Governments and businesses in the GCC are focusing on environmental sustainability, but thus far the financial sector has not kept pace. Developing the right structure and mechanisms for green finance can help unlock a huge opportunity for the region: $2 trillion in economic growth and more than 1 million jobs by 2030. Moreover, green finance—which looks at the environmental impact of investments along with purely financial returns—can accelerate the region’s goals of economic diversification, job creation, and, if structured correctly, attract foreign investment. To capture this opportunity, GCC governments should focus on four priorities: enact sustainability policies; create a new green investment body; strengthen capital markets; and establish, or join, standard and transparent reporting mechanisms for environmental performance.
Sustainability is becoming the chief societal priority around the world. Mainstream financial institutions today make investment decisions only after carefully studying environmental, social, and governance (ESG) risks. The world’s largest asset managers, insurers, and stock exchanges are redirecting resources massively toward sustainable investments, with profound implications for governments, investors, and companies. In the EU and the US, investors poured a record $156 billion into sustainable investment funds in 2019, nearly triple the previous year’s amount.
That kind of investment can help address the steep declines in foreign direct investment that the region has experienced recently. In previous decades, the GCC could attract foreign investors seeking low-cost hydrocarbons for sectors such as petrochemicals and refining. As ESG scrutiny has increased, investors’ appetites for those industries have declined proportionally, leading to a drop in foreign direct investment. Measured as a percentage of GDP, such investment into the GCC has declined by about 40% over the past decade, according to the World Bank.
To replace that, the GCC must capitalize on its new competitive advantage—extremely low-cost renewable resources. We calculate, based on figures from the International Renewable Energy Agency and International Energy Agency, that the cost of producing solar, wind, and green hydrogen are 2.5 to 3 times cheaper in the region compared to global averages. The region’s traditional, hydrocarbon-based projects may be less attractive in terms of attracting green finance, but emerging opportunities in renewable energy and carbon capture and utilization are greatly sought-after.
To quantify the benefits of green investing in terms of economic diversification and growth, we looked at six major non-oil sectors in the GCC, including power, water, construction, mobility, food, and waste management. We estimate that the cumulative GDP contribution of these sectors can reach $2 trillion through 2030. With the expansion of these sectors, we estimate they could add over 1 million jobs by 2030.
First, governments should enact policies that promote environmental sustainability in all industries. These include fees on fugitive carbon, plastic, and other materials that generate a negative environmental impact. They should implement improved regulatory standards for emissions, recycling, and building codes, along with incentives in areas such as renewable energy usage and electric vehicles.
Second, GCC governments each should create a new green sovereign wealth fund with the credibility and capabilities to engage with, and attract, international investors. This new body should not be beholden to the region’s legacy mindset regarding sustainability, which treats it as a cost burden, rather than an opportunity.
Most important, this investment body should act as a credible minority partner that attracts international and local private investors, rather than keeping them out. The right approach is akin to seed capital—governments that create the right environment for green finance can invest a small slice of the required capital and attract the remainder from institutional investors and other players around the world. Indeed, outside money can exceed the government’s stake by a factor of 11 to one.
Third, GCC governments should continue opening up, and strengthening, the region’s capital markets. A key constraint is that these capital markets are relatively underdeveloped. Building up these capital markets will allow investors to easily exit successful investments. In addition, it will help investors access GCC funds, such as those held by high-net-worth individuals and families.
Fourth, GCC governments need to build transparent, standardized, and comprehensive reporting systems. These will allow investors outside the region to judge the performance of sustainability initiatives objectively. As environmental returns can be difficult to measure, systematic regulation and validation frameworks can help governments maintain the credibility of their sustainability agenda.
Transparent measurement and reporting mechanisms are a complex challenge for sustainability initiatives worldwide. Governments in the region are unlikely to solve this challenge on their own. They will make faster progress, and have more credibility, by collaborating proactively with the international organizations already working to develop ESG accreditation and reporting.
GCC countries have already embarked on the transformation to sustainability. The central issue now is who will be best positioned to support these initiatives and capture the largest share of the economic prize. It is a race to position, differentiate, and capture green finance market share. If GCC governments are to win this race, they need to take decisive action.
This article originally appeared in Arabian Business, March 2021.