09 Nov 2022

Road to COP28: Latest Development in UAE Sustainable Finance

Authored by: Catriona McDevitt

Following our recent article regarding the Growth of Sustainable Finance, on 9th November 2022, the UAE Sustainable Finance Working Group (SFWG) issued their second public statement titled “2022 Public Statement on Collaboration on Sustainable Finance in the UAE” in which they provide an overview of their progress to date on sustainable finance within the UAE.

The SFWG was established in 2019 and is co-ordinated by the regulator of the Abu Dhabi Global Market (ADGM) – the Financial Services Regulatory Authority (FSRA), with the goal of supporting the development of sustainable finance in the UAE and facilitating regulatory co-operation between the UAE authorities on practices that can enable the finance sector achieve this goal. To ensure maximum collaboration across the UAE’s financial sector, it is comprised of Ministries, Federal and Financial Free Zone regulators and UAE exchanges.

The second public statement builds on three topics within sustainable finance, defined in the 2021 public statement, which were identified as being most relevant to the nature of financial services in the UAE and which are considered internationally as being the most conducive to achieving the desired change.

These are:

  1. Strengthening sustainability disclosure;
  2. Fostering sustainability- focused corporate governance; and
  3. Designing the UAE’s Sustainable Finance Taxonomy.

The second public statement gives a progress update of 2022 and highlights that in addition to the attendance of several meetings across the SFWG and its workstreams; extensive benchmarking and fact gathering exercises were undertaken to gain a better understanding of evolving standards and international best practices. The SFWG met with regulators in various jurisdictions, industry standard setters and consultants with expertise in sustainable finance.

Strengthening sustainability disclosure

The members conducted an initial exercise to determine the extent of entity-level and product-level disclosure currently in place within UAE regulatory regimes, the results of which showed that some UAE regulators require entities issuing and/or listing securities to disclose ‘Environmental, Social and Corporate Governance’ (ESG) and sustainability reports. Although there are no mandated disclosure requirements specific to financial service firms, it was noted that some do make sustainability disclosures on a voluntary basis. It was also noted that in relation to financial products labelled as “ESG” or “Socially Responsible Investing” (or similar), most regulators have relied on their general disclosure obligations and have not issued specific disclosure requirements, except for some non-mandatory Green Bond Guidelines on the issuance of green bonds and sukuk.

The workstream noted key international initiatives on ESG-related disclosures, in particular, proposals by the ISSB that aim to provide a global, uniform set of disclosure standards and intends to consider the option of aligning with these standards in the future, once the final standards are adopted by the International Sustainability Standards Board (ISSB) and endorsed by international standards-setters. In order to do so, engagement will need to be undertaken across both financial and non-financial industry in the UAE.

Fostering Sustainability-focused Corporate Governance

Workstream Two’s objective is to enhance climate-related corporate governance and risk management standards in financial services entities within the UAE and is developing a principles-based document which seeks to provide guidance for how financial services firms are to incorporate climate-related considerations and practices into their governance and risk management structures. The second public statement notes that currently, its scope will likely be the financial services firms regulated by the UAE Central Bank, the Securities and Commodities Authority, the Dubai Financial Services Authority and the FSRA, with wider application to be considered in the future. Once the final document has been agreed, the proposed solutions, which will derive from international standards and best practices, will be shared with the UAE’s financial sector and relevant stakeholders for feedback.

Designing the UAE’s Sustainable Finance Taxonomy

The third workstream explored the rationale and overall objectives of a UAE Sustainable Finance Taxonomy in order to support the achievement of the UAE’s climate objectives and to enable the transition to a net zero economy. It aims to provide guidelines for the classification of activities and entities according to their level of sustainability in order to provide transparency for investors on the environmental impact of certain economic activities.

The second public statement notes that this workstream has concentrated on developing principles for the taxonomy and that it intends to explore the application of an activity classification system in the future.

The SFWG will seek feedback from industry and relevant stakeholders on its proposals as it continues to develop its work over the next year and in advance of the UAE hosting COP28.

It is clear through the varied membership of the SFWG, the three clearly identified workstreams and the collaboration with various regulators, standards setters and experts in relevant fields that the SFWG is committed to promoting regulatory consistency amongst its members and is seeking to develop best practices for sustainable finance in the UAE in accordance with international standards.

Please watch this space for future updates on the progress of Sustainable Finance in the UAE.

 
 

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