Risk concern rising, but support for sustainable finance grows in the UAE

Environmental and social considerations are gaining a following in the capital markets of the United Arab Emirates, according to our detailed study of the views on sustainable financing and investing of 90 issuers and 90 investors in the UAE, in association with HSBC.

Now in its second year, the Sustainable Finance and Investing Survey 2020 chimes with responses from our broader global survey of 2,000 market participants from Asia, Europe, the Middle East and the Americas. Everywhere in the world, capital markets have been rocked by volatility in 2020 as a result of the Covid-19 pandemic. That jarring experience shows up in respondents’ answers to our surveys, through a heightened emphasis on risk.

UAE investors particularly emphasize risk and return factors in their survey responses. Fewer than one in five believe they understand the risks and opportunities of the transition to a low carbon economy sufficiently to be able to act on it, while almost half feel these are unclear or unknown. Investors also identify risk as the major obstacle to investing in the UAE’s green and sustainable economy.

In the UAE, the Covid-19 pandemic has highlighted social stresses sharply. The case for improving access to public goods like healthcare and education is acquiring new support and impetus. At the same time, issuers and investors both remain deeply concerned by the impacts of climate change and the UAE economy’s reliance on fossil fuels.

This year’s survey also highlights challenges in the UAE’s drive towards sustainability, including the need to increase opportunities for women and a lack of local expertise in environmental, social and governance issues. Nevertheless, the share of investors in the UAE who feel held back from pursuing ESG investing more fully has fallen, from 77% to 58%.

At the same time, however, the proportion of UAE investors who see obstacles to environmental, social and governance (ESG) investing has declined noticeably since last year (from 77% in our 2019 global report to 58% in this year’s global report). Moreover, investors are enthusiastic about the potential for clean technologies in the UAE. They also see scope to invest in socially beneficial areas, such as broadening access to healthcare and education.

Meanwhile, UAE issuers are signalling an intensified focus on taking action and willingness to do so. They were already persuaded of the need to reallocate capital towards activities that promote positive environmental or social outcomes and away from those that do not. In our 2019 global survey, 80% of UAE issuers expected to do this substantially or to a noticeable extent in the next five years.

Now, they report high levels of understanding of the transition’s risks, and are comfortable with them. In our global survey this year as many as 91% of UAE issuers expect to reallocate capital in positive directions. Their appetite for sustainable investments is high in some areas. Reflecting the UAE as an oil exporting country with a well-developed car culture, they are keen on investing in electric vehicles and charging infrastructure for them, and in carbon capture. Appetite for other kinds of investment is weaker, however — such as for water-related areas like desalination.

But issuers are enthusiastic about sustainable debt — more so about sustainability-linked loans (SLLs) than green bonds. Indeed, they want banks to develop the emerging SLL field further by linking the price of lending more directly to borrowers or projects’ sustainability credentials.

The country’s reliance on fossil fuels is causing particular concern, while the Covid-19 pandemic has galvanized support for improving access to public goods like healthcare and education. Against this background, more than nine out of 10 UAE issuers expect to reallocate capital towards activities that promote positive environmental or social outcomes and away from those that do not.

Investors are somewhat less bullish and more inclined to highlight risk. Even so, notably fewer of them report obstacles to ESG investing than a year ago (now down to 58% of investors). Despite a reported lack of local expertise in ESG issues, both groups see potential in sustainable infrastructure investment. Issuers see electric vehicles/charging infrastructure and carbon capture as priorities. Investors are enthusiastic about clean technologies’ potential too.