Put Your [Oil Money] Where Your Mouth Is: Oil and Gas Producing Countries on the Highway of Sustainable Finance

I had earlier shared my thoughts this week about the contributions oil and gas-producing countries could make to the global fight against climate change and the place of finance. It was reassuring to receive reactions from several persons who admit that finance definitely has a role to play even in the transition journey of these 'carbon-intensive countries'. Perhaps as a cue to take the conversation further, news broke yesterday that the Public Investment Fund i.e.?Saudi Arabia's sovereign wealth fund had contracted a group of 5 global banks to begin working on its ESG framework, just a day after it was reported that Oman, another oil-dependent country, will be rolling out an ESG Framework as well.

These events are significant for several reasons. First, it means that these countries, just like the number of oil majors that have been restructuring to respond to regulatory and societal pressure, have received very clear signals that business-as-usual in the fossil economy cannot continue, at least not for long. It is now necessary to demonstrate credible strategies to maintain social license and tap the growing pool of sustainability-conscious investors for their financing needs.

In addition, having a Sustainability Finance Framework signifies that the affected countries will be putting their money where their mouth is, going from mere branding campaigns and cosmetic diversification blueprints to earmarking funds for well-defined sustainable products and services whose impacts can be measured and tracked, that's if they choose to go the use of proceeds path (green bonds, social bonds, and sustainability bonds).

These benefits notwithstanding, there will be a few concerns, especially from environmental and social activists. To begin with, how does one reconcile the brown (carbon-intensive) profile of these issuers with their interest in tapping the sustainable finance market? Can there be clear additionality to climate mitigation and other environmental objectives from sustainable finance issuances by these issuers?

Besides their troubling carbon-intensive profile, the governance and social atmosphere in some of these countries are heavily shrouded in controversy ranging from suppression of the press to discrimination against women and religious minorities, vicious targeting of government critics, and condemnable tactics in armed conflicts. How do you structure a Sustainable Finance Framework?for an issuer tainted by these kinds of issues? How will investors hold sovereign entities to account for flouting the sustainability 'covenants' embedded in the so-called sustainable finance transactions?

The concerned issuers and their advisors will no doubt need enough creativity and innovation to get around many of these topics, and I don't intend to discuss this today.

However, I'd attempt to address several questions raised earlier. When it comes to the discord between the profile of an issuer and the nature of sustainable finance instruments, it must be emphasised that the goal is to see all segments of industry and society get on the sustainability track. It isn't a race meant for only environmental and social purists, otherwise, there'll be no talk of ambition, transparency, and credibility. Names from the energy industry such as Eni, Enel, and Orsted are proving that having controversial legacy business profiles should not get in the way of a?successful transition journey.

?And when one looks at country case studies, Norway remains a textbook example of countries that can be sustainably transformed even from carbon money. Today, Norway holds the largest sovereign wealth fund, and sitting with it in the place of top ten are Kuwait, the United Arab Emirates, and Saudi Arabia (plus Qatar if we stretch into the top 11). But when one compares the performance of Norway on sustainability to these other countries a different picture emerges, though some may debate about differences in their political systems and geographic positioning.

Many will be keeping an eye out to see what form the Sustainable Finance Frameworks from Oman and the Public Investment Fund (of Saudi Arabia) take. Will they turn out as champions for oil and gas producing sovereigns seeking to tap the sustainable finance market or laggards unable to pool a sustainability weight?