Economic Research Forum (ERF)

Reframing sustainable finance: lessons from Lebanon

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Capital investment is needed to fund the green transition. This means that the finance sector must be involved in combating the climate crisis in countries around the world, including Lebanon. This column argues that to ensure that these funding needs are met, policy-makers should work in harmony with other stakeholders to ensure that businesses are incentivized to de-carbonise their operations. Only by easing the process of the green transition through sustainable financing can countries like Lebanon meet their environmental pledges. Policy action to support such funding is needed urgently.

In a nutshell

A green transition is only possible with the right balance of political will and targeted financing. Sustainable finance is therefore key to helping nations de-carbonise.

In Lebanon, there are many opportunities for green economic growth. With the correct funding, such growth could also benefit local communities by creating jobs and boosting productivity.

The financial sector has a large role to play in smoothing the green transition. Policy-makers and other stakeholders should coordinate and act quickly to help mitigate the worst effects of a changing climate.

The financial sector will play an important part in mitigating the worst effects of climate change. This will involve sustainable finance, which encompasses all financing activities that contribute to sustainable development, including addressing environmental and climate challenges. Ecological breakdown and extreme weather events are not only deeply harmful to the natural world, but could also undermine the business interests of financial institutions themselves. Sustainable finance is therefore vital.

To limit the most adverse effects of a changing climate, it is essential for financial institutions to engage with environmental challenges and propose a range of solutions. In Lebanon, for example, financial professionals should adopt a vision of social and environmental responsibility, promoting long-term investments in sustainable economic activities. Some examples of sustainable finance include sustainable micro-finance lending, green bonds, renewable energy equity financing, carbon credits and public institutional equity investing. Each of these systems can create incentives for firms and individuals to adopt green behaviours, helping Lebanon achieve a cleaner economy at the aggregate level. Further, the presence of natural resources in Lebanon could change the energy mix and help the country in its transition to a low-carbon economy. With the right combination of financing and resource management, a clean transition is viable.

Taking an example, Banque du Liban (BDL) is a member of the Network for Greening the Financial System (NGFS). This means it can benefit from technical assistance from the World Bank (Gratcheva et al., 2020) to set the national standard for clear definitions of green assets, activities and projects. Such definitions can play an important role in shifting financing towards climate-smart and environmentally sustainable growth (Monetary Authority of Singapore, 2021). More work is needed to develop BDL’s approach to climate risk assessment and build a transparent credit rating system for this purpose, but network membership, and access to World Bank support, is a good starting point.

Why sustainable investment?

Sustainable investment focuses on environmental, social and corporate governance (ESG) criteria. The idea is to generate long-term competitive financial returns as well as a positive societal impact. Sustainable investments include various products and asset classes, including public equity investments, cash and fixed income funds, as well as alternative investments like private equity, venture capital and real estate. Studies have shown that investors can align their investments with their values and avoid companies with poor ESG practices (Mathonet and Meyer, 2008; Fung et al., 2010; Richardson, 2008). By investing in ESG assets, individuals and firms can ‘vote with their wallets’ to support green goals. Active owners can also exercise their share-holder rights to influence company decision making. This represents another way in which investors can directly affect a company’s adherence to ESG principles (Arayssi and Jizi, 2019).

Going green does not have to mean accepting lower growth. Morgan Stanley (2019) found that sustainable funds provide returns in line with traditional funds while reducing downside risk. In 2020, sustainable equity funds actually outperformed non-ESG peer funds by a median total return of 4.3%, while sustainable taxable bond funds outperformed their peers by 0.9%. So, opting for green assets does not necessarily come at the expense of competitive returns.

There are also investment strategies that focus on community projects. Such schemes fund projects or institutions that serve poor and underprivileged communities, and promote outcomes such as healthy communities, food access, education, child care, transportation, jobs and affordable housing.

Both climate and community-oriented investments promote responsible business practices and allocate capital towards projects with broad societal benefits. Individual as well as institutional investors in Lebanon can participate in this investment strategy, from people who work from home to commercial and development banks that make supporting serving low- and middle-income communities part of their mission. The Housing Bank, for example, extends loans for residential solar power installations relatively low interest rates. This call for more renewable energy is an example of blended finance and is consistent with Lebanon’s commitment to cut greenhouse gas emissions as part of the Paris Agreement. Given that 60% of Lebanon’s emissions come from the energy sector (UNDP, 2021), schemes like the Housing Bank’s solar panels project are clearly aligned with the country’s wider de-carbonisation goals, while also helping local communities to prosper.

The Ministry of Energy expects Lebanon to surpass 20% renewable energy production capacity this year. To maintain momentum, incentives for renewable energy generation, such as fixed-term remuneration rates, also need to be implemented. There are several groups which can help push for this. Social and non-governmental associations supporting community development loans and high social impact investments can help achieve these goals. And religious institutions and venture capitalists can both advocate for ethical, environmental and governance standards in their portfolios. The government itself should then introduce fiscal policy tools, carbon pricing, spending and investing, and public guarantees. And non-government organisations (NGOs) can also play a crucial role in facilitating sustainable investment, such as fossil fuel divestment, which has gained momentum and attention. By coordinating, these various groups can help promote a cleaner a cleaner environment and reduced energy costs, both of which will benefit wider society, especially those on lower incomes.

Investors and banks can also screen corporate lending and corporate bonds to avoid loans in carbon-intensive companies. For example, green bonds offered through a World Bank programme can finance projects that reduce carbon intensity. Similarly, Fransabank launched the Sustainable Energy Finance initiative in 2013 with the support of International Finance Corporation (IFC) and European Bank for Reconstruction and Development (EBRD). The bank finances energy efficiency projects, renewable energy, green buildings, waste water and water management. The Central Bank of Lebanon (BDL) initiated the National Energy Efficiency and Renewable Energy Action (NEEREA) to provide subsidised loans for energy-efficient and renewable energy projects. By January 2015, over 200 projects were approved under NEEREA, with 60% for solar photovoltaic and 82% for green buildings (Regional Center for Renewable Energy and Energy Efficiency, 2014).Lebanese Environmental Action supports the financing of environmental projects by the private sector and non-profit organisations. But despite this encouraging progress, more work by the government and NGOs is needed to encourage banks to invest in green initiatives in low- and middle-income communities.

Accredited investors also have a role to play. This group can invest in alternative investment classes, such as private equity funds, venture capital funds and real estate funds, each focusing on environmentally sustainable companies, renewable energy, energy efficiency, sustainable agriculture, forestry and waste management. Financial institutions should be given subsidised loans to encourage them to invest in these areas. Real estate investments can be climate-focused (Scott et al., 2018), focusing on green building, sustainable timber, farm and ranchland, nature conservation, brownfield re-development, urban infill development and smart growth. And revitalising key sectors in rural areas can mobilise resources through renewable energy, efficient land use, ecosystem services and a circular economy (OECD, 2021). Government commitment is needed for strategic planning in these areas. Key recommendations include mainstreaming sustainable finance in climate-related documents and reports, increasing awareness of sustainable finance in policy-making processes, enhancing public institutions’ capacities to mainstream sustainable finance, and improving data collection systems. With the correct policies in place, sustainable finance can help allocate capital to parts of the economy most able to help Lebanon (and other countries) achieve its climate goals. Given the urgency of the wider issue, policy-makers should ensure that such financing options are readily available. A green transition is possible, but the financial sector needs to ease the process of such a process through the various channels at its disposal. If successful, everyone stands to win. If not, the scale and severity of the coming crisis is deeply concerning.

Further readings

Arayssi, M. and Jizi, M.I. (2019), “Does corporate governance spillover firm performance? A study of valuation of MENA companies”, Social Responsibility Journal, Vol. 15 No. 5, pp. 597-620.

Gratcheva, E. M., Emery, T., and Wang, D. (2020) Demystifying Sovereign ESG. Equitable Growth, Finance and Institutions Insight. World Bank, Washington, D.C.

Fossil free https://gofossilfree.org/divestment/commitments/

Fung, H. G., Law, S. A., & Yau, J. (2010). Socially responsible investment in a global environment. Edward Elgar Publishing.

Mathonet, P. Y., & Meyer, T. (2008). J-Curve exposure: Managing a portfolio of venture capital and private equity funds. John Wiley & Sons.

Rezec, M., and Scholtens, B. (2017). Financing energy transformation: The role of renewable energy equity indices. International Journal of Green Energy, 14(4), 368-378.

Richardson, B. J. (2008). Socially responsible investment law: Regulating the unseen polluters. Oxford University Press.

Scott, K., Rowe, F. and Pollock, V. (2018): ‘Creating the good life? A wellbeing perspective on cultural value in rural development,’ Journal of Rural Studies 59(1): 173-182.

Stanley, M. (2019). Sustainability Reality: Analyzing Risks and Returns of Sustainable Funds. New York: Morgan Stanley.

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  • Mahmoud Arayssi
    Mahmoud Arayssi
    Associate Professor of Finance, Institute of Islamic Finance

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