energy and sustainable real estate company, also recently launched a sustainable real estate investment trust (REIT) with an initial valuation of between AED 950 million and AED 1 billion.

The REIT will initially include four commercial properties within Masdar City, Abu Dhabi’s sustainable urban community that is focused on low-carbon urban development and it will cover more than 57 thousand square metres of net leasable area. Exhibit 6: Key building blocks of INFF KEY BUILDING BLOCKS OF INFF

Governance and Coordination

Monitoring and review Financing needs

Financing landscape

Risk assessment Coordination tools

Institutional mechanisms Policy and institutional binding constraints Assessment and diagnostics

Policies for public finance Policies for private finance Policies for non-financial MoI Monitoring for results Review and accountability

Financing strategy

Source: United Nations, Inter-agency Task Force on Financing for Development. 2019 Financing for Sustainable Development Report Source: United Nations, Inter-agency Task Force on Financing for Development. 2019 Financing for Sustainable Development Report

Exhibit 8: Stakeholders supporting SDGs in the UAE STAKEHOLDERS SUPPORTING SDGs IN THE UAE

Chairs the National Committee and oversees data collection on SDG indicators Federal Competitiveness and Statistics Authority Private Sector Advisory Council Launched in 2018, PSAC serves as a link between the private sector and the government to promote SDGs

Launched by the FCSA in 2018, its purpose is to provide a platform for youth to share their ideas on SDG-related topics Youth Advisory Council On SDGs National Committee On SDGs Formed in 2017, the Committee engages all government stakeholders on SDGS. In 2012, it conducted the thematic mapping of the National Priorities of Vision 2021 to the SDGs

Source: Oliver Wyman

Since 2006, Masdar Clean Energy has invested in renewable energy projects with a combined value of $8.5 billion. Masdar’s renewable energy projects currently span across the UAE, Jordan, Mauritania, Egypt, Morocco, UK, Serbia, and Spain. The electricity generating capacity of these projects, which are either fully developed or under development, is 2.7 gigawatts (GW) gross. Earlier in January, BlackRock joined Climate Action 100+, a group of more than 370 investment managers with a combined $41 trillion in assets. The investment giant announced plans to exit investments with high sustainabilityrelated risk as climate concerns drive a sweeping change in the way the world’s largest asset manager invests its $7 trillion in assets.

BlackRock is hardly alone when it comes to big financial institutions buying into sustainability in a serious way. Citigroup, Barclays as well as BNP Paribas, Crédit Agricole and Standard Chartered are also among big financial institutions going green.

Delivering the SDGs remains a formidable governance challenge for all countries globally, irrespective of their stage of development or income levels. Oil-rich GCC economies have had a head-start over many of their peers in emerging markets as they have not been severely financially constrained. However, that has not been enough when it comes to addressing the most pressing sustainable development challenges.

SUBSCRIBE NOW!

WEALTH Arabia is a controlled circulation magazine delivered directly to specific, named HNWI individuals across the GCC.

Institutions may also arrange bulk purchase orders of the magazine and its supplements to circulate among internal and external stakeholders. If you wish to arrange regular bulk deliveries, please contact subscriptions@cpifinancial.net for terms.

Annual individual subscription (6 issues/year) US$60

CPI Financial, PO Box 502491, 1209 Shatha Tower, Dubai Media City, Dubai, UAE. To subscribe, simply fill in the order form and return it, with your cheque for US$60 to: