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Middle East borrowers turn to sustainability-linked loans

SLLs offer more flexibility for borrowers targeting sustainability, but the structure is coming under scrutiny around the world for potential greenwashing concerns.

Middle Eastern Businessman on wind turbine in farm
Photo: Getty Images

In 2022, Middle East bond issuance dwindled sharply. According to Dealogic, deal volumes shrank 16% between 2020 and 2021, followed by a 59% drop from 2021 to 2022. A combination of lower oil prices, market volatility and high liquidity at banks meant that for regional fundraisers, the easiest and cheapest route was the bank market.

An upshot of this was a rise in regional issuance of sustainability-linked loans (SLLs), and with COP28 around the corner – hosted this year in Dubai – it is no surprise that banks and borrowers alike are taking the opportunity to bolster their environmental, social and governance (ESG) portfolios.

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Like sustainability-linked bonds (SLBs), SLL products offer a cost of financing that varies depending on the extent to which the borrower meets pre-set key performance indicators (KPIs) that focus on one or more aspects of sustainability – some structures offer discounts if the KPIs are met, while others provide penalties if they’re not.