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Middle East borrowers tipped to boost transition bond market

Fears over greenwashing claims have often dissuaded issuers from the Middle East from entering the sustainable bond markets. That could be set to change.

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Debt capital markets bankers are predicting a surge in sales of sustainability bonds from the Middle East in 2021, as issuers tap into investor appetite for new transition-friendly structures.

Until last year, the concept had struggled to gain traction in the region. First Abu Dhabi Bank set the ball rolling with a green bond in 2017 but the following three years saw just three more deals emerge.

The revival of global bond markets last summer, however, set the stage for a flurry of green bond debuts from borrowers including Saudi Electricity, Qatar National Bank and Egypt, as well as a ground-breaking sustainability sukuk from Islamic Development Bank.

That pace of growth can be maintained over the coming months, says Gareth Thomas, head of global banking in the Middle East, North Africa and Turkey at HSBC, which on January 20 announced the formation of a dedicated sustainable and transition finance team for the region.

“Green, social, sustainable (GSS) and sustainability-linked issuance out of the Middle East roughly doubled to almost $5 billion last year and we are expecting an even bigger year in 2021,” he says. “Most of the issuers we are talking to in the region have already started to incorporate sustainability into their financing strategy.”


Bankers say Middle Eastern borrowers are particularly encouraged by the emergence of new bond structures that allow them to emphasize their energy transition plans rather than risking unwelcome scrutiny by laying claim to green credentials.

“Issuers everywhere are concerned about greenwashing, but particularly in the Middle East,” says Courtney Lowrance, head of Citi’s EMEA sustainable banking and corporate transitions group. “There is a fear that they will be criticized by investors because the whole region is in transition.”

Issuers everywhere are concerned about greenwashing, but particularly in the Middle East
Courtney Lowrance, Citi

This point was driven home this month when Bloomberg reported that oil giant Aramco had excluded emissions from international operations and those not wholly owned by the company from its carbon emissions disclosures.

Alex Kennedy, head of sustainable finance solutions at Standard Chartered, says greenwashing was a major concern for Abu Dhabi’s Etihad Airways ahead of its sustainability market debut in October.

“They really wanted the transaction to land well and were cautious about any mention of greenwashing, particularly given the sector they are in,” he says. “They wanted to underline the fact that this bond was about transition.”

The result was a $600 million sukuk with a sustainability-linked structure, in which coupon payments are tied to Etihad meeting targets on carbon emissions by 2025. The deal also included a more traditional green component, with part of the proceeds earmarked for environmental projects.


The sustainability-linked bond (SLB) format first emerged in September 2019, when Italy’s Enel issued an inaugural $1.5 billion note linked to the UN Sustainable Development Goals. It started to gain traction in June, when the International Capital Market Association (Icma) published guidelines for issuance in the format, and really took off after the European Central Bank agreed in September to accept SLBs as collateral.

Issuers in the region have been concerned that the green label is too focused for them
Victoria Land, Crédit Agricole CIB
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Also new in 2019, transition bonds – which replicate the green “use of proceeds” structure but with funds allocated to decarbonization projects – proved less popular last year. Investors questioned the environmental value of the format, which in turn made borrowers nervous of committing to it.

“There is a common concern that bringing a transition bond signals that an issuer is not good enough for a green bond,” says Lowrance. “I think those fears are misguided. Some investors do hold that view but, for many, transition bonds are a very exciting concept.”

The structure received a fillip in December, when Icma – which had previously declined to publish principles for transition bonds – released a Climate Transition Finance Handbook with guidance on disclosures for both use of proceeds and sustainability-linked bonds.

Bankers say transition bonds and SLBs are particularly relevant for the Middle East. “Issuers in the region have been concerned that the green label is too focused for them, given that many are in industrial sectors or from geographies that are not associated with green and sustainable activities,” says Victoria Land, head of sustainable banking APAC at Crédit Agricole CIB.

“The transition label allows them to signal to investors and other stakeholders that they are embarking on a journey to decarbonize but understand that they still have further to go.”

Several companies that have yet to issue have expressed an interest in transition bonds
Oliver Phillips, Standard Chartered
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Oliver Phillips, who covers sustainable finance for Standard Chartered in Dubai, agrees. “Several companies that have yet to issue have expressed an interest in transition bonds,” he says. “They’ve started to put in place a sustainability strategy and committed to targets, and now they’re looking at ways to get that onto people’s radar.”

The bond market development comes against a backdrop of intense activity across the Middle East, and particularly the Gulf states, on energy transition and diversification away from hydrocarbons.

On January 17, Abu Dhabi sovereign wealth fund Mubadala Investments and the emirate’s national oil company formed a “Hydrogen Alliance” and announced a partnership with Siemens as part of a drive to build a green hydrogen industry in the United Arab Emirates.

Saudi Arabia is also looking to become a leader in hydrogen energy, as evidenced by July’s announcement that US industrial giant Air Products and Chemicals had been tapped to build a $5 billion green hydrogen plant powered by wind and solar energy in the Kingdom.

Meanwhile, Dubai’s Mohammed bin Rashid Al Maktoum Solar Park will be the largest in the world when the fourth phase comes online in the second half of this year.


Regulators in the region have also been working to promote environmental, social and governance (ESG) standards. The region’s first Guiding Principles on Sustainable Finance were published during Abu Dhabi Sustainability Week in January 2020. Policymakers in Saudi Arabia and Qatar have also indicated support for the sector.

Bankers say this is gradually translating into heightened appetite for ESG assets among local investors. As Lowrance notes, in centrally controlled economies things happen very quickly “when the button is pushed” by policymakers.

Over the last 12 to 18 months we’ve seen a major shift in the way global investors think about ESG
Cristina Lacaci, Morgan Stanley

“That’s what we’re seeing now across the Gulf region,” she says. “Governments have made the decision to embrace ESG and responsible investing and the market is moving very fast in response.”

At the same time, Cristina Lacaci, head of sustainability bonds EMEA at Morgan Stanley, says the recent market development has been primarily driven by external investors.

“Over the last 12 to 18 months we’ve seen a major shift in the way global investors think about ESG and it is now becoming part of every investment decision,” she says. “That has been a key driver for Middle East borrowers to look at ESG across their strategy, disclosure, ratings and financing.”

She is also predicting a step up in issuance volumes from the region this year. “All markets reach a tipping point where sustainable finance goes from being a niche product to be considered much more broadly by issuers,” she says. “I think we’re probably very close to that in the Middle East.”

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