UAE banks can lead the way on green financing – and it can be lucrative too
A world of possibilities are there for UAE’s biggest banks to build green credentials
A key focus for the UAE ahead of the COP28 summit has been climate finance. The UN believes $125 trillion of climate investment will be needed by 2050 if the world is to slash its emissions and meet its Paris agreement goals.
The question is: Are banks doing enough to support this? Or indeed, doing enough on sustainability, making a positive environmental and social impact? Apart from the mandate from regulators, banks are under increasing pressure from investors, customers and employees to go green.
I believe sustainability will be the next frontier of competitive advantage for banks globally.
In a recent survey, over two-thirds of customers ranked sustainability as a Top 5 purchase decision driver, while 20 per cent said they would be willing to pay a 10 per cent premium for sustainable products. As for employees, as much as 40 per cent of talent seek to work for sustainable banks.
The United Nations principles for responsible banking were created in 2019, and already half of global banking assets are covered under them. Created by the UN in partnership with founding banks, the principles are designed to be integrated into banks’ strategies and activities, bringing purpose, vision and ambition on sustainable finance to the core of the organisation.
One offshoot is the UN Net Zero Banking Alliance that brings together global banks committed to aligning their lending and investment portfolios with Net Zero emissions by 2050. About 138 banks have signed up to this alliance globally, FAB being the first signatory from the GCC.
Green as a theme
Sustainable finance has grown fast in the past five years to become now a major theme for banks. Key areas are green hydrogen, green fuels and low emission power infrastructure.
Over $900 billion of sustainable bonds have been issued in 2023, about 15 per cent of total issuance, and up 65 per cent from 2020. Sustainability related syndicated loans are 13 per cent of global syndicated market volumes.
Green supply chain finance is gaining rapid popularity, and some banks have set up an SME marketplace for green products. Given that global green debt is expected to be a $100 billion per annum revenue line for banks by 2030, ‘green’ is not just an imperative of the Chief Sustainability Officer, but of banks’ CEOs as well.
On the retail banking front, banks have started offering green deposits (ring-fenced for green lending), green mortgages (for energy-efficient homes), green loans (for electric vehicles) and green credit cards (recyclable plastic; rewards for low carbon transactions).
Sustainable investments are increasingly popular with wealthy customers with banks offering ESG funds and climate transition funds. The Swiss digital bank Neon offers a carbon neutral account while Aspiration, a US fintech, rounds up all customer spends to plant trees.
Nutmeg in UK offers a robo-advisory for making socially responsible investments. Overall, green banking products are expected to grow at a healthy rate of 4-25 per cent per annum.
Rising to the challenge
Closer home, banks in UAE are making rapid strides in their journey to green. The Top 6 banks had collectively committed to Dh190 billion of green loans by end-2022. While Emirates NBD has recently launched the largest green bond issuance from a regional bank, FAB has committed to $75 billion of green financing by 2030. (Both these banks have appointed Chief Sustainability Officers.)
Dubai Islamic Bank has participated in green Islamic capital market transactions of over $7 billion and ADCB links executive compensation to KPIs on sustainability.
In the future, banks have a critical role to play in driving sustainability. They will need to integrate sustainability into customer journeys and enable customers to make green financial decisions.
Already the push towards digitalisation in banking is helping to make transactions paperless. The bigger challenge for banks, especially for those based in the hydrocarbon-rich Middle East, is to allocate capital away from high emissions activity to new technologies.
They have to make this transition while avoiding allegations of ‘greenwashing’ that have hurt the reputation of many global banks.
The COP28 summit in Dubai will undoubtedly put more pressure on UAE banks to focus on sustainability. Given the stellar growth and healthy profitability of the banking sector in the country, this is a challenge that the industry should happily embrace.
For a greener future for all of us…