Green finance and decarbonisation

Understanding sustainable finance frameworks is imperative if net-zero objectives are to be achieved

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The global sustainable finance market was valued at $3.65tn in 2021 and is expected to hit $22.48tn by 2031, according to projections from Allied Market Research.

Over the years, sustainable finance has garnered significant interest, especially considering its role in driving sustainable development. The concept represents an approach to impact investing that addresses environmental, social and governance (ESG) considerations.

With global challenges increasing, it is important to understand the concept of sustainable finance and to address elements including green and climate finance.

Green finance primarily concentrates on funding projects and initiatives that yield environmental outcomes.

In addition, sustainable finance also emphasises the significance of environmental and social risk management, acknowledging the importance of assessing and mitigating potential risks associated with economic activities, ensuring both financial viability and positive societal impact.

For its part, the UAE aims to establish itself as a worldwide centre for sustainability by introducing solutions that safeguard the environment and economy for future generations. In recent times, the focus on integrating sustainability into everyday practices and adopting environmentally friendly economic approaches has become a priority for government entities and international bodies, aligning with this vision.

Speaking on 7 December at the Sustainable Asset Management forum hosted jointly by Mashreq Al Islami and MEED in Dubai, Carlin Naidoo, group director of sustainability at global ports operator DP World, said: “Amid the frequent use of terms like ‘green’ and ‘sustainable’, having a framework outlining clear eligibility criteria is essential.

“It sets strict criteria – defining what genuinely qualifies as green or sustainable. These guidelines ensure organisations communicate consistently about genuine sustainability efforts.”

Financing the transition to net-zero

To achieve these net-zero objectives, organisations must have a robust sustainable finance framework that encourages the issuance of green and sustainable debt instruments to finance projects that enable the transition to a low-carbon and climate-resilient economy.

Issuing green, social and sustainability (GSS) bonds can directly support ESG and net-zero objectives. Industries with high carbon footprints can utilise green bonds to raise funds for decarbonisation projects, accelerating the shift towards cleaner energy.

Corporate green bonds and sukuk (Islamic bonds) resemble traditional bonds in their structure, risks and returns. The key difference lies in their allocated funding, specifically for environmentally beneficial projects like those addressing climate-change mitigation and adaptation.

“When issuing a green bond, companies are essentially showcasing their internal governance for managing it,” said Hussam Abdel Al, senior director of origination and head of sustainable finance, investment banking at Mashreq.

“External auditors verify compliance with set standards, enabling companies to confidently verify their adherence to these guidelines and show their commitment to meeting such standards.”

A green sukuk functions much like a traditional interest-free bond that is compliant with sharia principles, but it channels its funds specifically into initiatives focused on climate-related activities.

A shift towards sustainable financing is gradually taking place across the region.

Green bond and sukuk issuances in the GCC hit a record high in 2022 of $8.5bn from 15 deals, compared to $605m from six deals in 2021, according to data recorded in Bloomberg’s Capital Markets League Tables.

In October 2023, DP World raised $1.5bn in a green sukuk issuance targeted at financing its worldwide decarbonisation initiatives, further aligning its financial approach with its sustainability goals.

The proceeds generated from the sukuk issuance will be allocated to qualified green initiatives, including electrification, renewable energy, sustainable transportation and enhancements in energy efficiency.

Similarly, UAE-based Abu Dhabi Future Energy Company (Masdar) raised a $750m green bond targeted at funding dark green renewable energy projects. Such projects focus on developing economies and climate-vulnerable countries in critical need of investment.

This bond marks the initial step in the company’s wider initiative of raising up to $3bn in bonds. The funds generated from these bonds will support essential projects within the renewable energy sector, including wind power, solar energy, infrastructure for transmitting and distributing renewable energy and investments in battery storage assets.

Investors typically prioritise three key mandates when it comes to bond issuance.

“Possessing strong assets, maintaining a balanced portfolio and presenting compelling success stories strengthens a company’s strategy, making it more attractive to potential investors,” said Naidoo.

Sustainable finance framework

Organisations aiming to shift towards sustainable practices must focus on strengthening their financial frameworks, as making sustainable changes often requires upfront investment and long-term commitment.

Developing robust financial frameworks ensures the necessary resources are allocated efficiently, supporting the transition to sustainable practices while maintaining the organisation’s stability and growth.

To align with evolving best practices and reinforce its commitment to sustainability, DP World decided to update its sustainable development financing framework to a sustainable finance framework.

The decarbonisation plan under this framework is expected to cover five core elements, including electrification of equipment, enhancing process efficiency through digitalisation, sourcing renewable energy, securing low-carbon fuel and implementing carbon offset measures.

“In terms of frameworks, it is important that an organisation’s sustainability strategy aligns with the UN Sustainable Development Goals of achieving a more sustainable and better future for all,” said Naidoo.

This aligns with the firm’s objectives of achieving carbon neutrality by 2040 and net-zero carbon emissions by 2050.

Risk management

To achieve their sustainability objectives, organisations must have strong controls and procedures in place, especially when it comes to managing risks associated with projects.

Adopting a sound environmental and social risk-management approach can help identify, analyse and respond to any risk that arises during a project’s life cycle.

It is also vital for companies to have policies and guidelines in place that fall under the health, safety and environment management system, to achieve overall sustainability objectives.

Certifications such as ISO45001 aim to improve the safety of employees and other parties in the workplace.

Naidoo further explained how DP World has adopted a science-based approach to reduce its carbon footprint and emissions.

This includes scope one, or direct emissions from owned and controlled sources; scope two emissions, which are indirect emissions associated with the purchase of electricity; and scope three emissions, which covers all indirect upstream and downstream emissions in the value chain.

“The focus is to reduce our scope one and scope two emissions by 28% by 2030 in an effort to achieve carbon neutrality,” said Naidoo. 

14 March, 2024 | .By Mrudvi Bakshi