Green bonds, environmental sustainability goals, and economic growth in the Arab region

Date: 25 - 10 - 2023

Abu Dhabi

Source:  Alittihad Newspaper

Mufakiru Alemarat

Dr. Ali Mohamed Al Khouri

Our little blue planet is suffering from extreme and dangerous temperature rises at rates unprecedented in more than a hundred years, which indicates, if we are on an upward trend from year to year, real existential dangers that may make the catastrophe of a nuclear war seem like a picnic in exchange for this inevitable fate. Its possibilities should be underestimated, especially in light of the rise in global development, the expansion of industry and transportation, and the burning of organic fuels, from wood and coal to natural gas.

This disaster, and our other environmental problems, such as overexploitation of mines, sources of raw materials, pollution and carbon emissions, all indicate in parallel that our current modern civilization is taking life on Earth in another, opposite direction.

In light of this extremely dangerous trend, the international community is scrambling to achieve environmental sustainability agendas and mitigate the effects of climate change. With the escalation of efforts to achieve an orderly and responsible transformation of the energy sector, a new and innovative form of investment has emerged called “green bonds”. This financial instrument, designed to support environmentally friendly projects, is gaining widespread global momentum, especially as it achieves good returns, in addition to its potential to bring about positive changes in human societies, towards the use of sustainable alternatives. Despite the many challenges and their parallel opportunities in the Arab region, green bonds provide important solutions and keys to addressing pressing environmental issues and stimulating infrastructure and clean energy projects.

Green bonds as a development vehicle

Green bonds are debt instruments that take into account sustainability requirements in investments related to renewable energy, sustainable waste management, biodiversity conservation, etc. The issuance of green bonds is not limited to specific entities, but can be issued by national public bodies, municipalities, unions, and private companies. This diversity of instruments allows financing a wide range of government and private projects, making it a versatile tool for driving transformation in sustainability projects in various sectors. This interconnection between economic progress and climate change, often referred to as the green economy, has become a driving force for this sector and a vehicle for improving the quality of human life and ensuring a safer environmental future for future generations.

Although the popularity of green bonds is less than their traditional counterpart, they are witnessing a noticeable increase, even with traditional investors less aware of their importance in achieving the goals of balancing economic activities and reducing environmental pollution.


Global Green Bond Market

The value of green bonds issued around the world has risen significantly in the past few years. While the value of green bonds issued did not exceed $37 billion in 2014, it exceeded $1 trillion between 2021 and 2022, according to Statista ( Statista.
According to market analyses, global green bond issuance is expected to continue to rebound in 2023, amid supportive global policies, high interest rates, and a rise in government and private issuance. According to Barclays Bank forecasts, corporate green bonds alone will grow by more than 30% in 2023.

The growth of this sector has had a clear hierarchical and economic impact. A report by the International Renewable Energy Agency and the International Labor Organization, issued in 2022, indicates that global employment in the renewable energy sector has increased by 66%, reaching about 13 million jobs in various parts of the world, compared to about 4.3 million in 2021, which confirms that the growth This sector will boost local economies and create multiple economic and social opportunities.

The Arab Green Investment Movement

: The pressures of the international community that link the competitiveness of countries with environmental requirements have given investments in sustainable alternatives, such as clean energy, renewable water sources, water reuse, organic agriculture, green industrial products, and sustainable transportation, a high relative importance that cannot be overlooked, according to Standard statistics. & Poor’s Financial Services (Standard & Poor’s), the market for “green, social, sustainable and sustainability-linked bonds” (GSSSB) is expected to reach nearly $1 trillion in 2023, and will account for 14%-16% of total international bond issuances.

This global trend has generated increasing interest in green investments in Arab countries, and now reflects important shifts in the priorities of governments and private sector institutions. According to the International Finance Corporation, financing for green investments doubled to reach about $19 billion in the Middle East and North Africa region in 2020, with expectations that the total potential for climate investments in the renewable energy sector in countries such as: Egypt, Jordan, and Morocco will reach $265 billion. Bloomberg Capital Markets data shows that the Gulf’s open appetite for pioneering investments in renewable energy projects represents an integrated investment model for countries in the region, as the total issuances of green and sustainable bonds and sukuk reached $8.5 billion in 2022, compared to about $605 million in 2021.

The future of green investment in the Arab region

The Arab region as a whole still needs to develop the necessary infrastructure for renewable energy and transition to sustainable energy systems, but investment in this sector collides with a diverse mix of challenges simultaneous with opportunities, the most prominent of which is financing, especially since the nature of the projects The impact may require higher capital costs compared to traditional energy, in addition to that the rapid return on investment may not be as attractive as competing with other types of investments.
Here, green bonds emerge as an effective means of accessing innovative sources of capital that may contribute to creating business opportunities and supporting the job market in this sector, which is still in its nascent stage. But the comprehensive transformation here is not limited only to the idea of ​​having green bonds, but rather goes beyond it in overcoming other surrounding obstacles. There is a clear reluctance among many banks in Arab countries to support “green climate projects,” which they describe as “high credit risks.” This is an indication of the lack of awareness of the importance of green investments, which constitutes an obstacle to the widespread use and adoption of green bonds in many countries. This can be justified by the weakness of legislation and regulatory environments that stimulate local and international investments in Arab markets.

Overcoming Challenges

To bring about real change to face these challenges, governments should follow a multi-faceted national approach, and the decisive step can begin with legislative frameworks that stimulate investments and encourage the private sector to play a greater role in strengthening efforts aimed at confronting the repercussions of climate change and diversifying their investment portfolios, and can contribute Government budgets are in the first stage of providing financing for projects that banks may consider “unfinancial.”

Incentive policies can play an important role in supporting the local green bond market and encouraging more investors to participate. Incentives may include providing advisory centers equipped with distinguished scientific and international expertise, capital insurance, government grants, tax relief, and reduced borrowing costs, which should be designed to attract local, regional, and international investments.

What must be worked to achieve is the systematic expansion of the circle of participation in the green bond market, in a way that contributes to stimulating investors’ activities to create a national economy that addresses environmental risks, supports climate action, and is in line with the growing global call for the transition to low-carbon development.

Leadership in the future of the global economy

It has become clear that green bonds are not just an investment tool, but rather more like a catalyst for change and a means of aligning development requirements with environmental stewardship to reach carbon neutrality, which the international community seeks as a major goal that cannot be avoided.

As the Arab region struggles with unprecedented development challenges, green bonds emerge as a lifeline and a pivotal tool that is in line with global requirements to confront climate change and sustainable development. The region can also save the high energy costs that burden its budgets and fluctuate its trade balance. In short, the Arab region can harness green bonds to build a resilient and environmentally sound Arab future, but this requires strategic framing at the national level to set the tone for the goals and desired results.