Middle East banks must prove net zero commitment

Reuters

Open the annual report of any big Middle Eastern bank, and you will find several pages explaining its commitment to best practices on environmental, social and governance issues.

There will also be examples of sustainable energy projects the bank has financed and, in some cases, some statistics on its plan to reduce CO2 emissions linked to its own operations and those of its clients. 

All of this reporting should be welcomed, and there is no doubt that most Middle Eastern banks are keen to embrace the global enthusiasm for sustainable energy and share in the concern about the effects of climate change.

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But we should expect nothing less from them, given that most large Middle Eastern banks are based in countries whose economies and prosperity are derived from the production and sale of oil and gas. 

Two global initiatives, one sponsored by the United Nations, and the other arising out of the International Accounting Standards Board, provide an opportunity for Middle Eastern banks – and banks everywhere – to demonstrate, objectively and in a comparable manner, their commitments to combating climate change.

Signatories to the UN-sponsored Net Zero Banking (NZB) Alliance, commit not only to reducing net greenhouse gas emissions from their lending and investment businesses to zero by 2050, but also to publishing targets for reduced greenhouse gas emissions and then disclosing actual outcomes every year. 

Of the 134 banks that have signed up to the Alliance, only two are from the Middle East: Commercial International Bank (CIB) based in Egypt, and First Abu Dhabi Bank (FAB). That is the same number that have signed up from sub-Saharan Africa.

It is truly shocking that only two banks have joined the Alliance from a part of the world where seven countries together account for a quarter of global oil production, and which hosts in Qatar and Algeria some of the world’s biggest gas fields.

The Cop28 conference in Dubai later this year offers Middle Eastern banks the perfect platform from which to demonstrate that they recognise their responsibilities.

They are intimately connected with some of the biggest oil and gas companies in the world, and should be willing to have the international community hold them to account.

CIB’s disclosure to the NZB Alliance runs to 49 pages and includes detailed descriptions of emissions from the bank’s power generation and real estate portfolios.

FAB’s is a similar length and, like CIB’s, contains hard statistics and commitments that can be tracked in years to come. 

Demonstrating impact

The NZB Alliance offers banks the opportunity to show that they are playing their part in combatting climate change.

However, it does not – and is not intended to – show the extent to which banks themselves may be affected by the transition to net zero, either positively or negatively. 

That is what a second initiative is addressing.

The International Sustainability Standards Board (ISSB) was created in 2021. In June this year it published two accounting standards that provide a consistent way for financial institutions to disclose the extent to which their income streams are subject to risks arising from transitions to sustainable economies and from climate change. 

The ISSB is – as is clear from its name – a standard-setting organisation. It has no legal or regulatory power to compel financial institutions to adopt its standards.

But the expectation is that it will achieve the same authority as International Financial Reporting Standards.

Importantly, the ISSB has been incorporating standards and recommendations set by a range of similar bodies with the aim of becoming the sole setter of sustainability and climate-related accounting standards worldwide.

Simply put, if banks want to show that they know the value of their exposures to these risks, there is only one set of standards that they can now use to do so: those of the ISSB. Both accounting standards take effect from January 1 2024.

So when banks tell us that they are fully committed to moving their businesses to net zero, and that they have a sound understanding of how their own businesses will be affected, there are two simple questions that we can ask them.

Are they a member of the NZB Alliance (or will they soon become a member)?

And will they be reporting in line with ISSB Standards 1 and 2 from the end of their next financial year? 

Let’s hope we get some clear answers amid all the Cop28 excitement in Dubai.

Andrew Cunningham writes and consults on risk and governance in Middle East and sharia-compliant banking systems.