‘Goodwill’ bonds that will spark a Middle East transformation
The economic transformation of the Middle East is being driven by aspirations for innovation and social responsibility. Transformational projects abound:
Saudi Arabia is building the $500 billion NEOM, a futuristic megacity run on artificial intelligence and the Internet of things, while undertaking unprecedented social reforms; the UAE has embraced innovation across sectors, from health care and transportation to education and government services, even appointing the world’s first Minister of Happiness whose mission is to create happiness and wellbeing as a national lifestyle; Egypt is working on a law to exempt research institutions from taxes and customs fees in order to encourage innovation that benefits society.
A significant part of this transformation involves embracing renewable energy, a revolution for a region that is synonymous with oil.
Saudi Arabia has said it plans to exceed its target to generate 9.5 gigawatts of electricity from renewable energy annually; the UAE has committed to increase the contribution of clean energy in its total energy mix from 25 percent to 50 percent by 2050; meanwhile Egypt will increase its share of renewables in the country’s power mix from 3 percent currently to 20 percent by 2022 and 37 percent by 2035.
Green bonds are bond instruments whose proceeds are exclusively used for projects that have positive environmental or climate benefits.
In the UAE, Abu Dhabi’s Masdar has been pioneering renewable energy for more than a decade, while earlier this year Dubai broke ground on the world’s largest concentrated solar power project; Saudi Arabia and SoftBank are planning to invest $200 billion to build the world’s largest solar project; meanwhile, the European Bank for Reconstruction and Development is financing 16 new solar power plants in Egypt, reflecting an environment of ongoing conversion to renewable energy. In line with this spirit, it should be natural then that this green, socially responsible revolution be funded by new, innovative financing tools. The green bond is one of them.
Green bonds are bond instruments whose proceeds are exclusively used for projects that have positive environmental or climate benefits. The first such bond was pioneered by the European Investment Bank in 2007. Although still a new instrument for sovereigns and corporates, issues reached a record $29.6 billion in the first quarter, according to data published by law firm Linklaters, and are likely to become a crucial driver of this green transformation.
The first rationale for adopting green bonds is from a general policy perspective, as they offer issuers the opportunity to strategically position themselves as further embodying their commitment to these new objectives – green consciousness, innovation, social responsibility, sustainability, and long-term growth. In the Middle East, no green bonds have been issued to date. Yet, other world governments have adopted this instrument. In 2018, Indonesia became the first Asian issuer. Three European governments – Poland, twice, and France and Belgium – have already made benchmark green bond issues. The choice of green bonds by regional governments would reinforce the region’s responsible approach toward raising capital, and the obligation embedded in green bonds to communicate on progress through annual reports would also increase opportunities to strategically position the underlying green initiatives.
Globally, issuers and lenders alike are increasingly keen to really make this green consciousness part of every aspect of their operations: in January, for example, French dairy company Bel Group committed to deliver year-on-year improvements on its environmental and social strategic objectives in exchange for improved pricing conditions on a loan.
And this brings us to the second argument in favor of green bonds, the potential financial advantages. While these bonds can be offered to the existing pool of global investors, they also appeal to the green investor segment that might not otherwise invest in the region and that is growing in size. Diversity is arguably more important now than it has ever been, as sovereigns borrow more to fund transformation plans. The Global Sustainable Investment Review assessed the global impact fund market at $23 trillion in 2016, and global funds and asset managers continue to set aside more funds toward impact investing. There are also favorable policy moves that may contribute to future pricing advantages. The European Commission’s plans to create a ‘green supporting factor’ would reduce the capital charges levied on banks for green investments, while the world’s first law dedicated to green bonds has been proposed by the Luxembourg Ministry of Finance, the latest step by one of Europe’s leading financial centers to mobilize private capital for green investments.
And finally, we must address a recurrent concern about green bonds from an operational perspective. Some issuers believe that they are more complicated to set up than a conventional bond. Yes, there are certain processes that are required for green bonds: evidence the proceeds will be solely used for green projects; project evaluation and selection (a good green bond house with a dedicated social impact structuring team will walk clients through this); segregating the assets and keeping track of how they are managed; and reporting annually on the use of proceeds (once this has been done in year one you have a template in place that can be easily refreshed). These may seem burdensome, but banks and advisers are capable of helping run these in a smooth way. And although these might appear to be concerns, they are actually strong elements to show an issuer’s commitment.
In conclusion, green bonds are a powerful way to bring long-term transformation across the public, private and social sectors of a nation. They are attractive as they widen the investor pool, while bringing a level of commitment and discipline that serves the issuer’s long-term interest and positioning. This builds goodwill that can be leveraged and communicated. But equally, the adoption of green bonds sends a message that trickles down to financial institutions, corporates and the wider society: That non-financial goals ought to be valuable measures of performance, as these are the goals that will enable a sustainable future.
Such a message must come from the top: Green bonds reflect a national priority as well as enable it.
- Richad Soundardjee is the Regional CEO of Societe Generale Middle East.