Financing the energy transition in the Middle East

A century ago, technological innovation and a worldwide economic depression led to a deep recession in the Gulf. Its once flourishing pearl fishing industry was decimated by the creation of cultivated pearls and falling global demand. A few years later, the region’s first oil well was discovered in Bahrain, heralding the start of a century of oil-backed growth.

The Middle East needs to reinvent itself yet again as the world accelerates to net zero. While the current transition to cleaner, greener energy presents multiple challenges, the region has transformed before, and its considerable economic and human potential suggests it can do so once again. Chief among the daunting obstacles that will need to be removed is access to sustainable finance.

Climate change – a triple regional challenge

The impact of climate change is already being felt across the region, with more extreme weather, frequent floods and drought. For example, rising sea levels mean that the Egyptian city of Alexandria, home to 5 million people, is sinking1. While increasing sea levels are a global challenge, forecast to cost USD14 trillion per year by 2100, the Middle East is most exposed, with the biggest impact as a percentage of GDP expected in Kuwait, Bahrain and the UAE.2

The region’s economies also face a significant challenge from growing global efforts to tackle climate change. The International Energy Agency’s recent net zero scenario predicts that oil demand will have peaked in 2019 and gas will peak by 2030. As a result, net income in oil-dependent economies could drop to historic lows, challenging societies as well as economies. As the IEA report dryly notes, “structural reforms [will be]… needed to address the societal challenges.”3

Decarbonisation may be painful, but without ambitious action now, the region will miss the opportunity to limit the downside and maximise the upside from the move to net zero. It may be no surprise that support for the Paris Agreement was lowest among the Middle East’s business community, with just 35 per cent in favour according to Standard Chartered’s recent Zeronomics survey.

But there is substantial opportunity for the region to pivot towards. In a net zero scenario, annual investments in hydrogen, hydrogen‐based fuels and bioenergy will grow to nearly USD140 billion by 2050, with cumulative global capex on wind and solar each reaching USD1.5 trillion as soon as 2030.4

Pressure to transition is building

Companies in the Middle East also face the gathering momentum for greener growth. Firms responsible for up to USD37tn of assets have signed up to the Net Zero Asset Owners Alliance and Net Zero Asset Managers initiatives, respectively.5 According to our recently launched Carbon Dated report, 78 per cent of multinational corporations plan to take a zero-tolerance approach to their supply chain by 2025.

Meanwhile, consumers are also beginning to flex their muscles. Global spending on renewable energy, electric vehicles and other low-carbon technologies reached a record-breaking USD501.3bn in 2020, while more than 80 per cent of consumers across all regions believe that climate is a key issue and that companies should tackle it.6

Regulators, too, are becoming increasingly active. The number of environmental, social and governance, or ESG, regulations has increased five fold in the past decade, while the Task Force on Climate-Related Financial Disclosures is becoming mandatory on many exchanges. Carbon tariffs are being openly discussed by the EU and US. Their introduction seems to be a question of when, not if.

Intelligent capital can unlock net zero

According to our Zeronomics survey, finance is cited as a challenge by 80 per cent of executives in the region, compared with the global average of 67 per cent. Carbon-intensive companies, which need the highest levels of capital to transform, are those facing the steepest climb. Capital shortfalls are reported by 71 per cent of senior executives and 81 per cent of investors.

The solutions to these financial challenges are multi-layered. The first must be scale and ambition. As governments in the region invest, at Standard Chartered we are also committing capital: USD75bn of financing for cleantech, renewables and sustainable infrastructure by 2024. This year we published our first two transition pathways for the oil and gas, mining and metals sectors, detailing how we are supporting these industries in their journey to net zero.

However, while the Middle East needs finance, it also needs different types of capital. In some cases, completely new approaches are needed. Standard Chartered was pleased to partner with Etihad in launching the world’s first transition bond for an airline company. The bond’s sukuk format shows the natural synergy between Islamic and sustainable finance. We are now working on several other examples in different industries.

Transition finance must also be developed as an asset class, requiring new standards. Blended finance – the strategic use of philanthropic or government capital to mobilise commercial financing – can play an important role in catalysing and scaling new technologies and lowering costs. Such creative solutions have already helped mobilise USD47bn of activity in emerging-market renewables. Standard Chartered has delivered more than USD5bn of blended finance over the last four years.

In some cases, new markets are the solution, and must be created. Banks need to facilitate new flows of capital, not only into new transition technologies, but also nature-based solutions such as forestry and ocean carbon sinks. Offsets are not a substitute for reducing emissions, but well-designed carbon credits can complement and accelerate companies’ decarbonisation plans.

In this area, Standard Chartered has been pleased to work with the Taskforce on Scaling Voluntary Carbon Markets and to be part of the creation of Climate Impact X, a voluntary carbon credit exchange and marketplace for ecological solutions

Green shoots are emerging

The good news is that the Middle East is making important progress. Regional leaders like Majid al Futtaim, and governments including that of Egypt, are tapping sustainable finance markets to fund investment. In the UAE, organisations including ADNOC, Masdar and Mubadala are investing billions in technologies such as renewables, wind, waste to energy, blue ammonia, blue and green hydrogen and energy storage.7 By doing so they are carving a vital pathway for other local and foreign investors.

The UAE already has three of the world’s largest and lowest-cost solar projects, and has significant investments in more than 30 solar projects globally. Saudi Arabia has made similar announcements in renewables and sectors like hydrogen.8 Alongside Qatar, the US, Canada and Norway, Saudi Arabia is also the creator of the net zero oil producer initiative.9

Partnerships for action

Despite these encouraging signs, much remains to be done. In some ways, switching to electrification and powering by renewables is the easier task. The challenge for the coming decade may be how the Middle East tackles hard-to-abate sectors such as cement production, which alone accounts for around 7 per cent of all global greenhouse emissions.10

While some decarbonisation pathways –  such as electric arc furnaces, hydrogen, recycling – are clear, solutions are not yet scaled or commercial. In other sectors, technology is not yet available. It may be some time before any of us can board a fully electric airplane.

As the world accelerates to net zero, the Middle East can and must play a pivotal role. This will require collaboration across the region’s financial systems, regulators and governments. Three factors will be crucial: partnerships, innovation in capital and innovation in markets. Nations must take the lead in setting ambitious net zero targets, while regulators should consider how they can facilitate the energy transition.

Banks must also step up. At Standard Chartered, we are committed to playing our part and have pledged to make our own operations net zero by 2030, and the impact of our financing net zero by 2050.

The Middle East has reinvented itself before. With bold and optimistic partnerships for action and greener growth, it can transform and prosper once again.

1 https://www.weforum.org/agenda/2019/04/middle-east-front-lines-climate-change-mena/

2 https://iopscience.iop.org/article/10.1088/1748-9326/aacc76

3 https://www.iea.org/reports/net-zero-by-2050

4 https://www.iea.org/reports/net-zero-by-2050

5 https://www.netzeroassetmanagers.org/

6 https://www.nielsen.com/eu/en/insights/article/2018/global-consumers-seek-companies-that-care-about-environmental-issues/

7 https://investmentmonitor.ai/energy/gulf-states-energy-transition

8 https://www.pipelineoilandgasnews.com/interviewsfeatures/features/2021/march/the-middle-east-s-energy-transition-is-the-future-hydrogen-powered/

9 https://www.ief.org/news/international-energy-forum-commends-producers-for-forming-net-zero-club

10 https://www.iea.org/news/cement-technology-roadmap-plots-path-to-cutting-co2-emissions-24-by-2050

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