Middle East banks can benefit significantly from financing the transition of the oil and gas industry to cleaner, more sustainable technologies.
Regulators and policymakers could address the challenge by establishing carbon prices that adequately represent the cost of greenhouse gases and are aligned with international carbon price levels, Boston Consulting Group (BCG) said.
A new report by the consultants said there should also be financial and other incentives to support decarbonisation and develop environmental and industrial policies that align with climate objectives.
The report said that in 2016-2020, green bonds in the region grew by 38%, and in 2020 alone, Middle Eastern governments drove 97% of green bonds compared to 13% four years prior to that.
The report made three recommendations, first providing financing for non-bankable green projects with lower risk-adjusted returns or higher investment risks, such as supporting research and development of innovative technologies such as renewable power and carbon capture utilisation and storage (CCUS).
The second is mobilising private capital investments in green projects by improving their risk-adjusted returns with various risk mitigation instruments.
Using expertise to provide support and advice to policymakers and regulators on the reforms needed to scale up climate finance was the third recommendation.
Banks in the region need to review the risk of transition to cleaner energies on their portfolios and to prepare for the future, said Aytech Pseunokov, project leader at BCC, as they become the key funding source.
“With time, as climate finance regulation is rolled out and green projects become more bankable, banks and financial institutions will become the key source of funding for the climate transition,” he said.
“Until then, Middle Eastern banks would benefit from reviewing the impact of transition risk on their portfolios and preparing themselves for the future by declaring portfolio emissions reduction targets and joining global alliances to exchange best practices.
“Doing nothing means maintaining their portfolios’ ever-increasing exposure to the impacts of climate change a far riskier option.”
(Reporting by Imogen Lillywhite; editing by Brinda Darasha)