In Brief:
- Sustainable Finance is no longer considered a “niche” area in banking or investing.
- The implementation of ESG metrics is critical for companies and financial institutions.
- The UAE is committed to the development and growth of sustainable finance and has implemented a number of action points in advance of COP28.
The UAE’s commitment to sustainable finance is highlighted by two recent announcements from the DIFC and the ADGM. Catriona McDevitt provides an overview of sustainable finance in the UAE.
The recent announcements in October this year by two of the UAE’s financial free zones, namely the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM), highlight the UAE’s commitment and focus to sustainable finance and the steps the country is taking to prioritise ESG considerations in light of the climate crisis and the increasing global appetite for regulatory frameworks on sustainable finance.
The ADGM and the Z/Yen Group have announced a partnership between the Global Green Finance Index (GGFI) and ADGM, providing support for the development of the index and underpinning ADGM’s commitment to sustainable finance.
The GGFI tracks the development of green finance globally by rating the depth and quality of green finance undertaken in financial centres.
Sustainable Finance is also a key focus area for ADGM which has led initiatives such as the UAE Guiding Principles on Sustainable Finance, the Abu Dhabi Sustainable Finance Declaration, the Executive Certificate in Sustainable Finance and the Abu Dhabi Sustainable Finance Forum, all of which are significant contributors to Abu Dhabi’s sustainable finance industry.
The Abu Dhabi Global Market Sustainable Finance Platform is designed to accelerate the objectives of ADGM in promoting sustainable finance in the Middle East. The Platform presents key sustainable finance data and trends related to five sustainable finance themes:
- Responsible Banking;
- Responsible Investing;
- Sustainable Products;
- ESG Disclosure; and
- Sustainable Capital Markets.
On 24th October 2022, the DIFC announced a year-long partnership with the Global Ethical Finance Initiative (GEFI), ahead of the United Nations Framework Convention on Climate Change’s 28th Conference of the Parties (COP28) which will take place in Dubai in November 2023, in which they will seek to implement change across the global financial industry in relation to, amongst other items, financing sustainable development goals.
This follows the announcement in September this year by the Dubai Sustainable Finance Working Group (DSFWG), which was established in 2019 by the DIFC and Dubai Financial Market (DFM), of the introduction of a self-assessment tool for measuring the maturity of ESG policies and practices in companies.
The tool was developed in-line with the principles of the United Nations’ Sustainable Development Goals (SDGs) and the standards of the Global Reporting Initiative (GRI), an independent, international organisation that provides the world’s most widely used standards for sustainability reporting – the GRI Standards. By using the self-assessment tool, companies will be able to assess their own progress against SDGs and keep up with the best ESG practices in-line with global standards. The assessment will benchmark companies against five levels of maturity and enable them to strategise how best to develop their ESG principles and practices in their organisations.
The UAE’s first set of Guiding Principles on Sustainable Finance were introduced in 2020 as a result of collaborative efforts among a number of financial services authorities in the UAE, including the ADGM; the Ministry of Climate Change and Environment; the Central Bank of the UAE; the Insurance Authority of the UAE; the Securities and Commodities Authority; the Dubai Financial Services Authority; the Dubai Islamic Economy Development Centre; the Abu Dhabi Securities Exchange, the DFM and Nasdaq Dubai. This is a first-of-its-kind initiative aimed at furthering the UAE’s sustainability agenda and the implementation of the UAE’s sustainability priorities.
The UAE became the first GCC country to announce a net-zero carbon commitment – the Net Zero by 2050 Strategic Initiative – to attract investment from global capital markets as investors increasingly seek ESG-compliant investments.
What is Sustainable Finance?
The World Bank notes that Sustainable Finance is the process of taking account of environmental, social and governance (ESG) considerations when making investment decisions in the financial sector, leading to increased longer-term investments into sustainable economic activities and projects. It has become a powerful movement led by regulators, institutional investors and asset managers globally.
Sustainable investing covers a range of activities, from investing in green energy projects to investing in companies that demonstrate social values such as social inclusion or good governance by having, for example, more women on their boards. Examples of sustainable finance products include green bonds, green-tagged loans, green investment funds and climate risk insurance.
Enviromental factors include taking steps to mitigate the climate crisis or the use of sustainable resources. Social factors refer to human rights, diversity (for example, gender diversity) and consumer protection. Governance includes management and employee relations of organisations.
ESG and Crypto-assets
The global appetite for the rapidly evolving crypto asset sphere is increasingly calling into question the relevance of and need for ESG factors in the crypto-asset world.
Some of the key ESG factors relevant in the crypto-asset market include environmental issues such as energy consumption and the carbon footprint in the mining of crypto-assets. Governance factors include the de-centralised nature of crypto-assets; the scope for illegal activities to be conducted through the use of crypto-assets and the need for regulation thereof.
The very nature of the speed of developments in the crypto sphere makes it difficult for both investors and regulators to keep pace but as the industry matures and global regulation of crypto-assets increases, there may be a decline in ESG risks. It is important, however, that ESG factors are considered as part of the development of governmental regulatory frameworks in relation to crypto-assets.
ESG and the Finance Industry
The omnipresent climate crisis has required the finance sector to play a key role in sustainable finance as it has power in not only funding, but also raising awareness of issues in, sustainablility.
Historically, ESG has been seen as a niche area and not one that has typically been prioritised by companies - primarily because of the historical trends for companies to prioritise profit above other considerations. However, investors are demanding more transparency and accountability from companies and given the significant focus on climate crisis and ESG globally, companies need to ensure that if not already doing so, their focus has to shift to recognising the importance of such ESG factors. Indeed, an increasing number of institutional investors are incorporating ESG performance measures into their capital allocation and governance criteria, highlighting an attitude shift toward sustainable finance which goes beyond investing in a socially responsible manner to also include asset management and ownership.
Another reason for the increasing trend of investors and companies embracing sustainable finance is the evidence that incorporating ESG factors does not have to come at the cost of profit - but rather, companies which actively incoporate ESG factors can deliver in terms of profit and shareholder and employee satisfaction. Sustainable finance can no longer be treated as an outlier in financing but one that needs to be embraced - and can be done so in a myirad of ways including through impact investing and prioritising companies that are committed to diversity and inclusion.
The way forward
The UAE’s commitment to developing relationships that can further foster the adoption of sustainable finance in the region, its net-zero carbon commitment and the hosting of COP28 are evidence of its vision in embracing ESG factors and addressing the climate crisis.
It is clear that with increasing global regulatory oversight of sustainable finance, companies and financial instutions need to identify and address ESG risks and factors which will not only enable them to adapt to inevitable future regulation but which will ultimately benefit them both in terms of profit and shareholder and investor satisfaction.
For any queries, please contact the Banking & Finance team at Hadef & Partners LLC.