Can MENA Capital Markets Drive Impact Investment?

The call for sustainability has long been limited to a few selected groups and individuals, typically within the public sector. As of late, the importance of sustainable behaviour has been acknowledged more broadly, including in companies and financial institutions.

While sustainable financing and business practices began to spread around the globe, they have remained rare nascent in the Middle East and North Africa (MENA). This is also true for impact investment, a particularly prominent and growing “green market”.

One way to promote impact investment in the MENA region is through governmental and stock market regulations. In fact, new “sustainable” stock market requirements may facilitate impact investment by capturing the social and environmental benefits and externalities of publicly listed companies in the region.

Simply put, “impact investment” aims for positive social and environmental effects, alongside financial returns. It constitutes a growing market that bridges philanthropy and business, providing the capital needed to address a series of socio-environmental challenges.

Variants of impact investment range from community investing to green bond issuance and private equity-like deals. While impact investment initially attracted a limited number of philanthropists and well-meaning investors, it has recently developed into more mainstream investment practice.

In the Middle East and North Africa, impact investment is still in its infancy. A recent report by the Global Impact Investing Network (GIIN) found that only 1% of companies managing impact investment assets have their headquarters in MENA. These numbers stand in stark contrast to other regions, notably the US and Europe, which respectively manage 58% and 21% of today’s global impact investment assets.


According to a Stanford Social innovation study, the impact investment space was virtually non-existent in MENA countries in 2013. Since then, there has been much improvement, with incubators, financial authorities, and local investors becoming more aware of sustainable financing. Interest in green bonds, for instance, has been rising, which is expected to be followed by ESG-linked issuances. In 2016, the UAE’s National Bank of Abu Dhabi launched the Middle East’s first green bond, while the Abu Dhabi Department of Energy (DoE) announced a new Green Bond Accelerator initiative in January this year.

A few months later, in September, the Egyptian government launched its first issuance of green bonds. Finance Minister Mohamed Maait declared that the offering of green sovereign bonds will help attract investors interested in financial and socio-environmental returns.

Besides individual awareness among investors, the existence of an enabling financial and regulatory framework constitutes a prerequisite for impact investment. These two components are interrelated: stable impact investment structures are widely thought to foster awareness and induce motivation among impact investors.

Introducing new regulations in MENA capital markets constitutes a particularly promising method to boost impact investment in the region. Contrary to investor awareness and motivation, which may spread slowly and unevenly – or not at all, market regulations can help ensure a more comprehensive turn to impact investment.

National governments and international organizations, such as the World Bank and the International Monetary Fund, can set up sustainable financing structures, such as green bonds.

A potentially greater role can be played by stock market regulators, who may introduce new rules for listed companies. For instance, stock markets may legally require Environmental-Social-Governance (ESG) reporting that highlights the social and environmental benefits and externalities of publicly listed companies, while also capturing their risks and strategies. To date, 24 stock exchanges have made ESG reporting a requirement, including Euronext London and Singapore exchange.

Mandatory ESG reporting would allow investors to identify firms with sustainable investment opportunities, while also understanding the ESG-related risks embedded in companies or industries. This can facilitate the inclusion of socio-environmental costs and benefits in prices and returns.

In MENA, a first move towards the establishment of market-wide incentivising structures was recently observed in the United Arab Emirates (UAE), whose Abu Dhabi Securities Exchange (ADX) launched its first sustainability report in June 2020. The report reinforces guiding principles of sustainable finance and encourages the growth of sustainable investment opportunities in the UAE. While the guidelines and the report have no binding power, they illustrate ADX’s efforts to help align the UAE’s financial system with global best practice in ‘green finance’.

Where MENA markets are integrated in global finance streams, international sustainability standards may act as an important motivator for national regulators, rewarding “green reforms”, while punishing the lack thereof. In October, Saudi Arabia was excluded from the investment portfolio of a top global fund, Candrian, along with other emerging heavyweights, Russia and China, as the three countries score too low in their ratings for ESG risks. This was the latest in a series of events suggesting that ESG is becoming an international investment requirement. To catch up, Saudi Arabia’s stock exchange, the TADAWUL, plans to launch an ESG index in cooperation with global index provider MSCI by 2021.

A look outside the MENA region suggests that sustainability-focused funds tend to outperform the market. Figure 2 shows that in 2019 funds such as Redwood, Nuveen and Calvert, which all emphasize sustainable investments, had average returns of around 30%, compared to 20% for the S&P 500.


In the Middle East, a region that has long been struck by violent conflict and state fragility, new market regulations alone cannot guarantee increased impact investment. Peace and legitimate political and legal systems are required to ensure a more stable investment environment. Yet, in safer havens, particularly in the Gulf, the establishment of sustainable financial structures and practices constitutes a sensible political step that may well have a regional domino effect.

The intervention of governments and stock market regulators can change the culture within global financial firms, where conflicts of interest are still exploited, and valuation practices tend to exclude long-term social and environmental impact. The regulation of capital markets, through standardised indicators and benchmarks, may help ensure that the importance of social inter-generational equity and the environment is acknowledged in investment and business.

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