As it has been pointed out in numerous climate forums over the last several months, $2.4 trillion annual investment is required to achieve climate goal and limit the global average temperature increase to 1.5 or 2 degrees Celsius by 2050. It has also been highlighted that the $2.4 trillion is not sufficient and $4-6 trillion may be required each year to transition to a low carbon global economy. However, the reality is that the pledged investments towards climate goals have fallen behind year after year. That said, out of $2.4 trillion, it is estimated that $1 trillion will be financed by the private sector, a figure that can be reached through the avenue of sustainability linked financing amongst others.

In this context, what instruments has the private financial sector got to enable and accelerate progress towards its climate financing objectives? For one, sustainability-linked loans (SLLs), which are a form of financing that incentivize an organisation to implement sustainability goals. Rather than being directed to a purely green project – such as solar energy or green hydrogen- an SLL can help a traditional industry reduce its environmental footprint or improve its ESG metrics and aid its transition journey. As the transition to reach the UAE’s national Net Zero by 2050 commitment is underway, it is essential that, in addition to accelerating green efforts by building up zero-carbon infrastructure, we launch specific initiatives for the transportation, logistics, metals and energy sectors. Within this framework and despite not being the only available vehicle towards climate financing, SLLs are likely to become one of the most popular ways to source and direct money for transition plans.

Both the companies in these sectors and banks are feeling pressure to establish and execute strong ESG and transition strategies. Investors are looking closely at environmental credentials as part of their due diligence process and investing requirements. Energy providers, similarly, are grappling with the energy trilemma of energy security, affordability, and transition. Here, the focus is on two areas of action. The first is increasing the energy efficiency of processes, which is by many regarded as low hanging fruit as energy operations are traditionally highly carbon intensive. The second area focuses on advancing new technologies such as energy storage and transition, which are still developing but have immense potential for scalability as they become more affordable.

The nogaholding example – sustainability-linked financing in Action

For many organisations, including nogaholding – with which Mashreq and Gulf International Bank B.S.C. led the largest SLL in the region’s history – sustainability -linked financing is the solution to engage stakeholders while achieving their transition and sustainability goals. The Kingdom of Bahrain has made a 2060 net zero commitment and the government has committed to a 30% reduction in GHG by 2035. As nogaholding is a key contributor to national GHG emissions, the organisation has an important role to play in the energy transition decade that lies ahead by finding paths to support Bahrain’s national goals and reduce its own emissions by 25% by 2026.

The initial target of the SLL was to raise $1.6 billion, but the deal was 2x oversubscribed and ended up raising $2.2 billion. This kind of deal sends a clear signal to stakeholders that nogaholding and the Government of Bahrain are serious about the transition journey, and for banks like Mashreq, it demonstrates that there is a clear and reliable risk management process behind investment decisions. nogaholding’s SLL was a prime example of real partnership between the stakeholders and Mashreq, and a great success which demonstrates the growing appetite in the market for this kind of transition financing.

One of the recommendations for a SLL is that a transition plan needs to be in place. As part of the process of calibrating the Key Performance Indicators (KPIs) and Sustainability Performance Targets (SPTs), banks play an active role in advising clients on what actions, processes, and strategies they need to implement to get to net zero. As part of this process, it is important to demonstrate that the SPTs are truly ambitious and not just business as usual. There are checks and balances in place to identify whether targets fail to go far enough, and deal coordinators are likely to push back if targets are not sufficiently ambitious.

Together, nogaholding, Mashreq and Gulf International Bank B.S.C which coordinated the sizable deal agreed on ambitious and appropriate targets around emissions and health and safety. nogaholding employs around 15,000 people and set an ambitious target to reduce the number of safety incidents to zero. To put this into context, we reviewed several peer companies in the petrochemical industry over the last few years and only one company (in one year) achieved zero incidents.

Having third-party verification of compliance with results is an important SLL principle that enables assurance and prevents greenwashing criticism. Eventually, we expect that regulators will introduce mandatory ESG reporting – from emission intensity to health & safety credentials – that will have to be audited by third parties, so this is the first step in anticipating that scenario.

Partnerships and Understanding to drive Sustainability-linked Financing

ESG has become a crucial part of any conversation between banks and clients. Banks, investors, and companies are all under pressure to deliver on the climate transition targets we have set. Much like Islamic financing when it started, innovative financing takes some time to gain traction, but SLL is an unquestionable enabler to achieving our ambition to move along the energy transition pathway.

But in the absence of public finance, sustainability-lined financing is an interim solution to help organisations in emerging markets access financing. As Tarek El Nahas, Group Head of International Banking at Mashreq, points out when discussing the nogaholding’s SLL, “This deal can be replicated in every country, sector, company and that is the beauty of this deal. You just need partners that understand you and support you.”