GCC lays groundwork for green finance

The green finance has the potential to play a bigger role in funding the region’s ambitious pipeline of green projects. The GCC region continues to make good progress toward green growth and transition to a low-carbon economy, setting new sustainabile infrastructure targets that are creating demand for capital and new green financial vehicles, S&P Global said in a report poublished yesterday.

The GCC over the past few years has been investing in renewables, particularly solar power, and already hosts an active and growing renewables market. The International Renewable Energy Agency (IRENA) in its 2019 report expects that nearly 7 GW of new renewable power generation capacity is expected to come online by the early 2020s. These are all transactions that could be funded via green finance.

QNB Group in its 2018 annual report noted, QNB Finansbank has financed 12 renewable energy projects worth over $350m to support Turkey’s transition to a more environmentally sustainable and diverse electricity supply. The bank financed the development and construction of six solar, three wind and three hydroelectric power plants that have helped to shift the country’s energy mix, significantly reducing greenhouse gas emissions.

The S&P in its report said the green bond market in the GCC is, however, still in its infancy, despite strong growth globally over the past five years. Today, climate finance in the region consists of a small number of large projects financed by loans or concessional loans from banks, governments, multilaterals, and climate funds such as the Green Climate Fund.

“The GCC over the past few years has been investing in renewables, particularly solar power, and already hosts an active and growing renewables market,” said S&P Global Ratings credit analyst Michael Wilkins.

After signing the Paris Agreement in 2016, certain GCC countries pledged to increase the share of clean energy in its total primary energy mix to 27 percent by 2021, reduce gas flaring, integrate carbon capture and storage, reform tariffs, deregulate fossil fuel prices, and adopt efficiency standards for buildings and household appliances.

Qatar, Kuwait, Oman and Bahrain have set out positive steps toward sustainability in their NDCs (Nationally Determined Contributions), including plans to reduce carbon footprints and introduce policies that would support mitigation and adaptation programs. For example, Kuwait’s sustainable energy target is to increase renewables to 15 percent and Oman’s is 10 percent by 2025. Qatar is aiming to install 200-500 MW of solar by 2020, and is committed to diversifying its economy so it can gradually reduce its dependence on hydrocarbon industries.

GCC governments have also laid groundwork for a green finance sector to support their sustainability targets.

Despite all of these advances, the green finance market in the GCC is still in an early stage of evolution and lacks cross-border financing and the presence of institutional investors such as pension funds that we see in other developed capital markets. “We believe that a combination of green and vanilla sukuk as well as conventional green bonds could provide the substantial funding support that is required for the realization of the region’s sustainability targets. In particular, new and conventional green finance vehicles could lower the cost of capital for overseas cross-border financing and open up a wider pool of capital of Islamic and conventional investors. Notably, we think that a number of the utilities we rate in the GCC could consider green issuance; yet they would most likely also expect to obtain pricing at least equivalent to conventional issuance before proceeding”, the rating agency said.

The expected rise in renewable energy capacity in the GCC is not the only potential force for the development of green finance in the region. Looking at green bonds issued globally in 2018, the S&P Global sees that almost equal amounts of proceeds were channeled to the real estate sector, making energy (31 percent) and buildings (28 percent) sector leaders in the market. Overall, according to the Climate Bonds Initiative’s January 2019 report, “Financing Low Carbon Buildings with Green Bonds,” $126bn had been allocated to low-carbon building assets and projects as of end-November 2018.


Source from: The Peninsula