The Year of Sustainability
2023, the 'Year of Sustainability' in the UAE, a nationwide commitment towards sustainable practices. Environmental, social and governance (ESG) considerations are increasingly shaping investment decisions. Green infrastructure and the mechanisms to finance clean development projects are critical to decarbonising the economy. UAE, along with the rest of the world, is racing towards net zero by 2050, in line with the commitments made under the Paris Agreement. However, while we are all aware of the need for action, it's often difficult to pinpoint meaningful progress towards net-zero. As the 28th United Nations Climate Change Conference (UNFCCC), Conference of Parties (COP28) draws near, the UAE, as host, is determined to solidify its commitment towards addressing the challenges posed by climate change.
In the run-up to COP28, the UAE has submitted its updated Nationally Determined Contributions (NDC) to the UNFCCC, outlining an absolute economy wide emission reduction target. The updated NDC reflects UAE's enhanced ambition to pursuing climate mitigation and adaptation in line with its national 'Net Zero by 2050' strategy, further supported by the recent signing of the Net Zero 2050 Charter. This initiative incorporates federal and emirate level strategies including the: (a) National Climate Change and Adaption Plans; (b) Green Agenda 2030; and (c) National Framework for Sustainable Development...amongst others.
The Climate Change Plan 2017-2050 sets a framework for management of greenhouse gas emissions, climate adaptation, and private sector driven economic diversification. This is supported by the Climate Change Adaptation Program aimed at increasing climate resilience. Additionally, the National Energy Strategy 2050 targets to increase the share of clean energy, renewables and nuclear by 50% while simultaneously reducing energy demand by 40% by 2050. These targets are underpinned by the Green Agenda 2030, geared towards supporting the public and private implementation of a collective vision for a thriving sustainable economy.
At a federal level, alignment and implementation of climate and sustainability initiatives are led by UAE's Council and Ministry of Climate Change and Environment (MOCCAE). Against this backdrop, MOCCAE has released UAE's Sustainable Finance Framework 2021-2031 to address existing gaps in the UAE's roadmap and build upon the initiatives launched.
UAE's Appetite for Sustainable Finance
With COP28 on the horizon, ESG and sustainable finance have taken center stage and a range of green finance instruments and initiatives are being developed. However, UAE's transition towards a green economy began much earlier in 2019, with Abu Dhabi Global Market's (ADGM) Sustainable Finance Agenda establishing a roadmap to develop ADGM as a sustainable finance hub. A voluntary framework encouraging financial firms to incorporate ESG considerations, titled UAE's Guiding Principles in Sustainable Finance1 was published soon after. These commitments were further formalised under Dubai and Abu Dhabi Sustainable FinanceDeclarations, which over 50 entities have adopted. In line with the country's plan, regulators across the UAE have taken their own approach to green implementation.
A. Dubai International Finance Centre (DIFC)
DIFC has announced the introduction of a sustainability framework as part of its 2024 strategy. The roadmap identifies green financial instruments, green fin-tech, sustainable reporting and disclosures as well as ESG taxonomy as key components of its framework. Additionally, DIFC established the Dubai Sustainable Finance Working Group (SFWG) and the DFSA Task Force on Sustainable Finance (TFSF). SFWG have published multiple reports, including a statement outlining substantive measures that authorities may employ to integrate sustainability into their regulatory frameworks, such as corporate disclosure standards, governance, green taxonomy and greenwashing. Most recently, SFWG announced its Consultation for Principles for Sustainability Related Disclosures which takes into consideration the UAE's Guiding Principles in Sustainable Finance.
B. Abu Dhabi Global Market (ADGM)
ADGM is actively building its sustainable finance ecosystem and earlier this year, it implemented its sustainable finance regulations, with amendments across ADGM and FSRA's existing framework. Importantly, the Financial Services Regulatory Authority (FSRA) has introduced the concept of 'Environmental Instruments' as a financial instrument. The definition is broad in nature and encompasses instruments that enables the holder to emit GHG, attest to the reduction or removal of GHG (specifically identifying carbon credits) or attest to the environmental attributes of an underlying unit.
This has facilitated the formation of the world's first regulated, voluntary carbon credit (VCC) exchange in ADGM, the Air Carbon Exchange (ACX). ACX has gained recognition as an investment exchange and will allow companies to trade and finance carbon credits similarly to conventional financial assets. This in turn, will facilitate increased investment into global carbon emission reduction and offset programmes. ADGM's recognition and supervision differentiates this exchange from other VCC exchanges, as it enables regulated trading of carbon offsets.
Moreover, the inclusion of financial instruments or assets designated as green instruments, such as green and climate transition funds or green and sustainability-linked bonds represents a significant step in channelling capital towards achieving net-zero transition. Such designation builds confidence in ADGM's sustainable finance ecosystem as it identifies only those instruments that meet ADGM's robust minimum standards. ADGM has already proposed adoption of the International Sustainability Standards Board (ISSB) ESG disclosure standards as a mandatory requirement for all companies. The ISSB standards aim to establish a global baseline while consolidating existing disclosure frameworks across industries, geographies, and accounting principles. Adoption of such standards shows ADGM's commitment to aligning with internationally accepted ESG disclosure standards.
In addition to its framework, the ADGM has established a voluntary, membership-based sustainable finance association with other regulators including Central Bank of the UAE (CBUAE) and Securities and Commodities Authority (SCA). The association aims to increase the quality of green financial products and create a thriving sustainable finance industry to support the achievement of the UN Sustainable Development Goals.
The Future of Sustainable Finance in the UAE
The VCC market in the UAE is in its formative years and progress has begun with the establishment of regulated VCC exchange, launch of UAE Carbon Alliance as well as SCA and MOCCAE's announcement of establishing the world's first-of-its-kind national system for carbon credits using blockchain technology. The Carbon Alliance aims to promote national decarbonisation efforts, constructive carbon financing and support clean development projects. In recent years, investors and organizations are increasingly seeking ways reduce their carbon footprint, resulting in the demand for credible VCC markets. Therefore, UAE's goal of establishing a resilient, transparent, and high-quality carbon market will drive capital towards clean development projects, while providing corporations with a market-based mechanism to accelerate and certify their transition journey and achieve reduction targets. These collaborations ultimately contribute towards achieving UAE's NDCs.
At a national level, UAE regulatory authorities collectively, have already endorsed key guiding principles for ESG. This endorsement signifies a unified commitment to foster adoption in their respective communities in line with the country's sustainability goals. Furthermore, the significance of international best practices, principles and recommendations of established international bodies such as the UN Framework Convention on Climate Change and UN's Sustainable Development Goals have been taken into consideration. Additionally, even the most recently established bespoke Virtual Assets Regulatory Authority (VARA) has already included ESG as part of their virtual asset framework and licensing requirements for virtual asset service providers in the Emirate of Dubai.
In conclusion, UAE's climate strategy encompasses internationally recognised principles, local regulatory frameworks as well as public and private initiatives. UAE is tackling climate change at all levels, incorporating pro-active measures while each regulator develops its own framework for a sustainable economy. On one hand, ADGM has made significant progress, by implementing its actual regulatory requirements and establishing deadlines for the implementation of further regulations. Companies operating in ADGM should prepare to comply with these updated regulations and expect further developments to be introduced. On the other hand, DFSA is currently developing its regulatory framework in consultation with key public and private stakeholders, having published key insights in areas such as greenwashing and green taxonomy. Likewise, companies operating in DIFC should expect such requirements to eventually form part of DFSA's existing regulatory framework. In the run up to COP28, we are sure to witness the UAE entrench sustainable finance into the country's economy and regulatory environment, further solidifying the country's commitment towards tackling climate change.
At KARM, we are closely watching this space, advising on the purchase and sale of carbon credits and other environmental instruments, their regulatory compliance and disclosure requirements, as well as their use in secondary markets. We ensure that our clients maintain regulatory compliance with existing and emerging requirements, bridging the gap between emerging technology and legal regulations. We understand these innovative technology and solutions and how such novel ideas fit into the emerging sustainable finance frameworks.
1. The principals endorsed by UAE authorities are: (a) Integration of ESG Factors into Governance, Strategy and Risk Management; (b) Minimum Eligibility Requirements for what constitute 'sustainable financial product'; and (c) Promotions of appropriate ESG related Reporting Disclosures.
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