A $2 trillion opportunity for green financing in the Middle East
Governments and companies in the Gulf Cooperation Council (GCC) are focused on environmental sustainability, however the financial sector has lagged behind. By 2030, creating the right framework and processes for green financing will help the region unlock a tremendous opportunity: $2 trillion in economic growth and over 1 million jobs. Furthermore, green financing, which recognizes the environmental effects of investments in addition to strictly financial gains, will help the region meet its economic diversification and job-creation targets, as well as draw foreign investment if properly organized.
To make this prospect a reality, GCC governments should concentrate on four priorities: enact sustainability policies; create a new green investment body; strengthen capital markets; and establish, or join, standard and transparent reporting mechanisms for environmental performance.
Across the world, sustainability is now a top social concern. Environmental, social, and governance (ESG) risks are also closely examined by major financial institutions when making investment decisions. The world's biggest asset managers, insurers, and stock exchanges are moving massive amounts of capital into renewable investments, with significant implications for governments, investors, and businesses. Investors pumped a whopping $156 billion into sustainable investment funds in the EU and the US in 2019, almost tripling the previous year's number.
This form of investment could be able to help the area rebound from recent dramatic drops in foreign direct investment. The GCC used to be able to attract international investors searching for low-cost hydrocarbons for industries like petrochemicals and refining. Investor demand for those sectors has diminished proportionally as ESG scrutiny has risen, resulting in a reduction in foreign direct investment. According to the World Bank, investment into the GCC has decreased by around 40% as a percentage of GDP over the last decade.
To compensate, the GCC must take advantage of its current strategic advantage: incredibly low-cost green resources. Based on data from the International Renewable Energy Agency and the International Energy Agency, we estimate that the cost of generating solar, wind, and green hydrogen in the region is 2.5 to 3 times lower than global averages. Traditional hydrocarbon-based ventures in the area could be less attractive to green investors, but emerging prospects in renewable energy and carbon capture and utilization are in high demand.
We looked at six major non-oil sectors in the GCC, including power, water, construction, mobility, food, and waste management, to measure the benefits of green investment in terms of economic diversification and progress. We predict that these sectors' joint GDP contribution will hit $2 trillion by 2030. We expect that these industries will add over 1 million jobs by 2030 as a result of their growth.
The GCC countries have been confronted with a huge opportunity, but they must move quickly to take advantage of it.
First, governments should adopt policies that facilitate environmental protection across the board. Fees on fugitive carbon, plastic, and other materials that have a detrimental environmental effect are among them. Improved regulatory standards for emissions, recycling, and building codes, as well as initiatives for clean energies usage and electric vehicles, should be adopted.
Second, each of the Gulf Cooperation Council governments should develop a new green sovereign wealth fund with the reputation and capability to engage with and attract foreign investors. This new body should not be constrained by the region's legacy approach to sustainability, which sees it as a costly disadvantage rather than an advantage.
Most notably, this investment body should serve as a reliable minority partner that draws foreign and domestic private investors, rather than holding them back. Governments that establish the right environment for green finance will spend a small portion of the necessary capital and draw the rest from institutional investors and other actors across the world. Admittedly, outside capital will surpass the government's spending by an 11-to-1 ratio.
Third, governments in the Gulf Cooperation Council should continue to open and develop the region's capital markets. The fact that these capital markets are largely underdeveloped is a big major obstacle. The growth of these capital markets would make it easier for investors to exit profitable investments. It would also make GCC funds, such as those owned by high-net-worth people and families, more accessible to investors.
Fourth, the governments of the Gulf Cooperation Council (GCC) must establish transparent, standardized, and detailed reporting systems. These would help investors from outside the region to properly determine the effectiveness of sustainability initiatives. Since environmental returns are difficult to calculate, governments should rely on systematic regulation and validation frameworks to hold their sustainability agenda credible.
Sustainability initiatives around the world face a daunting challenge in terms of transparent measurement and reporting mechanisms. The region's governments are unlikely to be able to solve these issues on their own. Through proactively partnering with foreign organizations already working on ESG accreditation and reporting, they will make quicker progress and achieve more credibility.
Countries in the Gulf Cooperation Council (GCC) have already started the transition to sustainability. The biggest concern now is who would be best positioned to help these initiatives and gain the greatest economic benefit. It's a race to position, differentiate, and capture market share in green finance. If the GCC governments are to win this race, they must move fast.