An official call for financial assistance
The United Nations Framework Convention on Climate Change (UNFCCC), the Kyoto Protocol and the Paris Agreement call for financial assistance from parties with more financial resources to those that are less endowed and more vulnerable. This recognizes that the contribution of countries to climate change and their capacity to prevent it and cope with its consequences vary enormously.
Climate finance refers to local, national or transnational financing—drawn from public, private and alternative sources of financing—that seeks to support mitigation and adaptation actions that will address climate change.
How the Arab region financial system can help
Green islamic banking
Islamic banking has been an important driver of banking system growth over the last decade in the Arab region and beyond. Greater availability of Islamic financial products and instruments in recent years has helped make banking services acceptable to investors and borrowers who were previously non-bankable for religious reasons. As green Islamic finance instruments become more available, the region could become an exporter of SDG-aligned investment products across markets.
Islamic financing instruments comprise only a small fraction of microfinance supply. In Syria, for example, they comprised only 3% of outstanding microfinance loans in 2006. Providers of Islamic microfinance also tend to be small in size. Indonesia, Bangladesh, and Afghanistan account for 80% of the global outreach of Islamic microfinance. This suggests that the Arab region has a major opportunity to enhance its role in clean energy microfinance and other SDG-aligned market segments by bringing more Islamic financial instruments to the market.
Non-bank financial institutions
Non-bank financial institutions include pension funds, insurance companies, investment managers, and other financial intermediaries in the regional economy. All countries in the Arab region except for Lebanon have some type of pension program for public and private sector employees.
While non-bank financial institutions have shrunk in size since the 2008 financial crisis because of increasingly challenging market conditions and/or tightening of regulation, they have a key role to plan in SDG financing to 2030 and beyond. The insurance sector remains limited, while investment companies and mutual funds are most active in the wealthiest countries, primarily in Kuwait and Saudi Arabia.
For most of the region’s pension funds, promised benefits are not in line with retirement rules and contribution rates, yet a number of the pension funds are significant financial market players. Traditionally, GCC countries have had excess savings linked to massive revenues from exports of oil and gas. These well-capitalized pension funds have invested outside the region.
Saudi Arabia has the largest pool of pension assets. These are split between the Public Pensions Agency, for public sector workers, and the General Organization for Social Insurance, for private-sector workers. The two funds often co-invest in companies together and alongside the country’s sovereign wealth fund, the Public Investment Fund. Aside from stakes in dozens of major listed companies, they also invest in private companies. The Saudi Arabian model of co-investment and their use of blended finance vehicles could be a valuable model for regional partners looking to boost SDG-aligned investment across a number of sectors.
Approximately two-thirds of all workers in the region may not have access to health insurance or are not contributing to a pension system that would provide them with income security after retirement. The region’s pension funds have an important role in helping to finance the SDGs, and reform of the pension sector itself will also be key to ensuring the SDGs are met. Increasing access to basic health insurance and pension programs is a major opportunity.
Sovereign wealth funds
Sovereign wealth funds in the Arab region play an integral role in the health of the financial ecosystem. The GCC host some of the largest SWFs on the planet. Those economies which rely on fossil fuels use SWFs to diversify their income stream and drive progress towards the SDGs.
For example, Saudi Arabia’s Vision 2030 economic plan aims to dramatically transform the Kingdom’s Public Investment Fund (PIF), currently the 11th largest sovereign wealth fund in the world, into an investment vehicle that will diversify the economy and reduce Saudi Arabia’s reliance on oil revenues. It follows that this would have positive impacts on the SDGs, particularly SDG 8 – to encourage sustained economic growth by achieving higher levels of productivity and through technological innovation.
Arab sovereign wealth fund managers have become increasingly sophisticated as global investors, managing complex international portfolios. Some of them make strategic investments in industries that their governments perceive to be particularly relevant for the development and diversification of their national economies. The Abu Dhabi Investment Authority, the Kuwait Investment Authority, the Public Investment Fund of the Kingdom of Saudi Arabia, and the Qatar Investment Authority are all members of the One Planet Sovereign Wealth Fund Working Group.
Regional development banks
The EBRD is actively supporting sustainable market economies and boosting growth in Egypt, Jordan, Morocco, Tunisia, Lebanon and the West Bank and Gaza, investing over €10.5 billion in more than 230 projects in the region to date. The projects range from financing Africa’s largest solar plant in Egypt to supporting olive oil producers in Tunisia.
2018 marked the first investments by the EBRD in Lebanon and in the West Bank and Gaza. In Lebanon, the EBRD signed a US$ 100 million Green Economy Financing Facility (GEFF). In addition, the EBRD subscribed with US$15 million to Fransabank’s bond to boost green economy and extended a US$20 million financial package for BUTEC Utility Services S.A.L. to address Lebanon’s urgent energy supply crisis by improving the reliability and efficiency of the distribution grid.
The Islamic Development Bank (IsDB) has a stated policy objective of taking action on climate change since it is necessary for achieving sustainable development and economic growth. “IsDB understands that failing to mitigate and adapt to the effects of a warming planet could undermine gains made to alleviate poverty, improve health, promote education, improve governance and boost prosperity across all IsDB member countries”.
The IsDB has been a large provider of development assistance in the Arab region for more than 50 years. Major areas of investments include agriculture and water security with an increasing focus on ways to make such investments climate-resilient.
In 2016, UNDP and IDBG forged a new phase of partnership signing a new global Memorandum of Understanding to synergize efforts and collaborate on several strategic areas of work, including climate change. “New cooperation is being developed between UNDP and IDBG to bring together UNDP’s role as the UN’s largest provider of grant assistance on climate change, with IDBGs role as a leading provider of concessional finance for poverty reduction and the SDGs.”
Stock exchanges & clearinghouses
The Saudi stock market accounts for about 50% of the total market capitalization and has the highest turnover ratio. At the country level, Qatar and Kuwait have the largest stock market capitalization relative to GDP. Every country in the region has a stock exchange, and a number of the exchanges participate in UNCTAD’s Sustainable Stock Exchanges Initiative.
Regional clearinghouses are responsible for processing securities transactions, providing financial logistics and risk management services of millions of securities transactions every day. The Kuwait Clearing Company, Misr for Central Clearing, Depository and Registry (Egypt) and MAROCLEAR (Morocco) are three leading Arab clearing companies. When the region’s concentrated group of clearing choose to wield its influence to boost financial market robustness and transparency in line with the SDGs.
Clearinghouses service three key capital markets players in the Arab financial system. First, specialist investors who trade on the local stock exchanges. The second type of clearinghouse client includes financial institutions such as banks, insurance companies, and pension funds.
Large companies are the third clearing house client whose international business operations – particularly in the energy and agricultural commodities sectors – hedge price risks in the oil and gas value chain. By trading in forward contracts in the “futures market”, energy companies seek to insulate their profits from the effects of unpredictable price swings.
These derivative financial contracts reflect the price development of the underlying commodities, such as oil, gas, cereals, and coffee. Clearinghouses have a key role to play in developing stable financial market infrastructure and healthy money markets to support SDG financing across the region.
Fintech & financial inclusion to achieve the SDGs
Financial inclusion occurs through access to financial services such as credit, bank accounts, deposits, payments services, insurance, and pensions. Firms of all sizes across the Arab region need access to financial services to be able to invest, innovate, take advantage of market opportunities, manage cash flow and costs, and reduce risks.
Microenterprises constitute the vast majority of regional enterprises and are a significant employer (92.5 per cent of enterprises in the case of Egypt, and 63.6% share of private employment at the regional level). Individuals and households benefit from financial inclusion through a safe place to save, safer and cheaper access to remittances and other payments, loans or insurance payments to cover health or education expenses, and pensions for old age.
In using fintech to address the SDGs, Arab banks and other investment intermediaries can leverage strong economic ties with the Indian subcontinent. Indian fintech partners are piloting solutions across the subcontinent that could enable the Arab financial services industry to develop faster than their peers in other parts of the world.
Central bank action on climate risk
In December 2017, eight founding central banks and supervisors, including Morocco’s Bank al-Maghrib, established the Network of Central Banks and Supervisors for Greening the Financial System (NGFS). Since then, the membership of the Network has grown dramatically, across the five continents, including a number of central banks in the Arab region.
The NGFS works to strengthen the global response required to meet the goals of the Paris Agreement and to enhance the role of the financial system to manage risks and to mobilize capital for green and low-carbon investments in the broader context of environmentally sustainable development. Arab central banks and prudential regulators support the Network in defining and promoting best practice on green finance. [See also this article and this report for more information].
Multilateral cooperation on environmental issues in the arab region
A pattern of cooperation in the last decades of the 20th century on environmental problems shows what could be possible with coordinated regional action to finance the SDGs. Specialized organizations operating at the regional level include the Arab Organization for Agricultural Development, the Arab Organization for Industrial Development and Mining, and the Arab League’s Education, Culture and Science Organization (ALECSO), whose focus is on environmental problems. Additional collaboration bodies include the Arab Centre for the Study of Arid Lands and Dry Regions (ACSAD) and a number of regional seas programs covering the Gulf region, the Red Sea, the Gulf of Aden and the Mediterranean.
The Council of Arab Ministers Responsible for the Environment (CAMRE), created in 1987 under the auspices of the Arab League, is one organization whose role in enabling SDG finance could be enhanced. In addition, the secretariat of the Gulf Cooperation Council includes an environmental department which has developed some joint programs among its members.
The Rio Declaration on Environment and Development, signed by all 22 countries in the Arab region during the Earth Summit in Rio de Janeiro (Brazil) in June 1992, includes a number of principles on regional environmental governance and sustainable finance. Principle 4 affirms that “In order to achieve sustainable development, environmental protection shall constitute an integral part of the development process and cannot be considered in isolation from it.”
Principle 10 states the following: “Environmental issues are best handled with the participation of all concerned citizens, at the relevant level. At the national level, each individual shall have appropriate access to information concerning the environment that is held by public authorities, including information on hazardous materials and activities in their communities, and the opportunity to participate in decision-making processes. States shall facilitate and encourage public awareness and participation by making information widely available. Effective access to judicial and administrative proceedings, including redress and remedy, shall be provided.”