- Some regulations and policies have begun to be adopted in the Arab World, according to a new UNEP FI report
- Awareness gaps about the differentiation between sustainable finance & philanthropy and humanitarian finance slow development
- As regulators build their own capacity on sustainable finance across the region, financial institutions that aren’t yet preparing will be left behind
We are in the early stages of regulators and the financial sector adopting frameworks for sustainable finance in the Arab World, according to a new report from UNEP FI. Many challenges remain: not least the limited capacity in financial institutions. UNEP FI found some financial market policy guidance that has been issued to cover ESG disclosure in five of the six Arab countries it reviewed (Saudi Arabia was the exception). Other elements of sustainable finance are much less common.
Although climate change is important in the objectives of sustainable finance, the report’s separate focus on sustainable and climate finance shows that this is not the only issue that should be to the fore. In reinforcing the RFI Foundation’s message, UNEP FI points to a clear alignment of objectives and the capacity for Islamic finance to be active in sustainable and climate finance.
The recommendations that are the most relevant to the financial industry relate to regulatory changes, awareness and capacity development, and market-building efforts to increase the volume of bankable green assets. Each of these categories includes varying levels of supportive and prescriptive features which government or regulatory policy could adopt. Many have a regulatory purpose that derives from the impact that climate change and other sustainability issues have on prudential considerations.
The financial impact of ESG is relevant for regulators in the Arab world and their focus on this topic is beginning to emerge. However, many of the recommendations that follow in the report show a lack of similar urgency among many financial institutions in the region. This separates out the list into things that financial institutions could do on their own and what they might be told they must do in the future.
For example, the encouragement comes in providing guidance resources relating to green financing, development of taxonomies and green finance departments in regulatory and government agencies. More prescriptive policies would include mandated sustainable finance disclosures and financing criteria, and stress tests relating to climate-related prudential and systemic risks. The decision about voluntary or mandatory policies is determined in part by local trends of adoption and how best practice develops globally.
Another example of a pair of policies that could advance sustainable finance would be developing frameworks to measure impact that could help institutions prioritize between different possibilities. In some markets this has been developed as a voluntary, industry-led initiative with regulatory support, such as in Malaysia with Value-Based Intermediation.
More active regulatory involvement could include regulator-led research into the credit risk differences between green and other assets. This would be useful for regulators to decide how quickly to step up their requirements for financial institutions to make disclosures about sustainability and adjusting supervisory policies, or even directing credit allocation or incentives for financing priority (green) sectors.
Some mix of these recommendations are likely to be enacted in the future. One of the challenges UNEP FI identifies is that not only do regulators and financial institutions in many parts of the Arab World lack the capacity now to adopt these policies, but financial institutions haven’t developed awareness about why they matter financially. They noted: “There is still a lack of awareness of the merits of sustainable finance. Most FIs still consider sustainable finance as a philanthropic and humanitarian cause rather than a business case for developing their ventures.”
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