9 minute read
Turning the tide
Conscious investing is attracting growing attention from investors and policymakers alike in the GCC due to the strategy’s promise of utilizing a range of non-financial information to better align finance with long-term value and societal values
The pandemic crisis did not only bring the greatest recession since World War II, but investors are calling it the 21st century’s first ‘sustainability’ crisis, one that is acting as a wake-up call for decisionmakers to prioritize a more sustainable investment approach, said J.P Morgan. Sustainability, which incorporates environmental, social and governance (ESG) concerns, is increasingly topping the agendas of most companies globally.
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While reacting to the Intergovernmental Panel on Climate Change (IPCC) report on climate change in August, the UN SecretaryGeneral António Guterres cautioned that global warming is dangerously close to spiraling out of control, saying it is “Code Red for Humanity”.
Deloitte said that although sustainability might not be the first boardroom topic one may think of, it is central to corporate competitiveness and is vital for a company’s continued ability to operate.
Though ESG practices appear to be in the initial stages of implementation across the GCC region, with teething troubles around consistency and financial materiality, the six-nation bloc of oil-rich Gulf countries is spearheading economic diversification away from heavy reliance on oil revenues to advance sustainable growth.
Meanwhile, conscious investing is attracting growing attention from investors and policymakers alike across the Gulf region owing to the strategy’s promise of utilizing a range of non-financial information to better align finance with long-term value and societal values.
The pandemic crisis is expected to put the Islamic finance industry back on ESG investors’ radar. In its report, Islamic Finance Outlook 2021 Edition, S&P Global said that the twin shocks of COVID-19 and low oil prices have created opportunities to accelerate and unlock the long-term potential of the Islamic finance sector.
“Investors representing more than $45 trillion in assets under management have already agreed to drive climate change action across their portfolios,” Karin Oertli, the COO, Personal and Corporate Banking and Switzerland, UBS said in a report published by the World Bank. Hence, ESGs are increasingly becoming an integral part of how the global financial services sector operates.
Analysts believe that sustainable financing together with technological innovation and digitalization in the financial services sector is instrumental to sustainable innovation and growth and the transition to a less carbonintensive economy.
“The alarm bells are deafening, and the evidence is irrefutable: greenhousegas emissions from fossil-fuel burning and deforestation are choking our planet and putting billions of people at immediate risk,” Secretary-General Guterres said earlier in August.
Towards sustainability
Though green bonds have been a rare sight in the Mideast, many corporates and sovereigns borrowers have been issuing fixed-term securities to raise funds for projects with environmental benefits such as renewable energy projects.
As large public institutional investors are gradually incorporating ESGs into their investment mix, Abu Dhabi Investment Authority (ADIA) is reportedly studying how to incorporate sustainable investing factors in its indexed equity investments. First Abu Dhabi Bank became the first Gulf bank to issue $587 million green bonds in March 2017. Last June, the Abu Dhabi-based lender also issued a $96.77 million five-year Hong Kong dollar-denominated green bond through a private placement.
Qatar National Bank (QNB) is also another regional bank that made its foray into the green debt market. The Qatari bank issued a $600 million green bond last September signaling a growing investor appetite for these instruments in the Gulf region. S&P Global hailed QNB’s green, social and sustainability bond framework saying it is fully aligned with four components of the green bond principles and the social bond principles that make up the sustainability bond guidelines.
The UAE, home to the Dubai Financial Markets, Nasdaq Dubai and Abu Dhabi Securities Exchange, made female representation on the boards of all listed companies compulsory in March to foster gender diversity. Since the enactment of the law in March, Dubai’s Emaar Properties, telecoms major Du, Abu Dhabi National Oil Company for Distribution, and Dana Gas have all appointed female board members.
Damian Regan, Director, Audit & Assurance, Deloitte Middle East, said, “It is time for Middle Eastern companies to be part of the global response to these ESG issues and take action in the development of their response to and reporting of ESG; recognizing their role in driving a more equitable and sustainable economy and society, both now and in the future.”
In Saudi Arabia, the state-owned electricity transmission firm, Saudi Electricity Company, raised $1.3 billion dual-tranche green Sukuk last September. Egypt became the sovereign in the Middle East region to sell green bonds. The Arab world’s populous country raised $750 million from the issuance last year.
Although the outbreak of coronavirus slowed down the implementation of ESGs, it is evident that banks continue to embrace the strategy as new banking products and models are being developed, tested and commercialized. KPMG said that wealth managers are moving towards ESG-informed investing while retail banks are creating new sustainable banking and investing products and services.
– Deloitte
– KPMG
Islamic finance
Though not mutually exclusive, Shari’ahcompliant financial instruments offer a framework that embodies the social and ethical values of ESG investing, providing Middle East investors with an opportunity to adopt more sustainable, responsible investment strategies while tapping into the potential value of conscious investing.
S&P Global said that funds raised from green Sukuk typically support investments in renewable energy or other environmental assets such as solar parks, biogas plants, wind energy projects, as well as renewable transmission and infrastructure projects.
The pandemic crisis is projected to boost the appetite for sustainable instruments in the GCC region as governments and corporates look to revive their economies amid diversification from hydrocarbon-based economies and transition to sustainable financing.
Islamic finance social instruments can help core Islamic countries, banks, companies and individuals economically affected by the pandemic to navigate these choppy waters, with market participants eyeing Qard Hassan, Zakat, Waqf, and Social Sukuk, said S&P Global.
As GCC sovereigns and corporates are tapping debt markets – taking advantage of low borrowing costs and investor demand for higher returns – to finance projects that were shelved last year and plug their ballooning deficits, analysts expect Shari’ah-compliant social instruments to widen the appeal of Islamic bonds beyond traditional markets in the Middle East and South Asia to include ethical investors in West.
Sustainable debt covers a variety of instruments, from the well-established green bonds to the fast-emerging category of sustainability-linked loans. With a new global record of sustainable debt issuance hitting $465 billion in 2019, a 78% increase compared to $261.4 billion in 2018, sustainable finance is a fast-growing category of fixedincome securities.
Islamic banks in the GCC region are witnessing a growing frenzy for green bonds although the appetite is still in its infancy as more investors are committing to responsible investment. Last year, the overall green bond market was worth over $230 billion, and it reached $2 billion in the Middle Easr region with the potential to grow further.
Last October, Abu Dhabi’s Etihad Airways issued a five-year “transition” $600 million green Sukuk to support its shift to a greener future. Etihad is the first airline to issue a sustainabilitylinked Islamic bond as it seeks to slash its carbon emissions level in half by 2035 and reduce emissions to zero by 2050.
Having issued its $1.2 billion debut green Sukuk in November 2019, Saudibased Islamic Development Bank also tapped the international debt markets with a five-year $1.5 billion sustainability Islamic bond to support its member states to mitigate the fallout from the COVID-19 pandemic.
Though overall Sukuk issuance is gathering steam in some of the world’s largest financial hubs such as London, the market for green Islamic bonds remains small compared to the conventional Sukuk market. Last year, total Sukuk issuances reached $205 billion and only $6.2 billion of that was in green Sukuk, said Moody’s.
Sustainable finance
“While some big questions and uncertainties exist, it is clear that bank executives can no longer afford to take a ‘wait and see’ approach,” said KPMG. As the world is emerging from the pandemic and starts to map out the future, regulators, oversight authorities and policymakers are expected to take the lead in calling for the need for greater adoption of ESG.
Investors are ramping up pressure on banks to some extent due to the increasing recognition that conscious investing, in particular issues to do with climate change, represents material risks that must be managed. This has seen several lenders refusing to renew loans on existing fossil-related projects such as coal mining to improve their carbon disclosures. However, as investors strive to ensure the profitability of their investments in these shifting operating conditions, KPMG said data showed that
ESG-related funds outperformed the markets in the first quarter of 2020 — when the pandemic crisis hit.
Before the outbreak of the coronavirus, several global banks including HSBC and Goldman Sachs had already made significant strides towards greener finance and the trend is expected to soar post-pandemic. “The quantum of ESGrelated announcements coming out of banks before COVID-19 was staggering,” said KPMG.
In October 2020, HSBC said that it aims to reach a net-zero carbon client portfolio by 2050. The London-based bank also pledged to support its clients with between $750 billion and $1 trillion in funding and investments to contribute towards low carbon transition in a step to align its business activities to the goals of the Paris climate agreement.
HSBC previously came under fire for financing harmful environmental investments and the bank is Europe’s second-largest financier of fossil-fuel companies after Barclays since the end of 2015, according to Bloomberg.
JPMorgan Chase & Co. also unveiled its carbon reduction goals for clients in line with the Paris financing commitments in April as it faces mounting pressure from shareholder activists to align its funding activities with their climate change commitments.
The Wall Street bank appealed to its oil and gas clients to reduce the intensity
of direct and indirect emissions, plus emissions from the combustion of oil and natural gas. JPMorgan Chase’s appeal to clients comes a month after it unveiled $2.5 trillion to lend, invest and provide other financial services over the next decade to advance long-term solutions projects that address climate change and address social inequality.
Globally, almost all sectors including the fashion industry are focusing more on environmentally friendly and sustainable investments amid pressure from clients, consumers, shareholders and regulators to align with ESGs. British luxury fashion major Burberry Group, French telecoms firm Orange and Germany auto giant Daimler have all sold green bonds underscoring growth in the ESG debt market.
– UN Secretary-General António Guterres
