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How is the Middle East calling for a just and fair net-zero transition?

15 minute read 01 May 2024
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Government and Public Sector
Sustainability

Exploring the complexities and opportunities of a just and fair transition to net-zero emissions in the Middle East with a focus on the finance industry.

In brief

  • The importance of a just and fair transition to net-zero emissions in the Middle East is highlighted, aligning decarbonization with broader societal concerns and development goals.
  • The financial sector has crucial role in managing associated risks and connecting climate policy with economies.
  • There is a need for a supportive environment for financial institutions by policymakers and regulators, along with the integration of gender-centric policies.

The Middle East's transition to net-zero emissions is crucial in the global climate change efforts. Two key questions arise: how to share its benefits across the region and how to ensure it is fast, fair and inclusive. The role of financial institutions is crucial in achieving net zero, thus necessitating a swift and equitable transition. However, it could be stated that the region's financial sector is not fully prepared for this critical role, as it often overlooks the broader social implications of decarbonization.

To address this, they must not only strive for net-zero emissions but also consider the social risks and opportunities that come with it. This involves considering the needs of different industries and the communities they support.

Governments and regulators also need to provide suitable incentives, expectations and frameworks to facilitate this transition. While COP28 demonstrated the Middle East's efforts to reduce emissions, it also underscored the importance of considering societal needs in devising a just and sustainable future.

A just and equitable transition to net zero

Our understanding of decarbonization has significantly grown recently, with strategies now being implemented at all levels, from boardrooms to international institutions. There's a growing call to align these plans with broader sustainable development objectives via the Sustainable Development Goals (SDGs). However, the global transition needs to be prompt, substantial and ensure no one, particularly marginalized groups, is left behind, striving for a just and equitable shift.

A just and fair net-zero transition goes beyond decarbonization to create a sustainable future where everyone benefits. In principle, it ensures everyone's involvement in the transition and no one is left behind. Since being mentioned in the 2015 Paris Agreement, it gained momentum and became central to the COP26 and COP27 discussions, United Nations Secretary-General's priorities and 2022 IPCC report. The UAE's COP28 Presidency continued the focus on a just transition. If well-designed, a just transition can address existing social and economic inequalities, ensuring marginalized groups are also included in our sustainable future.

Designing a just transition to net zero requires considering both environmental justice and social equity. Often, marginalized and vulnerable groups bear the brunt of climate change and transition processes, especially in carbon-intensive economies. Both environmental justice and social equity must be accounted for in transition plans and success measurements. The Just Transition Initiative offers a framework to assess these processes, emphasizing social inclusion and distributional impact in its action plans.

How EY can Help

Complex interactions in just transition realization

Just transition involves complex interactions across various levels. For effective design, interdependencies like financial flows, geopolitics, technology shifts and supply chain dynamics need understanding. Governments should make policies focusing on creating opportunities and employment for marginalized groups in emerging industries like clean technology, sustainable agriculture and resource management. Local communities should be actively involved in decision-making and policymakers should provide access to education and training. Achieving a net-zero world inclusively will involve the financial industry in creating new products moving capital towards regions needing the most support and managing societal risks effectively, as governments and regulators shape a suitable transition landscape.

 

Middle Eastern countries are highly exposed to climate change impacts, such as rising temperatures, frequent droughts and extreme weather events. The decarbonization journey in the region is complex due to resource scarcity, existing conflicts and other dependencies. However, there have been ambitious net-zero targets set by several countries, influencing major companies to follow suit. Policies and initiatives are being devised for a sustainable, diversified and inclusive economy. For the more proactive countries, this transition is seen as a significant opportunity for economic growth and societal advancement.

 

The Middle East Green Initiative (MGI), launched in 2022 by Saudi Arabia, exemplifies climate action leadership. Prioritizing collaboration, MGI unites regional countries to jointly tackle climate change, aligning with the Paris Agreement targets. It aims for emission reduction, economic diversification, job creation and private sector investment. Its goal is to improve life quality, safeguard future generations and uphold global energy security, sowing the seeds for a just transition in the Middle East.

 

Transitioning to net zero poses a unique challenge for the Middle East, given their economies' reliance on fossil fuels. Yet, this shift prompts crucial discussions on shaping the regional pathway and exploring benefits beyond decarbonization. The diversification toward a cleaner future should be fair and inclusive. Governments face the task of ensuring broader sustainable and inclusive development. For instance, the region must address its severe water scarcity, worsened by climate change and expanding populations, in its net-zero plans. Potential solutions involve boosting the water management industry to promote sustainable agriculture and water-efficient technologies. These advancements can produce secondary benefits and drive impact beyond decarbonization.

 

Role of financial industry in connecting the dots

Financial institutions are key in achieving net-zero emissions due to their role as capital allocators, which provides significant influence on business transitions. The increasing focus on integrating environmental, social and governance (ESG) criteria into decisions promotes more sustainable practices in businesses. Additionally, these institutions have a growing responsibility to incorporate climate-related risks into their risk management processes, as they affect the safety of financial markets. They are progressively ensuring that climate risks influence strategic planning and pricing models.

 

The financial industry has a crucial role in the net-zero transition, extending beyond energy systems to the broader economy. By connecting climate policy with real economies and markets, it can channel capital where needed and manage transition risks. Just transition also presents a strategic opportunity for this sector, balancing the need to upscale climate finance and reduce inequality. It holds potential for transforming business models, ensuring long-term growth and success.

 

Turning to the Middle East: from laggards to leaders?

Middle Eastern businesses have made substantial progress in reducing emissions, though financial institutions have been slower in their climate change responses. With ongoing climate conferences, the focus on the role of these institutions in decarbonization has increased. While there have been numerous bold announcements, more concrete actions in sustainable finance deals are emergent. Advanced institutions are setting concrete targets related to net zero and sustainable finance, with a focus on financed emissions.

 

However, decarbonizing financed emissions is challenging. Financial institutions in the region need to expedite their transition, impacting their industries, institutions and individual portfolios. This large-scale action can create new business opportunities and benefit economies, societies and people. The transition requires enhancing financial institutions' ability to integrate climate change into their business strategies and building climate resilience within financial systems. This will boost climate adaptation efforts, preserving livelihoods and promoting future prosperity.

 

Three immediate actions to be prioritized by the financial industry are:

  • Get strategic
  • Broaden transition plans
  • Be sector-specific

Creating an enabling landscape

Internationally, policy groundwork for a fair and just transition to net zero is taking shape. The Paris Agreement already mandates a just workforce transition and many national climate pledges and long-term strategies reflect this. While policy and government action drive climate change response, the success hinges largely on financial institutions that guide our economies and markets. Therefore, governments, central banks and regulators should foster a supportive landscape for these institutions. In the Middle East, this favorable environment is emerging, urging an inclusive, sustainable development focus beyond just bold net-zero commitments. This involves incorporating key considerations into regional policy and regulatory discussions, especially in the aftermath of COP28.

 

To enable a successful, beneficial net-zero transition in the Middle East, policymakers must devise comprehensive policies promoting sustainable practices with simultaneous emission reduction incentives. This task is complex, particularly in heavily regulated sectors like finance. Crucial steps include creating a supportive regulatory environment for green finance, incentivizing financial institutions to prioritize environmentally and socially friendly projects. Solutions include financial incentives like tax breaks and subsidies for clean energy adoption. Moreover, governments can lead capital raising efforts, such as green bonds, to implement plans aligning with national net-zero ambitions.

 

The issue of greenwashing, where companies mislead the public about their environmental efforts, poses a challenge to achieving climate commitments. This problem, applicable to all sectors, including finance, can lead to false claims about their environmental and social benefits. Greenwashing risks are magnified in the financial industry due to its opaque business nature and the difficulty of demonstrating the direct impact of financial decisions. While the industry is integrating sustainability frameworks and methodologies, more legislative and regulatory guidance is needed to prevent greenwashing. Reputational risks and market confidence are at stake. The UN stresses the importance of clear transition plans, accountability and transparency to counteract greenwashing, as a just transition can't occur without full transparency about the impact of an organization's initiatives on all aspects of society.

 

Middle Eastern governments have significantly supported research and development to accelerate the region's transition. For instance, Saudi Arabia's Circular Carbon Economy National Program aims to foster investment in emission reduction, reuse, recycling and removal technologies. Achieving collective prosperity involves the region's significant sovereign wealth funds investing in innovation, research and new climate technologies. They can dictate the direction of the market and facilitate the scaling of climate-friendly technologies. Innovation in funding models and mechanisms can also help identify and price social risks and opportunities related to the transition.

 

Climate diplomacy is critical

The new era of climate diplomacy requires leaders to foster a dialogue about what climate resilience and adaptation mean for local communities. The financial industry must be part of these discussions to ensure realistic and financeable measures. Proactive climate diplomacy could promote climate-adapted agricultural practices, build weather-resistant infrastructure and develop early warning systems. Including financiers in these discussions can help convert these ideas into practical and viable solutions.

 

Middle Eastern governments' climate leadership can attract substantial investment. The region has a considerable opportunity to present a case for a just transition to investors post COP28. A just net-zero transition strategy appeals to investors seeking stable, sustainable and resilient investment opportunities and those prioritizing proactive climate risk management. By collaborating with leading regional financial institutions, governments can lure investors and develop innovative green financing options. These options should include social opportunities like green job creation and access to clean technologies, facilitating funding and capital access for net-zero initiatives.

 

The inclusion of women is critical in achieving a just net-zero transition in the Middle East. Women are already essential change agents across various roles, demonstrating sustainability leadership. Their position in the financial industry can contribute to climate and sustainability efforts and their involvement is key for holistic and inclusive approaches. They can be supported through financing to female entrepreneurs and ensuring women's representation on company boards. Financial products can also be tailored specifically for women to invest sustainably. Gender-centric policies can empower women's participation in the green economy and incentivize investors to invest with gender consideration. Women's full participation is crucial in addressing the climate crisis and achieving a sustainable and prosperous region.

 

Conclusion

The Middle Eastern financial industry plays a crucial role in achieving the region's net-zero goals. This role must extend beyond facilitating a sustainable, low-carbon economy to ensuring a fair and just transition for all. Success should not be a binary decarbonization decision but should consider broader social priorities and align with the Sustainable Development Goals. After COP28, decisive action is vital in transforming bold net-zero commitments into reality. Holding the financial industry accountable will be crucial as people must remain at the core of the global climate transition.

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    Summary

    Financial institutions in the Middle East plays a pivotal function of in propelling the area's net-zero targets. There is a need to have a vast viewpoint that goes beyond decarbonization, touching on subjects like social fairness, gender equality, and other objectives for sustainable development. Governments and regulators play a crucial role played in cultivating a conducive environment for the finance sector, along with mitigating greenwashing and pushing forward active diplomacy on climate issues. It is important to have a joined, inclusive response in the transition journey for the welfare of the area.

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