Green Finance and ESG Rules in Egypt – An Awaited Overhaul

Green finance has become a hot topic in the banking, finance, and business fields worldwide. International efforts have taken place, especially in recent years, to promote business and economic sustainability through green finance tools. These efforts aim to diversify, reinforce and stabilise the worldwide economy by promoting and increasing awareness and inclusion of green finance activities in various sectors.

So, what is green finance? In short, green finance is an investment or finance tool that supports eco-friendly projects. The G20 Green Finance Study Group has defined green finance as the “financing of investments that provide environmental benefits in the broader context of environmentally sustainable development”. The definition of green finance is broad enough to capture a number of financing tools, services, and products that support the environment including sector-specific activities (such as banking, energy, and construction), as well as public policy and organisational approaches.

In December 2015, the United Nations introduced the Paris Agreement (“Paris Agreement”), which sets out a number of important measures and guidelines, including setting gas emission targets, limiting climate change effects, and mobilising enough finance to sustain and protect the environment. Egypt acceded to the Paris Agreement in 2017.

Egypt has recognised legislation reformation to support green finance. For instance, in 2016 Egypt adopted the sustainable development strategy (SDS) under the Egypt 2030 vision (SDS Vision), which reflected the United Nations Sustainable Development Goals (SDG). Moreover, in May 2022, Egypt issued the national strategy for climate change 2050 (“Climate Change Strategy”). This strategy provides a road map aiming to thwart climate change and encourage the use of non-conventional finance.

Green finance has become crucial in attracting investments and funding capital in green projects to support economic growth and sustainability. In recent years, Egypt has introduced a number of legislative reforms aiming to attract investments in the green field and support the business transition to green finance.

For example, Egypt issued law No 203 of 2014 in connection with encouraging the use of renewable resources to produce electricity (“Renewable Resources Law”), which provided facilitations to investors in the electricity production field.

Additionally, the new Investment Law No 72 of 2017 (“New Investment Law”) extended incentives for green projects (such as renewable energy, green hydrogen, and electricity projects) to encourage investment in these projects. Amongst the key incentives granted to investors in green projects are tax deductibles ranging between 30-50% of their investment costs, customs exemptions, and free investment repatriation in foreign currency.

Moreover, the Financial Markets Law No 95 of 1992 as amended (“Financial Market Law”) and the Financial Market Law executive regulations issued by ministerial decree No 135 of 1993 as amended (“Financial Markets Law Executive Regulations”) were changed recently to include a number of green finance instruments. These instruments are green bonds, ESG bonds and sovereign green bonds.

In 2018, the Financial Markets Law Executive Regulations were updated to include a section incorporating green bonds. Green bonds generally refer to a financial instrument used to fund environmentally-friendly projects. The income generated from green bonds will be used to finance and re-finance green projects. The types of green bonds include the following.

• Green use of proceeds bond – The income of these bonds will be used in environmentally-friendly projects. The issuer of these bonds is under the obligation to pay the bond’s value and interest incurred.

• Green use of proceeds revenue bond – Payment of liabilities resulting from the issuance of these bonds will be generated from the income of the financed projects.

• Green securitised bonds – These bonds are collateralised by one or more specific environmentally-friendly projects. The source of repayment will be generated from the cash flow of the securitised assets.

In addition to the foregoing, in October 2022, the Financial Markets Law Executive Regulations were amended to adopt a broader spectrum of green finance instruments by incorporating, inter alia, the environmental, social, and governance (ESG) objectives. These include the following.

• Sustainable bonds – These are bonds used for the purposes of financing sustainable projects. The proceeds of these bonds shall be used in green and social development projects aiming to achieve sustainability.

• Sustainable-related bonds – This type of bond possesses structural characteristics connected to predefined sustainability/ESG objectives. These bonds do not pose particular obligations to finance a specific green project. The issuer is however committed to using these bonds to attain certain sustainability or KPIs relating to sustainability objectives.

• Social bonds – The proceeds of these bonds shall be to finance or re-finance existing or new social projects.

• Women empowerment bonds – This type of social-related finance instrument has structural characteristics to finance projects or initiatives supporting gender equality and women empowerment in Egypt.

• Climate bonds – The proceeds of these bonds are used to finance and re-finance environmentally-friendly projects that aim to reduce carbon emissions and mitigate climate change risks.

• Transitional environmental bonds – These bonds are used to finance projects that are not eco-friendly and aim to transition to a green project spectrum.

Sovereign green bonds are financial instruments issued by the government to fund public sector green projects. Egypt has successfully issued the first Middle East and North Africa (MENA) sovereign green bonds in 2020 for USD750 million with a 5-year term and a rate of 5.25% – which is lower than Egypt’s benchmark conventional bonds. It has targeted financing eco-friendly projects, especially in the housing, transportation, and renewable energy fields. By contrast, Egypt also issued the Sovereign Bonds Law No 138 of 2021 (“Sovereign Bonds Law”) and its executive regulations issued by ministerial decree No 1574 of 2022 (“Sovereign Bonds Law Executive Regulations”) to regulate the use and issuance of sovereign bonds.

The ESG Rules refer to a framework designed to screen and evaluate business sustainability based on environmental, social, and governance factors and data. In 2021, the Egyptian Financial Regulatory Authority (FRA) issued two important decisions in connection with integration and disclosure related to ESG. The FRA issued two decisions setting out key performance indicators (KPIs) for the ESG and Task Force on Climate-Related Financial (TFCR) disclosures. These rules require companies meeting the criteria specified under the decisions to:

• submit ESG annual KPI reports; and

• fulfil TFCR disclosure requirements annually.

By contrast, the Central Bank of Egypt (CBE) supported multiple initiatives to encourage banks to provide financial services to green projects. In this context, the CBE issued guiding principles in 2021 on sustainable finance (“Guiding Principles”).

The Guiding Principles recognised and defined the sustainable finance notions as “financial or banking services which observe the climate, environmental, social and governance components in a bank’s decision making when granting credit or taking an investment decision. The purpose of sustainable finance is to attain sustainable benefit to customers, concerned parties, and the community”.

The Guiding Principles embodied guidelines on mitigating financial risks and supporting financial stability. These risks include reputational, physical, credit, environmental, legal, and social risks. As a step forward, banks in Egypt have started to integrate ESG principles into internal governance policy and offer ESG products to support green finance.

Egypt clearly made efforts to encourage and raise awareness of sustainable economy and transitioning to green finance. To assure these efforts, Egypt is hosting the 27th Conference of the Parties of the UN Framework Convention on Climate Change (UNFCC) (COP 27). This is a particularly important worldwide event to discuss and empower climate change inclusion, awareness, issues, and solutions, especially for developing countries.

So, what are the next steps for green finance? The current framework in connection with green finance is slowly growing. It is expected that the banking and non-banking financial sectors will play an important role in promoting and using green finance instruments by offering and innovating more green finance products and solutions in different sectors (such as loans and other types of credit facilities). Additional efforts are aimed at helping to set a clear legal framework for green finance.  

In addition to the continuous legislative efforts, Egypt should look into developing and applying a green rating system to assess and certify green buildings and projects on the local market level. Although the Egyptian Green Building Council (EGBC) was established in 2009, it is still a grey area in many ways and no mandatory rule is currently in place in terms of certifying or rating the green compliance of buildings or projects. Indeed, having in place a good rating system will optimise investment and funding for green projects.