Environmental, social and governance (ESG) is playing an increasing role in the finance sector, with regulators putting increasing attention on climate risk management and ESG criteria, and banks and funds following suit.

With the requirement for sustainable investment set to grow significantly in the coming years, experts participating in the Global Energy Utilities Forum (GEUF), part of Middle East Energy, spoke of the impact that will have on corporations and financing for energy projects.

Sustainable finance is the biggest buzzword in the banking industry at the moment. Oliver Phillips, Associate Director of Sustainable Finance, Africa and MENAP, at Standard Chartered, simplified the term in two ways. On the one hand, he said “do no harm”, which outlines the minimum level of standard from an ESG standard that one is willing to do, and on the other hand, he said “do some good”, which encompasses three different elements. 

The first involves green, including financing environmentally sustainable projects, renewable energy and energy efficiency. The second focuses on the social side, which emerged in 2020 to 2021, as the COVID-19 pandemic moved that shift from just the ‘E’ to the ‘S’, to realise the impact it was having on business models. Finally, the third area is transition, in which Phillips believes “we are not quite there on the green side, but we are moving along that spectrum, and there could also be a combination of all. It's very simple, do no harm and do some good,” he added.

Jeffrey Beyer, Managing Director at Zest Associates, said sustainable finance can also be looked at and considered through classification systems. One of the emerging ways to perform this is through a green taxonomy. “Late last year, the European Commission decided to formalise this, and it created a common language of what green really means,” he said. “It creates a common language between different stakeholders in green investment, and it helps bring security to investors as well.”  By doing so, it avoids micro-fragmentation and allows for interoperability for the finance sector between different financial hubs. “We’ve also seen this for southeast Asian nations as well,” Beyer noted.

Such a move is considered a real opportunity in the Middle East to create a regionally appropriate green taxonomy as well, to allow the free flow of capital between different countries to accelerate a green transition. But Beyer mentioned some flaws within taxonomies, one of which excludes investors from investing in polluting companies.

“Because of it, that means you’re not leveraging one of the biggest opportunities from capital markets,” he explained. “And if they own these companies, they can help these companies manage that. So it can backfire.” 

He said taxonomies are also quite static so if any changes in technology were to occur, some green technologies may be left out. Taxonomies suffer from an issue around coverage, as well. “About a third of global emissions come from publicly listed companies controlled by institutional investors so they have a lot of benefits and some drawbacks but it’s not the full solution,” he added.

However, capital flow needs to happen much faster in terms of reaching the places that need it the most, according to Phillips. Around 90 percent of the United Nations’ Sustainable Development Goals (SDGs) is already financed or being financed in developed markets. That figure drops to 60 percent when it comes to emerging markets, and less than one percent in Africa.

“So there’s a significant lack of where funds go,” he noted.

“They’re the ones that are going to face the impacts of climate change [the most] if we don’t do enough to stop it. Everyone needs to work together because no one wins if we don’t all win.” 

He mentioned regulation as having the potential to play an important role as well, in terms of the need to set the right direction of travel. The financial sector also needs to put its money behind the commitments it is making, backing up its net-zero commitments, more green financing and ensure it does so responsibly.

“It’s important because, if a bank doesn’t do it, that doesn’t mean no one else is going to and maybe we have a role to play in being a more responsible lender,” Phillips said.

“Corporates themselves need to realise that this isn’t just a risk, there is an enormous opportunity from taking advantage of what is probably one of the greatest revolutions in the global economy that we’ve ever seen – when all these things come together, we might have a chance of getting there.”

Chetan Kapoor, Partner at Synergy Consulting, spoke of ways in which to accelerate sustainable finance in the region. Almost all countries in the MENA region have developed a green growth agenda, and most of them have already declared a carbon emissions strategy, such as 2050 for the UAE and 2060 for Saudi Arabia.

All regional countries have also developed their own sustainable development growth agenda and adopted a sustainable finance framework. “There are guidelines and frameworks for the implementation of these policies,” Kapoor said. “Now there has been a bit of financial market innovation with respect to certain products, which will help accelerate the green growth strategies of sustainable finance. It’s something all countries in the MENA region have done.” 

However, even though there has been progress in the past few years, he said ESG is still a nascent area. Some steps which he considers vital today include strengthening the regulatory framework, which is not that explicit at the moment. “The governments themselves need to lead by example,” he added. “Some of them, like Egypt, issued green bonds, and others can follow suit here.”

Another important element he highlighted is a “typical mindset” within the regional community that sustainable finance is not profitable. As such, he called on that awareness to be raised at all levels that ESG is no longer a space which is a drag on profitability. Kapoor spoke of various research which demonstrates that there is a significant amount of profitability which exists and adds to the balance sheet.

Finally, he spoke of the significance of building capacity at all levels, with central banks having a main role to play to ensure that international, regional and local banks in that area are following, implementing and becoming the champions of the ESG framework and climate finance. This will ensure it becomes accessible to a large number within the community and adopted by most of the stakeholders.