Green bonds in the Gulf

Background & Aims: This paper aims to highlight the benefits of corporate and government entities in the Gulf states to issue unsecured and covered green, social and sustainable bonds, which appear well suited to promote environmental and social investment in these resource-rich economies. These benefits have already been illustrated in European countries, and Islamic finance lends itself to the structuring and issuance of these instruments. Green bonds represent an effective and accessible way for the environmental and social agenda to be advanced throughout the Gulf, and to raise the region’s standing globally in addressing climate change and social issues, through strengthening of environmental, social and governance (ESG) structures.
Design/methodology/approach: The study examines the evolution of covered and uncovered green bonds and their application in the Middle East, where they meld with shariah principles, as in the form of sukuk (Obaidullah, 2017; Liu, 2021). Different characteristics of green bonds are explored, including issuance process, use of proceeds, eligible assets for covered bonds, disclosure standards, project evaluation and selection, and reporting. The approach contrasts European and North American experience with what Middle Eastern economies can expect going forward, in an effort to deliver some recommendations in view of future prospects.
Findings: Green, social and sustainable (GSS) covered bonds only account for 3% of total GSS bonds, issued globally in the debt markets, suggesting substantial growth potential (Caron and Munoz, 2021). There is observed to be mounting interest in green bonds in Europe, Asia and North America, where they are proven to be efficacious in helping to meet financing and environmental targets. While social or green classifications are not always directly credit relevant, if they support demand leading to narrower spreads, this can be positive for credit ratings, other things being equal (Pagani et al., 2021; Zerbib, 2019). The ESG relevance scores assigned by credit rating agencies may have a credit impact mostly in the social and governance categories (Dow and Kopiec, 2021). The social and environmental challenges of the Middle East’s developing economies require substantial funding in a resource-driven and cultural context. The increasing use of green bonds, already under way in the Gulf states, as well as Malaysia and Indonesia, is found to be an effective solution to help meet these challenges, while propelling the agenda of responsibility forward (Tang and Zhang, 2018). They are governed under standard International Capital Markets Association (ICMA) guidelines and principles, in combination with the Global Reporting Initiative (GRI) template.
Contributions/Implications: This focused overview of green bonds reveals them to be effective instruments for promoting an agenda of environmental and social responsibility, for government entities and for corporations, including those involved in the energy industry (Valavina et al., 2021). They ought to form an integral and increasing component of funding plans going forward.