Saudi Arabia’s Green Financing Framework and How it Works

Saudi Arabia published its Green Financing Framework (GFF) in March 2024, marking a significant milestone in its journey toward sustainable development and environmental stewardship. This initiative, launched in alignment with the Kingdom’s Vision 2030, seeks to transform the nation’s economy by balancing environmental protection with economic growth. The GFF aims to mobilize financial resources to fund green projects and contribute to Saudi Arabia’s commitment to achieving net-zero emissions by 2060.

Also Read: Saudi Arabia Takes Steps Towards Environmental Sustainability: COP16 and National Green Initiatives

Objectives of the Green Financing Framework

The primary objectives of the GFF are:

1. Promoting sustainable investments: The framework aims to attract public and private sector investments in environmentally friendly projects. Key sectors include renewable energy, energy efficiency, clean transportation, water resource management, pollution prevention, and climate change adaptation.
2. Ensuring transparency and accountability: By adhering to the Green Bond Principles (GBP) of the International Capital Market Association (ICMA), the GFF ensures that projects financed under this framework meet internationally recognized sustainability standards. This transparency fosters investor confidence and mitigates the risks of greenwashing, which refers to misleading claims about a project’s environmental benefits.
3. Achieving climate goals: Saudi Arabia has pledged to reduce greenhouse gas emissions by 278 million tons annually by 2030 as part of its commitment to the Paris Agreement. The GFF is a critical tool for channeling investments toward projects that support this target, reinforcing the Kingdom’s role in global climate action.

Strategic importance of the Green Financing Framework

The introduction of the GFF positions Saudi Arabia as a leader in sustainable finance within the region. Historically known for its dependence on oil, the Kingdom is now making strides to diversify its economy and embrace green initiatives. This framework provides a structured approach to funding projects that align with environmental, social, and governance (ESG) principles, facilitating the transition to a green economy.

Through the GFF, Saudi Arabia aims to:

• Reduce its carbon footprint by investing in renewable energy sources such as solar and wind.
• Enhance energy efficiency in key sectors, including industrial production and urban development.
• Foster innovation in clean transportation, including electric and hydrogen-powered vehicles.
• Support projects that combat desertification and promote sustainable agriculture.

How the Green Financing Framework works

The Kingdom of Saudi Arabia has established its Green Financing Framework (the “Framework”) in accordance with the Green Bond Principles (GBP) 2021 (with June 2022 Appendix 1), as published by ICMA. Under this Framework, the Kingdom will be able to issue Green Bond(s) / Sukuk. In alignment with these Principles, for each Green Bond / Sukuk issued, the Kingdom asserts that it will establish the following arrangements, as set out in this Framework:

1. Use of proceeds: An amount equal to the net proceeds of any Green Bond/Sukuk issued by the Kingdom of Saudi Arabia under this Green Financing Framework will be allocated to finance new or re-finance existing projects/expenditures, in part or in full, which qualify under the eligible green project categories as set out below. Eligible expenditures falling under this framework are intended to:
   • Promote the Kingdom’s pathway to cleaner energy transitions and diversification of its economy, and protection of its natural environment in both urban and rural areas.
   • Support the achievement of objectives set forth under Vision 2030 commitments, the Saudi Green Initiative, Circular Carbon Economy (CCE) national program, and the Nationally Determined Contributions (NDC) under the Paris Agreement.
   • Eligible expenditures can include investments expenditures, operating expenditures, tax expenditures (including taxes foregone), and subsidies, insofar as any expenditure contributes to the Kingdom’s climate change mitigation and adaptation policies. Project categories are: Environmentally sustainable management of living natural resources and land use; Energy efficiency; Renewable energy; Clean transportation; Pollution prevention and control; Sustainable water and wastewater management; Climate change adaptation; Terrestrial and aquatic biodiversity.
2. Project evaluation and selection process: The Project Evaluation and Selection Process will ensure that the proceeds of any Kingdom of Saudi Arabia Green Bond/Sukuk are allocated to new expenditures or existing projects/expenditures that meet the criteria set out above in Use of Proceeds. The Kingdom of Saudi Arabia has established a Main Committee (“Sustainable Financing Committee”) to oversee the Kingdom’s green bonds/sukuk issuances. It has also established a sub-committee (“Projects and Monitoring Committee”) reporting to the Sustainable Financing Committee. The Sustainable Financing Committee will be responsible for:
   • Overseeing the implementation of this Green Financing Framework.
   • Validating the final eligible projects list.
   • Validating the allocation and impact reporting.
3. Management of proceeds: The Kingdom of Saudi Arabia, acting through the Ministry of Finance, will be responsible for the issuance of Green Bond/Sukuk. The net proceeds will be allocated to eligible budgetary programmes in the General Budget of the Kingdom of Saudi Arabia, within two budget years following the issuance of any Green Bond/Sukuk. The total expenditures required for the eligible programs will equal or exceed the net Green bond/Sukuk proceeds. Pending its allocation to eligible green projects, The Kingdom of Saudi Arabia will temporarily hold an amount equal to the unallocated proceeds of any Green Bond/Sukuk issuance in line with its Treasury Policy. The Ministry of Finance will oversee the allocation and tracking of expenditures on eligible green projects up to an amount equal to the net proceeds of Green Bond/Sukuk issued. In the event where some expenditures would be withdrawn from the portfolio of eligible expenditures, the Kingdom of Saudi Arabia will reallocate on a best effort basis the proceeds to other eligible expenditures which are compliant with the eligibility criteria, as soon as reasonably practicable.
4. Reporting: An annual allocation report will be made publicly available within one year of issuance of any Kingdom of Saudi Arabia Green Bond/Sukuk, which details the allocation of the net proceeds from any outstanding issuance. The allocation report will include the following details:
   • Total amount allocated to eligible green projects.
   • Total amount allocated per eligible green project category.
   • Total amount allocated per region.
   • Breakdown of expenditure by the type of expenditure.
   • Breakdown of refinancing versus new financing.
   • The amount remaining unallocated.
   • In addition, it will provide impact reporting on the expected environmental impacts of the eligible green projects. The impact report will be made available at least on a biennial basis, subject to the availability of the relevant data.
5. External review: The Kingdom aims to adhere to the highest standards in terms of external review of its Green Financing Framework. The Kingdom will follow a two-step approach to verification:
   • Second-Party Opinion (Pre-issuance verification): The Kingdom of Saudi Arabia has appointed Moody’s Investors Service to provide an external review on the Kingdom of Saudi Arabia Green Financing Framework, and confirm its alignment with the ICMA GBP. This Second Party Opinion (SPO) document will be made available on the Ministry of Finance’s website.
   • Post-issuance external verification: The Kingdom of Saudi Arabia’s annual reporting will also be subject to external verification by an External Reviewer. The auditor will verify:
     • The compliance of assets financed by the Green Bond/Sukuk proceeds with eligibility criteria defined in the use of proceeds section in this Framework.
     • Allocated amount related to the eligible green projects financed by the Green Bond/Sukuk proceeds.
     • The management of proceeds and unallocated proceeds amount.
   • The external auditor’s report will be published on the Ministry of Finance’s website.

Amendments to the GFF: The committee will review this Framework on a regular basis, including its alignment to updated versions of the Principles as and when they are released, with the aim of adhering to best practices in the market. Such review may result in this Framework being updated and amended.

Role in achieving Vision 2030

Vision 2030, Saudi Arabia’s ambitious economic diversification strategy, places sustainability at its core. The GFF complements this vision by providing a roadmap for financing projects that promote economic growth while safeguarding the environment. For instance, the framework supports initiatives such as the Saudi Green Initiative, which aims to plant 10 billion trees across the Kingdom and reduce land degradation.

Moreover, the GFF aligns with global trends in sustainable finance. According to the Climate Bonds Initiative, green bond issuance worldwide reached a record $500 billion in 2021. By adopting the GFF, Saudi Arabia taps into this growing market, attracting ESG-focused investors and positioning itself as a key player in the global green finance ecosystem.

Challenges and opportunities

While the GFF represents a progressive step, its implementation poses several challenges:

• Capacity building: Transitioning to a green economy requires substantial investment in technology, infrastructure, and workforce training.
• Market volatility: Fluctuations in global financial markets and commodity prices may impact the availability of capital for green projects.
• Regulatory hurdles: Establishing a robust regulatory framework to monitor and enforce compliance with GFF criteria is essential for its success.

Despite these challenges, the GFF offers significant opportunities. It opens doors for collaboration with international financial institutions, fostering knowledge transfer and innovation. Additionally, it provides a platform for Saudi companies to enhance their ESG performance, improving their competitiveness in global markets.

Outlook

Saudi Arabia’s Green Financing Framework is expected to play a pivotal role in achieving the Kingdom’s sustainability goals. By formalizing this framework, the nation provides structured guidance for green and low-carbon investment opportunities. The GFF not only accelerates progress toward net-zero emissions but also strengthens Saudi Arabia’s position as a hub for sustainable finance in the Middle East.

As the world transitions to a low-carbon economy, Saudi Arabia’s proactive approach through the GFF underscores its commitment to global environmental goals. Through strategic investments and robust governance, the Kingdom is paving the way for a sustainable and diversified economy, ensuring long-term prosperity for future generations.

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