The World Bank said on Wednesday it would stop providing financing to oil and gas projects after 2019, a move that analysts said may speed up the momentum towards clean energy investments by large global financial institutions.
The Washington-headquartered lender, whose current spending on energy accounts for 1 per cent of its annual budget, said it would channel 28 per cent of its lending to climate action by 2020. The announcement was made at the One Planet conference in Paris, convened by French president Emmanuel Macron, UN secretary general Antonio Guterres, and World Bank group president Jim Yong Kim.
The move follows similar initiatives by large financial institutions such as the US$1 trillion Norwegian sovereign wealth fund - the world's largest - which, in November said that it would sell all of its shares in oil and gas companies.
The global sentiment towards oil and gas investment is increasingly turning negative with large funds continuing to move away from fossil fuels. Even the large oil-producing nations such as Saudi Arabia are accelerating renewable energy programmes and phasing out subsidies.
"There is no doubt that, on balance, the global sentiment is increasingly hostile towards oil and gas, and the World Bank's announcement adds to it," said Carole Nakhle, chief executive of London-based energy advisory firm Crystol Energy. "However, until truly competitive alternatives are developed, the world will continue to see the dominance of fossil fuels in its primary energy mix for the foreseeable future."
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Mohamed Ramady, professor at Dhahran-based King Fahd University of Petroleum and Minerals, said that the announcement will serve as a "wake up call" for producers in the Arabian Gulf to cut reliance on oil.
"It's part of a trend when you see oil producers like Norway readjusting their investments in oil and gas," he said, adding that investment hedge and ethical funds will continue to invest in clean energy and gas. "This will encourage the step towards reforms in Saudi Arabia and the UAE which are looking at nuclear energy and renewables."
The World Bank's energy portfolio has been spent on helping communities living off-grid in energy poor nations to get access to power. Around 1.06 billion people worldwide live in energy poverty with no access to electricity, while another three billion subsist on polluting and hazardous fuels such as wood, charcoal, coal and dung for heating and cooking purposes, according to the bank.
However, despite being a net oil exporting region, countries in the Middle East and North Africa such as Egypt and Yemen have populations suffering acute energy deficiency . Others, such as Lebanon, have felt the strain of huge energy import bills squeezing their budgets.
The World Bank has supported access to electricity in these countries by dispensing loans. On Monday, the bank signed a $1.15bn financing agreement with Egypt, which among other things supports energy security in the most populous Arab nation . Egypt hopes offshore gas discoveries in the Mediterranean will transform it into a net exporter of the fuel.
Mr Ramady said that the bank's phase-out will bite the energy poor nations the hardest.
, The World Bank however said that it would make exceptions.
"Consideration will be given to financing upstream gas in the poorest countries where there is a clear benefit in terms of energy access for the poor and the project fits within the countries’ Paris Agreement commitments," it said in a statement.
The Paris Agreement is a global climate accord reached two years ago by around 200 countries that promised to limit global warming to 2 degrees or less by 2100 through lower carbon dioxide and other emissions.
The bank did not respond to emailed questions on its current and future spending targets for tackling energy poverty.
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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