Dubai as a Sustainable Finance Hub – The Story So Far
Sustainable finance instruments such as green bonds and sukuk set to grow in prominence in coming years
By Staff Writer, Special Contributions
Dubai in July signalled its intention to strengthen its position as the region’s number one hub for sustainable investment when it announced its latest government-backed initiative – the Dubai Sustainable Finance Working Group.
Launched jointly by the Dubai International Financial Centre (DIFC) and Dubai Financial Market (DFM), the new group has a four-pillar plan under which it will develop green financial instruments, promote responsible investing, grow sustainable finance, and increase diversity and inclusion. The plan is in line with Dubai’s 2021 Strategic Plan and the UAE’s Sustainable Development Goals 2030.
The project will also involve ten other companies, including Nasdaq Dubai, Emirates NBD, Société Générale, Dubai Islamic Bank and HSBC as well as ports operator DP World and transport and logistics firm Aramex.
Investing in line with ESG principles increasingly seen as good business
Sustainable investing in line with environmental, social and governance (ESG) principles is increasingly recognised not just as the right thing to do, but good business too. It is increasingly difficult in the digital, online age for companies to get away for too long with business practices that the millennial consumer finds short-sighted, harmful or immoral.
Sustainability investing is now a US$ 30 trillion market globally , with assets invested in line with ESG principles growing 17% a year. A study by Boston Consulting Group showed that top ESG performers attain 3%-19% higher valuation multiples than do median ESG performers. A survey by State Street Global Advisors found that 68% of asset owners believe that integrating ESG factors into business decisions significantly increases returns and 69% believe it reduces volatility.
The techniques used in sustainable investing have advanced as well. While early ethics-based approaches such as negative screening remain relevant today, other strategies have since developed. These newer strategies typically put less emphasis on the ethical concerns and are designed instead to achieve a conventional investment aim: maximizing risk-adjusted returns.
Challenges remain in growing ESG adoption
Still, challenges remain for businesses that would like to widen their adoption of ESG principles. Fees and expenses are one hurdle, as is the depth of knowledge within an organisation on what the ESG principles entail and how to put them into practise. Businesses also say it can be difficult to benchmark their performance against peers or to get accurate assessments from external ESG managers. Besides this, there remain a still considerable number of businesses leaders who simply don’t believe that adopting ESG principles can benefit their bottom lines.
This is where government support can come in, to develop and promote ESG so that it becomes still more prevalent and potentially one day becomes the norm. The Dubai Sustainable Finance Working Group aims to cultivate sustainable companies and green financial instruments, and to encourage responsible investing.
Dubai is already a regional centre for sustainable initiatives. In 2018, eleven UAE-based financial institutions signed the Dubai Declaration on Sustainable Finance, endorsing their support for the sustainability goals of the UAE’s Vision 2021 and the government’s commitment to the United Nations’ Sustainable Development Goals and the Paris Climate Agreement. In signing this declaration, the signatories recognised the role that finance can play in enabling a climate-resilient and inclusive green economy and sustainable development.
This they expected to achieve by improving their own environmental and social performances; by lending to, investing in, facilitating financing for, or providing insurance to projects, businesses and customers with sustainable purposes; supporting growth in the small- and medium-sized enterprise (SME) sector; providing stakeholders with economic, environmental and social opportunities; and taking into account the climate and ESG risks in their risk management processes.
Private companies also showing increasing interest in sustainability
Dubai and the other emirates of the UAE have introduced a number of environmentally friendly strategies and initiatives as they transform towards a green economy. In one example, Dubai has begun to green its fleet of government vehicles by purchasing over 4,000 electric and hybrid cars to replace earlier gas and diesel vehicles. The government is also providing support for private drivers to switch to green vehicles. Another major green initiative in Dubai is the Mohammed bin Rashid Al Maktoum Solar Park, which is the largest single-site solar park in the world.
The Dubai Electricity and Water Authority (DEWA) in 2016 established the AED 100 billion (US$ 27 billion) Dubai Green Fund to stimulate investment in clean energy and other green projects by providing seed financing, a de-risking facility, and facilitating crowdfunding. The Dubai Green Zone established as part of the plan is dedicated to attracting clean technology companies.
Sustainability is a fast-growing area of interest for private businesses in Dubai as well as government bodies. In 2019, Dubai Financial Market (DFM) – the world’s first Shariah-compliant stock exchange –launched a blueprint to promote ESG issues among its listed companies, with the intention of becoming the region’s leading sustainable financial market by 2025. DFM formed a sustainability committee to create awareness of ESG practices among local and regional investors. DFM also reported in 2019 that it had seen considerable improvements in corporate governance in more than two-thirds of its listed companies in the three years since it signed a partnership with Hawkamah Institute for Corporate Governance. It said Hawkamah had so far trained over 100 company secretaries and briefed the boards of more than 65 percent of DFM-listed companies on how to drive good corporate governance.
Green bonds a potential growing source of sustainable finance
In 2018, Dubai ports operator DP World secured a US$ 2 billion green Shariah-compliant loan which had an interest rate linked to the company’s carbon emission intensity. This was the first such loan for a corporate in the Middle East.
One increasingly popular method of financing sustainable projects is green bonds. Islamic green bonds, or sukuk, are an as-yet sparsely used tool, though this is likely to change as both Islamic finance and sustainable finance become more widespread, particularly in the Middle East. In May this year, Dubai-based malls developer and operator Majid Al Futtaim issued over $500 million-worth of 10-year, dollar-denominated sukuk. All proceeds of the issue will be earmarked for green projects, particularly renewable energy and sustainable water management. The sukuk were the world’s first financial instrument of their kind to focus on sustainable investments.
The global green bond market has grown from nothing five years ago to roughly US$ 200 billion today, and although interest in this area has been less than in other parts of the world, this is expected to rise in coming years in line with government aims to green the economy. Once one company like Majid Al Futtaim dips its toes into the market, others are soon to follow.
Courtesy By: ZAWYA