It wasn’t that long ago that green investing was associated with a warm moral glow, but it wasn’t the mainstream – not by far. However, growing climate awareness, growing policy change, and investors demanding environmentally and socially conscious options are transforming this, and while this is still not mainstream, it is happening. routes fairly quickly to megatrend status.

Over the past half-decade, ESG (Environmental, social and governance) investing has become the biggest global trend. Each year, more than $ 3 trillion in new global funds flow into the $ 30 trillion ESG market.

Meanwhile, green bonds have become the latest craze in the ESG sector, with the French management company with € 1,729 trillion in assets under management, Amundi, now the world’s leading green bond issuer. The green bond market is really booming; in 2020, governments and businesses issued green bonds worth $ 297 billion, with the forecast for this year being $ 500 billion and $ 1,000 billion in 2022.

And now the green bond industry has attracted an unlikely client: the oil-producing countries.

Saudi Arabia, the United Arab Emirates (UAE) and Qatar have all lined up billions of dollars in green bonds as they step up their game to fight climate change.

Green bonds

Tackling the climate crisis won’t come cheap, with the United Nations Intergovernmental Panel on Climate Change (IPCC) Estimate that limiting the temperature increase to 2C will require around $ 3 trillion in investment each year until 2050. To raise these huge sums, governments and businesses around the world are increasingly turning to the green bond market.

Green bonds work essentially like regular bonds, but with one key difference: the money raised is used exclusively to finance green projects such as renewables and green buildings.

As countries around the world step up efforts to reduce carbon emissions, the green bond market is booming. For example, in October, the European Union published about $ 14 billion of green bonds, marking the highest amount on record. The proceeds from the bonds will be used to finance projects, in particular a research platform for energy transition in Belgium and wind power plants in Lithuania. Orders exceeded available titles more than 11 times in the EU deal, pointing out that it may cost less to issue green bonds than the conventional variety.

Oil-producing countries are becoming aware of this phenomenon, with Saudi Arabia’s $ 430 billion sovereign wealth fund planning to announce its first green debt issue because it seeks to mobilize investments for renewable energies and other sustainable projects. One of these projects is the green megalopolis of Neom located in the north of the country.

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The Saudi government has announced plans to build a $ 5 billion green hydrogen plant that will power Neom when it opens in 2025. Dubbed Helios Green Fuels, the hydrogen plant will use solar and wind power to generate 4 GW of clean energy that will be used to produce hydrogen.

But here’s the main point: Helios could even produce hydrogen cheaper than oil.

Bloomberg New Energy Finance (BNEF) estimates that Helios costs could reach $ 1.50 per kilogram by 2030, far cheaper than the average cost of green hydrogen at $ 5 per kilogram and even cheaper than the gray hydrogen from the cracking of natural gas. Saudi Arabia enjoys a serious competitive advantage in the green hydrogen sector thanks to its perpetual sunshine, wind and vast expanses of unused land.

In fact, Saudi Aramco told investors that it had abandoned its immediate plans to develop its LNG sector in favor of hydrogen. Aramco said the kingdom’s immediate plan is to produce enough natural gas for home use to stop burning oil at its power plants and convert the rest to hydrogen. Blue hydrogen is made from natural gas either by steam methane reforming (SMR) or autothermal reforming (ATR), the CO2 generated being captured and then stored. As greenhouse gases are captured, this mitigates the environmental impacts on the planet.

Saudi Arabia clearly has its eyes on a future where the economy stops being too dependent on oil. Whether or not he will stay committed enough to achieve his long-term goal is another question.

Saudi Arabian regional peers are also in the game.

This year, the largest bank controlled by the government of the United Arab Emirates Posted at least $ 1.36 billion in green debt, while Reuters revealed in October that Qatar Energy, a state-owned oil company, is considering a multi-billion dollar green bond issue.

Legitimate obligations or greenwashing?

For many years, Big Oil has been berated for its outsized role in climate change and even pilloried for trying to polish its green credentials with half-hearted attempts at clean energy investments, aka greenwashing. The recrimination seems well deserved, given that the sector dedicates a tiny amount of its capital expenditure renewable energies while its activities are responsible for 15% of greenhouse gas emissions.

And now countries like Saudi Arabia risk falling into the same trap if their oil production roadmaps are any indication.

After all, Saudi Arabia, the world’s largest oil producer, has announced plans to stimulate oil production from the current 12 million barrels per day to 13 million barrels per day by 2027.

UAE has even more aggressive growth plan, with state-controlled oil company ADNOC say that it will increase 25% to produce 5 billion barrels per day by 2030. Meanwhile, Qatar continues to grow invest heavily in African oil fields and built the the biggest in the world liquefied natural gas (LNG) terminal.

A recent to study by Dutch asset manager NN Investment Partners found that the green bond market is currently facing various legal issues, with 15% of all green bond issuance “from companies involved in controversial practices that violate environmental standards.

An oil-producing nation can easily violate the spirit of green bonds, for example, by using fossil fuels to produce “green hydrogen”. This is not a far-fetched idea: Amundi recently threatened to withdraw your exhibition to the State Bank of India’s green bonds after it emerged that the bank was funding a coal mine in Australia.

Drawing clear lines between cash reserves and their spending requires a high degree of transparency, for which countries like Saudi Arabia and Qatar are unfortunately not known. Ultimately, this indicates a real and urgent need to develop clear standards and criteria with high granularity as this market intensifies.

By Alex Kimani for Oil Octobers

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