The future of green finance and investment in Egypt

Wind Turbines. Courtesy of Erik Wilde via Wikimedia Commons.

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This month, Egypt is due to publish an update for its Nationally Determined Contribution (NDC), which is a climate action plan to reduce emissions. Countries need to develop adaptation solutions and implement environmentally sustainable actions to respond to current and future climate change impacts. According to the United Nations Framework Convention on Climate Change (UNFCCC) investing in the green economy is a pressing necessity for the region and Egypt—the third biggest economy in the Arab world.

According to Bloomberg and the American Chamber of Commerce (AmCham) MENA Regional Council, green and sustainable finance in the MENA region reached 18.6 billion dollars in 2021, rising from 4.5 billion in 2020, according to the council’s 2023 MENA-US Trade and Investment Report. However, 230 billion dollars still need to be allocated per year in the region to meet their UN Sustainable Development Goals.

There is a variety of sectors in which firms are interested to invest in Egypt which will enhance its transition towards sustainability. Organized by Egypt’s American Chamber in partnership with the US Chamber of Commerce and Egypt-US Business Council, a delegation of forty American companies visited the country to explore sustainable projects in their “GreenTech Business Mission to Egypt.” The sectors they identified which have potential for green investments were finance, energy including renewables, transportation, agriculture, information and communication technologies (ICT), and manufacturing.

Green energy investments

Emerging markets and developing countries in the Global South, including those in Africa, have been facing challenges amid the global energy crisis since February 2022, since the start of the Russian-Ukrainian war. The dramatic geopolitical changes as a result of the military and political conflicts gives Arab as well as African governments no option but to invest in sustainability. The conflict in Ukraine has increasingly exacerbated the energy crisis in the region, so countries within the region needed to meet their energy demands as well as economic development targets.

The Organization for Economic Cooperation and Development (OECD) emphasized that green growth means achieving economic growth while reducing pollution and greenhouse gas emissions, minimizing waste, and improving efficiency in the usage of the countries’ natural resources. These challenging targets require long-term investment and sustained financing, and green projects are increasingly seen as a promising gateway to the emerging markets in the Arab region for regional and international investors.
Moving towards investing in green energy, in 2022, the Suez Canal Economic Zone (SCZONE) signed seven memoranda of understanding (MoU) with international companies, from the UK, India, KSA, and UAE to establish green hydrogen and ammonia production facilities in Al-Ain Al-Sokhna, in Suez governorate. Additionally, an agreement was signed separately with an Indian company to set up a green hydrogen factory in SCZONE. The 8 billion dollars project aims to produce 20 thousand tonnes of green hydrogen in a pilot phase starting from 2026, with a vision to increase it to 200 thousand tonnes per year.

Such green projects are key steps towards the decarbonisation of the energy sector as green hydrogen production has the potential to reduce emissions as it is produced by means of clean energy.
Furthermore, the region has potential to capitalize on solar and wind energy production. Mahmoud Mohieldin, the UN Special Envoy on Financing the 2030 Agenda for Sustainable Development, said that the region has “vast renewable energy resources” that can be taken advantage of, as it receives around 26% of the world’s solar energy, which has the potential to meet 50% of global electricity needs.
In that respect, a smooth energy transition would allow the economies of Egypt and the MENA region to develop sustainably, as well as helping boost affordable climate finance.

Green finance and climate change

As the field of sustainability is one of the fastest growing sectors worldwide, it is estimated by the Middle East Institute (MEI), to reach 12 trillion dollars annually by 2030. However, there is still a long way to go, as MEI also mentions that green bonds claim less than 3 percent of the bond market.

Beside its importance for sustainable economic growth, green investment can be used as a tool for adaptation to climate change impacts in Egypt. According to the Intergovernmental Panel on Climate Change (IPCC), the Nile Delta is among the top three most vulnerable regions in the world. The Green Climate Fund confirmed this fact, highlighting that the Delta faces the threat of flooding of coastlines near rising sea level. In that respect, a project has been launched by the Green Climate Fund aiming to provide coastal defense and management to adapt to flooding from the rising sea level and increased frequency of storms. Coastal defense are structures and infrastructures which encompasses protections against coastal erosion as well as sea defense against coastal flooding.

These types of green investments intend to reduce the vulnerability of coastal infrastructure as well as protecting agricultural land, neighborhoods, villages, and coastal roads. Developing an integrated coastal zone management plan for the North coast in Egypt is the second phase of this investment, as the government needs to develop in its coastal defense framework for the coming decades.
The finance, economy, and environment ministries have a key role in strengthening domestic policy frameworks to mobilize investments in support of green growth, to overcome bureaucratic barriers to sustainable investment, and to provide an enabling business-friendly climate in order to attract domestic and international investment in Egypt and the Arab world.

From its side, the Central Bank of Egypt (CBE) has stated that although the country produces only 0.6% of the world’s harmful gas emissions, it is exposed to the risks of climate change to a great extent, which gives rise to social and economic challenges. In addition to the environmental pollution issue, the Arab world’s most populous nation faces many challenges in terms of the resources’ scarcity, whether water or energy. Responding to this challenge, and with the need to establish a sustainable economic and financial framework and strategy, the CBE outlined a green finance strategy to promote the issuance of green bonds in the context of the interest in both environmental and social investments. The strategy entails a framework for sustainable finance across Egyptian banks to encourage them to incorporate the environmental, social, and governance (ESG) elements into the processes and decisions related to their projects. This goes hand in hand with the fact that the green bonds market has grown globally by more than 500 billion dollars in less than a decade.

In 2020, Egypt became the first country in the Middle East and North Africa to issue a sovereign green bond with a 750 million dollar deal to finance environmentally-friendly projects in the energy and transportation sectors. The World Bank confirmed that this funding solution has the potential to enhance access to drinking water and more crops through seawater desalination projects and through wastewater reuse for irrigation.

In the same year, the government established the Green Financing Framework which entails regulations for green and social projects, aligned with its commitment to achieve the United Nations Sustainable Development Goals (SDGs). The Ministry of Finance then announced the “Sovereign Sustainable Financing Framework” with the aim of achieving the goals of sustainable development. These frameworks should be translated into action and pave the way for more green investments in different sectors of the economy.

Financing tools

Green bonds are a key financial tool in green investment. The World Bank has highlighted the importance of the green bond for Egypt’s economy as a financial solution to meet its pressing need for environmentally-sustainable investment. This need can catalyze investments in green transportation, efficient and green energy and clean water, wastewater management, and pollution prevention and control.

To diversify the government’s funding sources, Egypt has also moved with the plans to allow Islamic bond sales following issuing Sharia-compliant sukuk bonds alongside Eurobonds and green bonds. The government issued its first ever sovereign sukuk in February 2023, a three-year 1.5-billion-dollar Sharia-compliant debt issuance. These financial tools aim to fund public projects to back green investments.
Sukuks are used to promote sustainable finance in the Arab region. According to the UN Environment Programme (UNEP) report in 2021, which was on promoting sustainable finance and climate finance in the Arab world, ‘sustainability’ is inherent in Islamic finance’s main principles, which looks at environmental and social considerations in accordance with Islamic law. These ethical financial values aim at poverty alleviation, wealth distribution, social and financial inclusion, environmental preservation, financial stability and economic growth.

Sustainable finance markets can enhance positive changes in emerging markets economies to address environmental, social and governance issues, as the International Monetary Fund (IMF) outlines.

However, the financial burden on developing countries for a green transition still hinders this transition. A possible way of addressing this problem is debt swaps. Debt swap initiatives have been recently launched and arranged between emerging markets and developed nations, to foster the green economy and boost green project development while reducing the debt burden. Under such agreements, creditors can gain a share in sustainable projects in exchange for making reductions or cancellation of debts.

International institutions and the private sector

The role that international organizations and the private sector play is crucial in boosting sustainable investment. The European Bank for Reconstruction and Development has identified projects to finance which support transformation towards the green economy, such as in renewable energy, environmentally friendly transportation, and green cities. In March 2023, the World Bank Group Board of Executive Directors approved a new country partnership framework (CPF) for Egypt to support a green, resilient, and inclusive development (GRID) approach, which aims to pursue poverty reduction and shared prosperity with a long-term sustainability lens, according to the World Economic Forum.

Egypt’s government has received climate finance from international institution to support its mitigation efforts, such as from the United Nations Development Programme (UNDP), the UNFCCC, and the Green Economy Financing Facility (GEFF) which was developed by the European Bank for Reconstruction and Development (EBRD) and is supported by the European Union Neighbourhood Investment Facility. These institutions can support businesses, such as companies aiming to implement energy efficient mechanical systems, in their implementation of green practices, to improve the energy performance of factories while becoming a sustainable partner for their retailers and business partners.

These international organizations have a key role in encouraging countries to fulfill their commitments in reducing their environmental footprint while becoming a sustainable partner for their retailers and businesses. In that respect, some companies have started to put plans to reduce their energy consumption and its environmental footprint, through adopting energy management programmes. In order to achieve the global sustainability goals, industries and businesses in the MENA region need to reduce energy and resource consumption and aim to reach compliance with the UN environmental regulations.

By implementing sustainable projects and taking environmentally friendly initiatives aimed at achieving economic development and promoting sustainable finance, Egypt and the MENA region can move towards transitioning into the green economy. This path will also help in attracting green investments and clean energy, which are needed in times of crisis and regional or global conflicts. It will also mitigate the dangerous impact of climate change by implementing sustainable consumption and production and resource efficiency for the region’s sustainable development.

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