Shortage of ‘bankable’ green energy projects stymies investment 

• Capital ready to be deployed
• More difficult in developing markets
• Regional banks ‘need educating’

While the Middle East has seen a surge in sustainable finance initiatives, investors are struggling to find commercially viable energy projects to invest in. This is particularly the case in developing nations, according to industry experts.

The financial sector in the UAE has pledged to “mobilise” AED1 trillion ($272 billion) in sustainable finance by 2030. 

But deploying that funding is a challenge. Mazin Khan, chief finance officer at Abu Dhabi’s main renewable energy company Masdar, says finding commercially viable projects was more difficult in developing markets than in developed ones such as Europe and North America.

“It requires creative regulatory solutions and long-term power purchase agreements to attract financing from both development and commercial banks,” Khan told a conference earlier this year.

Large corporations and governmental entities in the region are raising funds. 

For example, the Public Investment Fund, Saudi Arabia’s $925 billion sovereign wealth fund, issued its third set of green bonds last September, raising $500 million in green notes. The proceeds of green bonds and notes must be invested in environmentally credible projects.

Masdar has issued a total of $1.75 billion green bonds, primarily to fund projects in emerging markets particularly in Africa and Asia. Around 60 percent of sustainable bond issuance in the Middle East is directed to the energy sector, especially renewables.

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Behind the headlines, however, institutional players are wrestling with a shortage of bankable climate projects. 

A project is bankable when its risk-return profile meets investors’ criteria and can secure financing to implement it. 

“There is capital ready to be deployed, but project pipelines are either lacking or come with regulatory and political risks that investors struggle to price,” Mercedes Vela Monserrate, CEO of Abu Dhabi’s Global Climate Finance Centre (GCFC), tells AGBI.

At Cop28 in 2023, the UAE unveiled Alterra, a $30 billion fund aimed at “catalysing” or encouraging climate investment, intending to attract a total of $250 billion by 2030. GCFC was launched to find stakeholders and help deploy the capital.

Monserrate points to a need for guarantees, “blended finance” tools and regulatory certainty to attract private capital necessary to hit these targets. 

Green finance could help unlock $2 trillion in economic growth within the six countries of the Gulf Cooperation Council alone and more than 1 million jobs by 2030, according to Strategy&Pwc.

“Climate finance represents the greatest investment opportunity of our time, yet the speed of public institutions lags behind the urgency of private markets. We must bridge that gap to unlock capital at scale,” Monserrate says.

The financing gap is large especially when it comes to poorer countries. According to the Climate Policy Initiative’s 2023 report, less than 3 percent of global climate finance was invested in the least developed countries.

Marsh & McLennan Companies’ Asia Pacific Risk Center says that in Asia between 55 percent and 65 percent of projects “are not bankable without support from government or multilateral development banks”.

To move these barriers Monserrate says the GCFC works with partners to develop transition finance, carbon markets and mechanisms to spread the risk, such as debt, equity and guarantees. 

Partners include the International Renewables Energy Agency, the Glasgow Financial Alliance for Net Zero, Abu Dhabi Global Market and banks such as HSBC, First Abu Dhabi and Abu Dhabi Islamic Bank (ADIB).

Institutions including the World Bank, TPG, Emirates NBD and Deutsche Bank are also knowledge partners.

However critics say progress is uneven and slow, pointing to education gaps in regional banking, and inconsistent climate data.

ADIB’s group CEO Mohamed Abdelbary stresses the need for a “change of mindset” among regional banks, emphasising the need for education and awareness about green projects. 

The risk of greenwashing is also a concern. 

“People are using terminologies of marketing and promotion of so-called green products as well as transition products in a way that may not be fully transparent, fair and clear,” says Emmanuel Givanakis, CEO of ADGM financial services regulatory authority.