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MENA Banks Must Prioritise Climate Risks Ahead of COP28 Finds EY

Middle East and North Africa (MENA) banks are showcasing the significance of environmental, social and governance (ESG) in the region’s banking sector. In fact, nearly three in four banks analysed have already developed ESG strategies according to EY

The inaugural EY ESG MENA Bank Tracker has been released in advance of the opening of COP28 in the United Arab Emirates (UAE) on 30 November. It tracks the collective progress of the top 20 banks across the MENA region in Bahrain, Jordan, the Kingdom of Saudi Arabia, Kuwait, Morocco, Qatar, and the UAE. The study from the tracker was published in a report called Bridging the gaps: ESG governance to climate action.

EY aims to provide analysis that can help banks benchmark themselves against their peers. It is also designed to inform policymakers and regulators across the region. Especially in regard to the changes that may be required to help banks play an active supporting role in the region’s net zero commitments.

Climate considerations

The findings show that more than 80 per cent of the banks surveyed have not issued a climate commitment statement. Meanwhile, just 60 per cent say that they carry out materiality assessments. The report also highlights that less than 20 per cent of the banks have developed climate risk policies. Furthermore, only a fifth have created robust ESG frameworks backed up by key performance indicators.

The findings from the EY ESG MENA Bank Tracker also suggest that most MENA banks are not embedding sustainability considerations into their overall strategies. Particularly climate change.

Charlie Alexander, EY MENA financial services leader, says: “Prioritising climate risk mitigation is crucial for banks, and the integration of ESG risk frameworks and policies into their risk management strategies needs to be accelerated. Moreover, it’s essential to bridge the gap in implementing ESG strategies at the board level.

“There’s an opportunity for banks in the region to make significant progress by adopting fully transparent ESG practices with clear responsibilities, accountability, and robust measurement tools. While there’s room for improvement in aligning with global best practices, the MENA region can take advantage of proactive support from regulatory bodies to enhance and evolve their ESG strategies.”

Sustainable finance offerings on the rise

The report shows that those banks that are already making progress in aligning ESG climate risk into their commercial strategies are also ahead in the development of sustainable finance products and services. Of the banks surveyed, 45 per cent have established sustainable finance frameworks, which are typically linked to environmental and social considerations.

Many of these frameworks are backed by international standards. Such as, the International Capital Market Association’s (ICMA) Green Bond Principles (GBP), Social Bond Principles (SBP) and Sustainability-Linked Bond Principles (SLBP).

The survey shows that MENA banks compare favourably to global banks in the provision of sustainable financing products to corporate and institutional clients. A full 70 per cent of banks lend to renewable energy projects Additionally, 65 per cent issue green, social or sustainability bonds. Furthermore, 40 per cent also provide sustainability-linked loans, and 15 per cent are involved in green repo financing.

In contrast, there is less emphasis on sustainable retail bank products. The most popular is the green or hybrid vehicle loan, provided by 35 per cent of banks. Additionally, 25 per cent of banks extend solar loans and 10 per cent green mortgage loans.

Jessica Robinson, EY MENA sustainable finance leader, says: “It’s inspiring to see many banks in the region expanding their offerings of sustainable finance products, particularly in key markets where product innovation is thriving. Nevertheless, given the MENA region’s heightened vulnerability to the effects of climate change, it’s imperative that banks act swiftly to incorporate climate risk assessments into their comprehensive risk management frameworks.

“The ESG MENA Bank Tracker emphasises that there is room for improvement among major financial institutions in fully grasping, managing, and seamlessly integrating climate risk assessments within their governance structures and commercial strategies.”

Imperatives for meaningful ESG integration

As part of its analysis, EY has leveraged the findings of the survey to formulate seven priority areas that can assist banks and guide regulators in the development and integration of ESG policies.

ESG Strategy and governance

Banks should focus on ESG strategic thinking and direction by embedding ESG into broader commercial strategies and business plans. They should back this with robust governance and oversight covering ESG’s risks and opportunities, as well as progress on ESG implementation. To establish an effective governance structure or framework, there needs to be clear roles and responsibilities and accountability across business lines supported by a well-resourced sustainability team with the right capacity and skills.

Stepping up sustainable finance

Banks in the region should look to expand their product offerings for corporate clients by providing ESG advisory and underwriting services, sustainable trade and supply chain finance, sustainable repos, and carbon-specific tools. Meanwhile, they can offer retail clients sustainable cards, green deposits, sustainability-linked loans and ESG risk tools. Banks will have an important role to play once a voluntary carbon market is established in the region.

Climate risk management

Financial institutions will play a critical role in the fight against climate change, which starts with assessing climate-related risks and opportunities. Climate risk assessments are an iterative journey, taking several years to develop and integrate. The sooner MENA banks begin this journey, the faster they will understand the risks they face. Additionally, the banks leading in this area will find opportunities to increase profitability by developing new products.

ESG risk integration

Further action is required to fully integrate ESG risks into enterprise risk management frameworks. Many leading banks in MENA are still exposed to environmental and social risks, as over half of the banks assessed do not undertake an ESG risk assessment or frame an ESG risk policy or statement. To address this, banks should prioritize the integration of ESG risk assessment and management into their overall risk management frameworks. 

Toward net zero

Banks must start baselining and reporting their greenhouse gas emissions through recognized definitions according to the Greenhouse Gas Protocol, which is the world’s most widely used greenhouse accounting standard. Under its guidelines, banks must start baselining and reporting the Greenhouse Gas Protocol’s Scope 1 and Scope 2 emissions as a minimum activity, with the aim to step up to Scope 3 in the next two years.

Engage with global sustainability initiatives

Banks should consider the advantages of signing up for global sustainability initiatives like the UN Principles for Responsible Banking (PRB). By doing so, they can learn from peers how best to align their businesses with the UN Sustainable Development Goals (SDGs) and the Paris Climate Agreement.

ESG disclosure will drive progress

ESG reporting is likely to become quite onerous rather quickly. The expectations for reporting on an international level are becoming more prescriptive and complex, which can be seen in the International Sustainability Standards Board’s (ISSB) recent standards. ESG and sustainability are crucial elements for the financial performance of banks and standard setters are trying to enhance their alignment.

Author

  • Francis is a journalist and our lead LatAm correspondent, with a BA in Classical Civilization, he has a specialist interest in North and South America.

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