A number of GCC governments, including those in the UAE and Saudi Arabia, have set ambitious clean energy and energy efficiency targets. As the fastest growing region in the world, the GCC’s population is expected to grow more than 53 million by 2020. Substantial amounts of investments will be required to finance the clean energy and energy efficient projects necessary to meet the needs of the future population.
Capital markets allow investors a low-cost alternative
Green bonds, which tie the proceeds of the bond to environmentally friendly investments, have been used to finance green projects since 2008, when the World Bank pioneered the first-ever green bond. Since then, the World Bank has raised US$6.4 billion in green bonds through 67 transactions in 17 currencies.
Although historically international agencies have issued green bonds, the private sector has begun to use green bonds to finance their green activities.
Investors typically are attracted by the ability to easily integrate environmental initiatives into their investment portfolio, as well as the ability, in some cases, to offset the risks of their portfolio being exposed to climate change. Therefore not only public-sector investment funds, but increasingly asset managers and financial institutions are also buying these bonds.
Islamic finance liquidity
The global Islamic finance industry has seen remarkable growth in the last few years. Sukuk structures are an attractive alternative to conventional bonds due to the liquidity available in the market and it can be tailored to finance green initiatives. Green sukuk could mobilise essential finance needed to fund the rising number of clean energy initiatives throughout the GCC since the majority of clean energy projects will rely on large, long term infrastructure spending. The recent and successful 30-year international sukuk issuance by Saudi Electricity Company has already demonstrated the investor appetite for long term Shari’ah-compliant paper. Sukuk also could potentially fund shorter term energy efficiency projects, for which low cost funding has traditionally been harder to come by.
Who will be first?
The Dubai Supreme Council of Energy announced its partnership with the World Bank to develop a green investment strategy incorporating sukuk. If this strategy succeeds, governments in the GCC could play a key role in developing a green sukuk market. Such a market could play a key role in financing the region’s ambitious clean energy and infrastructure projects.