In recent years, 64% of companies in the UAE have started forming robust and formal ESG strategies. Compared to previous years more companies and government bodies have begun ESG strategy as a priority move. Since UAE is appointed to host the 28th session of the Conference of Parties in November this year, there has been a spotlight on the development in the region of ESG.
The integration of Environmental, Social, and Governance (ESG) principles into different greening assets is expected to drive economic growth in the country as many investors worldwide are attracted to invest in ESG-based products and projects and it commits a robust commitment to environmental responsibility.
In this blog, we will discuss the journey of UAE with ESG and its position at hosting COP 28.
ESG in UAE
Environmental, Social, and Governance (ESG) practices are often prompted by urgent worries about climate change. The Middle East has limited water sources, high levels of aridity, and large coastlines that are vulnerable to the effects of rising sea levels.
Investors in the Middle East have been shifting their priorities away from climate-related issues in favor of other environmental, social, and governance (ESG) considerations. The region is facing a lot of pressure to shift away from relying on hydrocarbons and towards more sustainable energy sources, and the fact that it’s hosting major conferences like COP-27 and COP28 shows that there’s a lot of determination to make a real difference in the world when it comes to sustainability.
According to the survey conducted by PwC, right now 64% of businesses have an ESG plan in place, and the number of companies with no ESG impact has gone down from 16% last year to 7% this year, according to the survey.
Industrial Development Finance Corporation (DIFC) has established a comprehensive Sustainability Framework to support its sustainability objectives in its 2024 Strategy. This framework is composed of four primary components:
Social: The goal is to bring people together to work collectively on projects that help people in need, and to teach future generations how to give back and make the world a better place.
Environmental: This initiative seeks to safeguard the natural world by forming strategic alliances with specialist organizations that are dedicated to environmental protection.
Governance: The goal of this initiative is to safeguard the organization and ensure its financial stability by forming strong relationships and managing stakeholders in a way that promotes openness and communication.
Government alignment: This initiative seeks to bolster the efforts of the United Arab Emirates Government.
Understanding COP 28
The annual Conference of the Parties (COP) is an international gathering of climate leaders with the goal of enhancing the Paris Agreement. However, the agreement came into force around the 21st United Nations Climate Change Conference (COP 21) in Paris 2016. COP 28 is the first international official treaty to make a signatory commitment to tackle climate change – which has gradually increased its signature membership. The UAE was the first Middle Eastern Party to sign this treaty in 2016.
The agreement establishes clear ambitions and goals on a fixed five-year cycle, with a prior focus on reducing greenhouse gas emissions and limiting global temperature rise to 2°C (to reduce this to 1.5°C), and each Party’s climate action plan is scrutinized with their goals in mind.
The Parties agreed that the first Global Stocktake would occur at the end of 2023 (and every five years thereafter) to evaluate progress made so far. This year’s COP 28 will also mark the fifth meeting of the COP acting as the Meeting of the Parties to the Paris Agreement (CMA 5).
An overview of the ESG journey in UAE
The UAE and ESG have a long-standing relationship, with the UAE actively engaging with companies. From 2020 onwards, the UAE focused its investment efforts on the longevity industry. The UAE Government has also implemented ESG reporting requirements for listed companies.
The Corporate Governance Code is the main governing body for these rules. It was published by the SECA in 2020 and requires all PSCs listed on the UAE stock exchange and the Dubai financial market to publish sustainability reports every year. These reports explain how companies are making a positive impact on society, the environment and governance through their activities.
ADGM’s commitment towards Sustainability
ADGM is setting an exceptional example by being the first global financial center to claim to be carbon neutral. What’s more, ADGM puts a lot of focus on finance, which is in line with the trend in the region when it comes to ESG. For example, it’s estimated that the Middle East and North Africa will issue $8 billion worth of sustainable bonds by 2021, which is a big step forward for ESG efforts in the region.
One of the UAE’s oldest private banks is a prime example of a corporate entity that is actively engaged in environmental, social, and governance (ESG) initiatives. Not only has the bank joined the United Nations General Assembly’s (UNG) Global Compact program for Ethical Corporate Behaviour, but it has also pledged to contribute USD 30 billion to Sustainable Finance by 2030. The bank has already facilitated a total of USD 15,5 billion in SusFin investments outside of the Gulf region, as well as USD 1,3 billion in Water-related projects that have directly contributed to job creation.
It is estimated that only a small fraction of corporations in the UAE have fully developed the personnel and systems necessary for full ESG capabilities. On the other hand, the vast majority of large corporations in the UAE are in favor of more ESG regulations. This support for a more comprehensive regulatory framework can be seen in ADAM’s Proposed SusFin Regulatory Framework, which could facilitate the uptake of ESG-related initiatives among UAE businesses.
The UAE’s commitment with ESG is reflected in regulatory mandates, corporate engagement, and its leadership in the global financial center. The UAE has made significant progress towards its ESG objectives, and the drive for additional legislation is likely to bring about even more significant changes in the business environment.
ADGM’s Proposal for Finance Regulatory
In a joint consultation paper titled “Proposals for a Sustainable Finance Regulatory Framework for ADGM” (Consultation Paper No. 6 of 2022), the Financial Services Regulatory Authority (“FSRA”) and the Registration Authority of the ADGM took input from a variety of stakeholders for this initial SusFin regime.
The consultation paper states the ideal agenda of the ADGM regarding finance sustainability which was published in January 2019. The ADGM aspires for its recommendations in this consultation paper to foster a SusFin hub where monetary gains and beneficial environmental effects can coexist and ADGM-incorporated firms are encouraged to adopt greener practices.
It would be interesting to examine stakeholders’ responses since the consultation process came to an end on January 23, 2023, and its release is being eagerly anticipated. With the option to disclose if they choose, ADGM is more tolerant of firms coping with stringent and inconsistent worldwide disclosure obligations. Without the supporting disclosures, it will be challenging to establish increased investor transparency about “green” products.
SusFin Regulatory Framework
The first suggestion made by the ADGM in its SusFin regulatory framework is for an ADGM Green Fund, in recognition of the fact that investment funds are excellent facilitators of investment toward green assets.
Combining green fund with ADGM’s green fund proposal, ADGM hopes to address the greenwashing (the distortion of sustainability-related activities and/or investment products) and other issues over the assets of environmental credibility held by green funds. However, the ADGM Green Fund Designation is currently being proposed as an opt-in framework, which implies that funds that satisfy the eligibility requirements will be officially recognized and listed as Green Funds on the FSRA Register.
The ADGM suggests a thorough and impartial evaluation procedure that gives special consideration to the verification procedure for green assets. The fund must either invest in assets aligned with a green taxonomy, those included in, or those that track a Paris-Aligned Benchmark to acquire the ADGM Green Fund Designation.
Funds for Climate Transitions
Climate Transition funds are those that can invest in greening assets. The capacity for investing in green assets is constrained because decarbonization is still in its early phases. As a result, to avoid limiting the framework, the ADGM acknowledges the need for a second sustainable fund. Assets that have the potential to go green over time are those whose investment directly supports the financing of their carbon reduction.
Though, distinguishing the two categories of asset groups may be difficult to practice. Though, transparency is maintained between green funds and climate transition funds to create confidence among investors, attract more investment in sustainability funds, and focus prevention on greenwashing.
There are a few criteria set by ADGM to maintain credibility and objectivity regarding green assets.
- Assets that follow a taxonomy for the climate transition.
- Infrastructure and real estate asset sustainability.
- Shares and loans issued by companies with a declared net zero goal and a solid plan for reaching it.
- Bonds and Sukuk are tied to sustainability and the environment.
Green bonds and sukuks for maintaining sustainability
The region already has a recognized green bond market, which the ADGM intends to develop into a “thriving center” for green debt through the implementation of a new opt-in framework that is intended to foster confidence, improve the standing of the current market, and stimulate investment. It proposes to grant ADGM Sustainability-linked Bond Designation to debt funding broad improvements in organizational sustainability and ADGM Green Bond Designation to debt funding more focused green initiatives.
ADGM understands the importance of raising awareness among investors for anti-greenwashing standards and further hopes to strengthen control over post-implementation. Like outlining minimum standards or limitations for second-party opinion.
The ADGM agrees that it hopes to include transition bonds, transition sukuks, and other forms of green debt as the SusFin regulatory framework will develop and broaden it over time.
Sustainability management and financial risk for climate-related products
A consultation on the Dubai Sustainable Finance Working Group’s (FSRA-coordinated) proposed Principles for the Effective Management of Climate-Related Financial Risk (the “Principles”) was launched on March 28, 2023.
The seven principles outlined by ADGM define the UAE Sustainable Finance Working Group’s basic expectations of ‘financial firms,’ particularly their boards and senior management, in supervising the physical, transitional, and liability-related financial risks posed by climate change.
For instance, Principle 5 addresses the monitoring and reporting of climate-related financial risks in depth. It requires financial firms to operate monitoring reporting systems that are “capable of producing relevant, accurate, and timely information”; identify any reporting gaps; and transmit this information to the board, senior management, and other stakeholders as needed.
The transition to a low-carbon and zero-carbon economy presents both risks and opportunities for the financial sector, and as such, these principles play an important role in providing financial firms with the tools they need to effectively identify and manage risk in the eyes of clients and regulators.
By hosting COP 28 Dubai Sustainable Finance Working Group has outlined detailed guidance.
- Unlocking the Potential of ESG Innovation in the UAE and around the World (taking into account the viewpoints of businesses of all sizes, whether start-ups or huge corporations, and providing step-by-step guidance on how to integrate sustainable practices through data- and industry-driven frameworks).
- The Net Zero Guide (which provides high-level, sector-specific direction to businesses throughout the emirates on how to build decarbonization programs).
ESG is an evolving and growing sector that is gaining the attention of investor circles globally. This sector is expected to see prominent developments in the UAE and worldwide. Though organizations alone cannot make this happen, government and public bodies have crucial parts to play.
Companies in the UAE need to create sustainability-based strategies from scratch and businesses that offer products and services in the green finance field will lead into the framework regulatory.
N R Doshi & Partners, the UAE’s renowned auditing firm in Dubai, is driving growth through expertise for its client’s business for more than 30 years.