When Masdar, the UAE’s flagship renewable energy company, launched its $750 million green bond in mid-2023, the response was overwhelming. Investors scrambled to get in, oversubscribing the issuance nearly six times.

A similar story played out a year earlier with Abu Dhabi National Energy Company (TAQA), whose $1 billion green bond was met with equal enthusiasm.

The message from capital markets was clear: sustainability sells, even in the oil heartland of the Middle East.

While green finance remains a relatively new concept in the region, it is rapidly gaining traction. Data from Bloomberg’s Capital Markets League Tables reveals that in 2023, annual issuances of green, social, sustainable, and sustainability-linked bonds (GSSB) in the Middle East and North Africa (MENA) soared to a record $24 billion, a 155% increase. The UAE and Saudi Arabia accounted for 77% of the total regional issuances.

For decades, Middle Eastern energy financing was dominated by fossil fuels. Banks and sovereign wealth funds funneled billions into oil and gas projects with little consideration for environmental concerns. Now, shifting government policies, evolving investor appetites, and economic necessity are pushing green bonds to the forefront of the region’s sustainability narrative.

Hedge Against Oil Price Volatility

Gulf governments are eager to future-proof their economies against oil price volatility. The UAE is pledging net-zero emissions by 2050 and Saudi Arabia by 2060, and both are driving a wave of renewable energy projects.

The UAE’s role as host of COP28 in 2023 amplified this momentum, with corporate and government entities collectively issuing nearly $8 billion in sustainable debt. The year saw 11 debut green issuers in the UAE alone, including DP World’s $1.5 billion sukuk (Islamic financial certificate), the Sharjah government’s $1 billion bond, and significant issuances from TAQA, Emirates NBD, Masdar, Mubadala, Aldar, and Commercial Bank of Dubai.

Traditional Islamic finance players such as Dubai Islamic Bank and Abu Dhabi Islamic Bank also joined the trend, with green sukuk worth $750 million and $500 million, respectively.

Saudi Arabia is also stepping up. The kingdom accounted for 32% of the region’s total green financing volume, marking a 69% year-on-year increase. The Public Investment Fund (PIF) was the region’s largest issuer, raising $5.5 billion in February 2023 alone. Other key players included Saudi National Bank, Saudi Electricity Company, and Al Rajhi Bank, each issuing over $1 billion in green debt.

Beyond the Gulf, other MENA countries are eager to ride the green finance wave. Egypt has made headlines with its Green Panda Bond, the first from the region issued in China, raising $479 million for public transit projects. The bond also benefited from a partial guarantee by the Asian Infrastructure Investment Bank, a move designed to lower Egypt’s borrowing costs.

Meanwhile, Jordan Kuwait Bank made history with Jordan’s first green bond, supported by blended financing from the International Finance Corporation (IFC). First-time issuers are emerging across the region, signaling a broader shift, but questions about market liquidity and long-term sustainability remain.

Emergence of Green Sukuk

One of the most significant trends is the rise of green sukuk. Islamic finance issuances accounted for over a quarter of total MENA green debt for the first time, reaching approximately $6.5 billion in 2023. This figure represented over half of all global green sukuk sales, with major issuances from ADIB, DP World, First Abu Dhabi Bank, Majid Al Futtaim, and Aldar.

The growing intersection of Islamic finance and sustainability reflects a broader shift in investor priorities. Sharia-compliant green bonds provide a unique opportunity for Middle Eastern economies to tap into ethical and sustainability-conscious investors while expanding the depth of their capital markets.

Recently, Dubai Electricity and Water Authority (DEWA) has invited international developers to submit expressions of interest for a tender to develop the 1,600 MW seventh phase of the Mohammed bin Rashid Al Maktoum Solar Park. This phase, which is expandable to 2,000 MW, will use photovoltaic solar panels and a battery energy storage system with a capacity of 1,000 MW for six hours, providing a total storage capacity of 6,000 MWh.

Similar mega renewable energy projects have been announced in Saudi Arabia and Oman. But these projects require capital, often tens of billions of dollars, when state finances are under strain, and investors are demanding proof of commitment to sustainability.

As governments look to balance their budgets, they are turning to alternative financing options, such as green bonds, to support these initiatives. Green bonds offer a valuable mechanism for tapping into global capital markets, enabling the financing of renewable energy projects while reducing reliance on state budgets.

In one of the biggest financing deals made recently, Saudi Arabia’s $8 billion NEOM green hydrogen plant secured its financial close, becoming the largest green project financing in the region.

Standard & Poor’s Global Ratings recently reported that sustainable bond issuances in the Middle East reached approximately US$16.7 billion in the first nine months of 2024. The Middle East’s green finance momentum shows no signs of slowing down.

Sharjah issued its second sustainable bond in February, Oman introduced a Sustainable Finance Framework, and Qatar is preparing to launch its first green bond. Saudi Arabia, which has already raised billions through PIF, is now contemplating its sovereign green issuance and has unveiled a Green Financing Framework to map out its climate commitments.

While the rapid expansion of green finance is encouraging, critical questions remain. Is the region truly committed to sustainability, or is this a convenient way to tap into a growing global investor base? Liquidity concerns, transparency issues, and pricing inconsistencies still loom large. Masdar’s CEO put it bluntly: “I’m not convinced that people are paying that greenium right now.”

Ultimately, the success of the region’s green finance push will depend on whether these issuances translate into real and measurable environmental impact. Investors are watching closely. The Middle East’s green finance boom is here, but whether it is a lasting transformation or just another financial trend remains to be seen.