Tracking Progress: Assessing the Role and Effectiveness of Climate Finance in Driving the Energy Transition in MENA 

The Middle East and North Africa (MENA) region is highly vulnerable to the impacts of climate change. While many countries in the region have pledged to adopt adaptation and mitigation measures through Nationally Determined Contributions (NDCs), MENA remains underfunded, with uneven access to finance, and therefore inadequately prepared to confront the climate crisis. The combined financial need of the nine MENA countries that have estimated the costs of their NDCs is $495 billion.[1] Yet, the region has only received and mobilised a fraction of the required financial support.  

The global rise and interest in climate financing offer a unique opportunity to bridge this gap and foster an enabling environment for sustainable investments in MENA. Securing climate finance is essential for MENA countries to tackle climate vulnerabilities, promote sustainable economic growth, and transition to clean energy systems. Adopting green finance instruments and practices will enable MENA countries to generate green jobs, enhance their global economic competitiveness, and achieve their NDC commitments.  

This article assesses the role of climate finance in driving the energy transition in the region, focusing on key instruments like global climate funds, green bonds, and green loans. 

The Role of Climate Finance in MENA’s Energy Transition 

The energy transition in MENA countries is essential, not only for mitigating the impact of climate change but also for improving energy security and economic prospects. However, deploying clean energy infrastructure is capital intensive and the region is lagging in achieving its energy targets. Climate finance is a key enabler of the energy transition, securing the necessary resources to develop low-carbon infrastructure. 

However, the effectiveness of climate finance depends on several factors, including the region’s ability to attract investments, develop bankable projects, access global funds and financial markets, develop financial instruments like green bonds and loans, and secure good value-for-money for low-carbon technologies. The success of these efforts will determine whether MENA can meet its climate goals while ensuring long-term economic sustainability. 

Global Climate Funds: Mobilising Resources for MENA 

MENA countries have increasingly sought access to global climate funds to finance mitigation and adaptation initiatives including renewable energy projects and energy efficiency programmes. However, the MENA region’s share of the total climate funding allocated from the major international climate funds is among the lowest globally. Financing is uneven, and the bulk of the approved financing comes in the form of loans. The MENA region’s total share is equivalent to 6.6% of the cumulative financing approved by these funds, which equates to $24.4 billion until the end of 2023.  

The three major global climate funds; the Green Climate Fund (GCF), the Global Environment Facility (GEF), and the Climate Investment Funds (CIF), and their sub-funds, have become critical mechanisms in channeling financial resources needed to support the transition toward sustainable, low-carbon economies. These funds not only provide financial support but also build the national technical capacity needed to implement climate projects. 

In MENA, 78% of the financing allocated to the region from these climate funds is concentrated in just a few countries, mostly in North Africa. The projects approved for Morocco and Egypt alone account for over 60% of the total.  The highest share of the financing approved for MENA through these funds is for energy-related projects, showcasing potential to increase applications for clean energy projects. 

However, several challenges remain on the way to accessing more financing and a more just distribution. These include technical capacity, bureaucratic hurdles, severe eligibility criteria, and political and economic stability. The least developed countries in the region and those affected by conflict, which are in dire need of financing, often struggle to meet the requirements necessary to secure climate financing. Furthermore, more than half of the region’s financing comes in the form of loans, which can add pressure to the MENA economies that are highly indebted. 

Green Loans: Leading MENA’s Financing Mechanism 

Green loans are taking the lead in climate finance in the region. Green loans are structured similarly to conventional loans, but the funds are specifically allocated for environmentally sustainable projects.  

Banks in MENA are offering green loans, specifically to support the region’s energy transition. Expanding the availability of green loans will require banks to develop specialised lending criteria, increase access to markets, and build capacity to assess the environmental impact of projects. Moreover, improving the business investment climate and adopting government incentives and regulatory support will be crucial in scaling up the use of these financial instruments. 

Green Bonds: A Growing Market in MENA 

Green bonds are becoming increasingly important financial instruments in advancing sustainable growth across the region, especially for transport and power generation from clean sources. The Gulf Cooperation Council (GCC) countries are the regional leaders in green bonds. In 2023, MENA’s annual total issuance doubled from an earlier year to $24 billion – a new record. 

Several countries in MENA have begun issuing sustainable bonds, particularly green bonds, and Saudi Arabia and the United Arab Emirates (UAE) are leading the sustainable bonds market in the region. Saudi Arabia’s Public Investment Fund (PIF) was the largest issuer, with issuance volumes of $5.5 billion as of February 2023. Islamic finance is also critical in funding sustainable development and climate projects in MENA. The GCC countries issued more than half of the global green sukuks in 2023, equivalent to $6.5 billion. Sukuk issuance is expected to grow. 

Aside from the GCC, green bonds have been gaining traction in only a few MENA markets: Egypt, Morocco, Jordan, and Lebanon with 11 issuances exceeding $1.9 billion until mid-2024.[2]Lebanon issued the Levant’s first green bond in 2018, valued at $60 million, but the country’s ongoing financial, economic and political crises have brought bonds to a halt. 

The green bond market in MENA remains relatively underdeveloped compared to other regions. Regulatory and governance frameworks are still evolving and there is a need for greater standardisation to ensure transparency and accountability. The creation of a regional green finance hub would enable this, as well as improve capacity building.

Opportunities for Enhancing Climate Finance in MENA 

Climate finance is a critical driver of the energy transition in MENA, providing the resources needed to develop low-carbon projects and build resilience to the impacts of climate change. While progress has been made in mobilising global climate funds, green bonds, and green loans in general, challenges remain in maintaining momentum – and deploying these resources effectively.  

Despite the challenges, there are significant opportunities for MENA to enhance the effectiveness of climate finance in driving the energy transition. A major opportunity is the growing interest from international investors in sustainable finance and the global demand for green investments. In order to tap into this, MENA countries should strengthen regulatory frameworks, promote stability, and develop bankable projects and attractive green finance products.  

Another key opportunity lies in improving regional cooperation on climate action. MENA countries can pool resources, share lessons learnt and best practices, and develop joint initiatives to accelerate the deployment of climate finance and clean energy technologies.  

Finally, MENA countries should align their climate finance efforts within broader economic and social development goals, ensuring that the benefits of the energy transition are shared equitably across society. This includes addressing issues of energy access, job creation, and social inclusion in the context of the low-carbon economy. 

[1] Jessica Obeid, Alice Gower. “Mind the Gap: Highlighting MENA’s Climate Finance Challenge.” 2023. Srmgthink.com. 2023. https://www.srmgthink.com/highlighting-menas-climate-finance-challenge  

[2]  Jessica Obeid. “Turning MENA Markets Green.” 2024. Srmgthink.com. 2024. https://www.srmgthink.com/featured-insights/411/special-report-turning-mena-markets-green