The Middle East faces growing pains as responsible finance starts to gain traction
- A survey by HSBC of issuers and investors in the MENAT region and globally found 44% of regional investors saw their adoption of ESG slowed by a lack of qualified staff
- Regulators in the region have been less active in providing structured guidance such as taxonomies to help bridge the gap between issuer and investor
- As the Middle East continues to develop, it will have to build market capacity to address transitioning sectors, as well as to channel funding towards the green economy
HSBC has released the 2021 version of its Sustainable Financing & Investing survey, and the results from the Middle East, North Africa and Turkey (MENAT) show some notable progress in promoting responsible finance, particularly in the UAE and Saudi Arabia. There are three key observations that give an indication of the state of progress, and what is needed from here:
- There is an acute shortage of financial sector staffing capable of understanding and integrating ESG; 44% of MENAT investors said their efforts were held up by the lack of qualified staff
- Regulators haven’t moved as much to provide market guidance as in other countries, and an official taxonomy was a common response by investors on what is needed
- There is a focus on the most portable tools such as green, social and sustainability bonds to tap the widest investor base, while few companies (only 15%) say they are considering reducing or getting out of business activities that are vulnerable to climate change.
Although the skills gap on ESG is an issue around the world, it is particularly acute in the MENAT region, and it is causing two types of challenges. First, investors in the region have among the lowest share of firm-wide responsible investment policies (19%), while a larger number (31%) say they have no intention of creating a firm-wide responsible investment policy.
A related issue is that there is a disconnect between the 51% of issuers who feel their disclosure is about right and haven’t felt pressure to increase disclosure and the equally large share of investors (47% for environmental and 42% for social) who feel current disclosures are inadequate.
The issue of adequacy of disclosure and the ability of investors to use these disclosures appropriately has become a global hot topic. Regulators are increasingly stepping in to define standards for disclosures by both issuers and investors. Taxonomies are one avenue for regulatory guidance, but there is still broad disagreement about what a useful taxonomy needs to include in order to make the most possible impact.

For the MENAT region, a European-style taxonomy may be useful for providing an easier inflow of capital to the region, but it could also be very limiting. The move towards green, social and sustainable bonds & sukuk in the region (64% of issuers said they expected to pursue advice on these types of instruments in the next 12 months) is indicative of issuers not necessarily being confident that regional investors and financial institutions are ready.
Issuers feeling pressure to act from customers, employees, shareholders and regulators will be most likely to pursue responsible financial options that come with some backstop from global investors able to easily invest through debt capital markets instruments. Viewed from that perspective, aligning standards of what qualifies as ‘green’ with the standards that will open up the widest investor base is sensible but may not be as clear as it seems.
An alternative viewpoint based on issuers’ interest in green, social and sustainable issuance and reluctance to reduce or get out entirely from activities that are especially susceptible to climate change suggests a more pressing need to focus on developing transition- and sustainability-linked financing. HSBC’s survey found that 72% of issuers were planning to increase or start new businesses so as to benefit from the economic changes from climate change, while only 15% were considering reducing or exiting businesses that are especially vulnerable.
Viewed in relation to the economy as a whole, this suggests ample opportunity to finance an emerging green economy sector in the MENAT region but higher risk to other types of business that are susceptible to climate risk. The lack of funding towards transitioning away from climate-vulnerable sectors into those that benefit from the economic trends that climate change causes increases the social risk relating to the growth of the green economy in reaction to economic shocks, hitting specific sectors that haven’t transitioned towards the green economy.
Reinforcing the need to develop a more robust two-sided market for businesses expanding into the green economy and those that are making the transition in that direction, the share of investors that have set net zero targets was only 6%. And while that was the same proportion of issuers who had set such a target, 78% of issuers, compared to only 12% of investors, were in the process of developing a net zero target.
There has been a rapid shift in the MENAT region towards adopting responsible finance, particularly during the past 1–2 years. This progress is currently being slowed somewhat by the skills gap, but it is a problem that faces every market’s responsible finance segment during the acceleration phase of adoption.
A more important challenge is still in the process of being overcome, in coming up with a market-accepted reference point for responsible finance, whether regulatory-driven or not, that finds a balance between the data required by investors and those which can be readily produced by issuers. An important part of finding a balance is understanding the green expectations of some investors while also recognizing that in order to fully develop an equitable transition to the green economy, there will also be investment needed in sectors that don’t qualify as ‘green’. The challenges of defining transition financing may be harder to pin down than defining what is green.
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