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Green finance: A $2 trillion opportunity

By Dr. Shihab Elborai, Dr. Raed Kombargi, Jorge Camarate, and Anthony Yammine

Article

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.

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.

About the authors

Dr. Shihab Elborai, Dr. Raed Kombargi, and Jorge Camarate are partners, and Anthony Yammine is a principal with Strategy& Middle East, part of the PwC network.

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Dr. Shihab Elborai

Dr. Shihab Elborai

Partner, Strategy& Middle East

Dr. Raed Kombargi

Dr. Raed Kombargi

Partner, Strategy& Middle East

Jorge Camarate

Jorge Camarate

Partner, Strategy& Middle East

Anthony Yammine

Anthony Yammine

Principal, Strategy& Middle East

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