Building the UAE’s Sustainable Finance Ecosystem:
A Framework for Enabling Investments in the Green Transition
Empowering Businesses to Mitigate Environmental Risks and invest sustainably
Sustainable finance has been well and truly gaining momentum in the Middle East and North Africa (MENA) region. Despite the challenging global economic environment, countries in the MENA region are making significant strides in sustainable finance initiatives, such as the growth in green bond issuance in the region surpassing the global trend. So, as the MENA region forges ahead in its green transition, there are clear indications of the increasing dedication of governments, regulators, investors, and businesses in the region to take substantive action to invest in this transition to make net zero a reality.
The government of the United Arab Emirates (UAE) has been at the forefront of taking action to forward the green transition in the MENA region. Over the past decade, the government has developed national and local strategies and invested in key local and international projects to foster sustainability. These include hosting the world’s largest single-site solar power plant, Noor, investing in Masdar City - a sustainable city project in Abu Dhabi – as well as bringing AeroFarms to Abu Dhabi, the largest indoor vertical farm using technology which saves 95% of the water used by traditional farming.
The UAE has followed up on these programs by becoming the first country in the Gulf to announce a net-zero carbon commitment – the Net Zero by 2050 strategic initiative. In line with this government initiative, Abu Dhabi Global Market (ADGM) is developing a vibrant sustainable finance hub to help channel capital to projects and activities that support the green transition and will help net zero become a reality.
Abu Dhabi and ADGM at the forefront
Since its establishment in 2015, ADGM has been a strong advocate of sustainable practices and has been developing a thriving financial hub that helps facilitate investments in projects and activities with environmental objectives at its core. Significant initiatives such as the UAE Guiding Principles, Abu Dhabi Sustainable Finance Declaration, and the Abu Dhabi Sustainable Finance Forum, have contributed to the growth of Abu Dhabi’s sustainable finance ecosystem and cemented its position as an innovative and progressive leader in sustainable finance, not only in the region but beyond.
The ADGM Sustainable Finance Agenda was published in 2019 and since then the objective of promoting sustainable finance has been advanced by several initiatives. These include the creation of the Sustainable Finance Working Group (SFWG), chaired by ADGM, which comprises UAE financial regulators, federal ministries, and UAE exchanges. The SFWG seeks to deliver sustainable finance regulation across the UAE as a whole. In November 2022, the SFWG published its Second Public Statement, which focuses on delivering ESG disclosure regulation across the UAE, directing firms to take account of climate change in their risk management and corporate governance practices and helping advance the UAE Green Taxonomy. As part of the ongoing work undertaken by the SFWG, in March ADGM’s Financial Services Regulatory Authority (FSRA) recently published a consultation paper with its peer SFWG members entitled “Principles for the Effective Management of Climate-Related Financial Risks”.
Net zero will need to be achieved primarily from reductions in greenhouse gas emissions. However, offsetting emissions is likely to be an essential component of achieving net zero. In this context, credibility is an essential component of a well-functioning and trusted carbon offsets market. ADGM has introduced a key measure to enhance the credibility of this market by being the first jurisdiction to support carbon as a commodity and to regulate carbon offsets as emissions instruments and a class of financial instrument (known as Environmental Instruments), and importantly to issue licences for exchanges to operate both spot and derivative markets. ADGM believes this measure is essential to enable investor trust and enacting it has enabled us to facilitate the establishment of the world's first regulated voluntary carbon trading exchange and clearing house here in ADGM, namely Air Carbon Exchange (ACX).
A regulatory framework to advance sustainable finance
For investors wishing to pursue a green investment strategy, the availability of sustainable financing opportunities in the UAE is a critical element for their decision-making across the corporate finance landscape. This also highlights the correlation between public and private investment necessary for the UAE to achieve its net-zero emissions target. A regulatory framework is vital to ensure the credibility of sustainable investments, attracting investors to the sustainability-focused products and services offered by providers based in ADGM.
ADGM and its Financial Services Regulatory Authority (FSRA) have dedicated their resources to building an innovative and progressive regulatory hub for sustainable finance, thus powering Abu Dhabi and the UAE’s position as a green ‘Falcon Economy’. In addition to the introduction of Environmental Instruments for carbon offset trading, ADGM has proposed a regulatory framework which will be implemented in mid-2023, that covers a wide range of investment products, such as sustainability-focused investment funds, discretionary managed portfolios and bonds. The proposed rules on ESG disclosures for large ADGM companies and the regulated voluntary carbon exchange will therefore help encourage companies to become carbon neutral and contribute to the UAE's net-zero goals.
Investors are often keen to employ their capital in sustainability-focused vehicles but are wary of the potential occurrence of “greenwashing” which is when entities misrepresent environmentally responsible features of a product, service or themselves as a whole. The FSRA’s regulatory framework addresses this risk by setting minimum standards for sustainability-focused investment vehicles. It believes that setting such standards will help to nurture transparency and investor confidence in the green credentials of those products and services. Furthermore, it has also created a new category of sustainability-oriented investment fund, known as the Climate Transition Fund. The purpose of this category of fund is to channel capital into projects and entities which are not green yet and require capital to become so. It underlines the importance of creating a separate category of investment vehicle for this type of strategy is crucial. If regulators are to play their role as enablers in sustainable finance, there is a need to facilitate the transition of the great majority of investable assets which are not currently ‘green’, along with strong safeguards in play to ensure they are genuinely ‘greening’.
As it seeks to become a leading green international financial centre, ADGM believes that the continued provision of an enabling ecosystem with transparent regulation, particularly in sustainable finance and ESG, will attract capital inflows towards projects with green objectives. A need to hasten the development of a sustainable finance industry in the region is of great importance to meet the challenges the world is facing due to climate change.
Turning to the future, in its capacity as an innovative and progressive international financial centre, ADGM will continue to play a pivotal role in enabling the country’s net-zero goals to be achieved by creating a vibrant ecosystem for sustainable finance. By serving as a hub for raising capital for investments that offer both financial returns and positive environmental impact, centres such as ours can contribute to a buoyant sustainable finance industry. ADGM’s efforts also complement the UAE’s broader long-term ambitions of economic diversification and pivoting away from a hydrocarbon-based economy.
ADGM is primed to capitalise on this opportunity, given its proximity to a number of the world’s largest sovereign wealth funds (SWFs) and institutional investors, not to mention the abundance of private wealth in the region. But investors of all types need to be able to trust the green credentials of products sold and be confident greenwashing risks have been addressed and appropriately mitigated. Its robust sustainable finance regulatory framework will be a major step in instilling investor confidence and helping to make net zero a reality. This all comes in the context of the UAE’s hosting of COP28 this year, in which the country will be able to demonstrate its meaningful contribution to help mitigate the risk of climate change by highlighting the substantive efforts it has been making in this field.
Sustainability is a fundamental principle in today’s world, but its adoption is still a work in progress. Regulators have the power to help facilitate an acceleration in the green transition by establishing strong regulatory frameworks that enable greater financing of green projects and that ‘green’ the financial system itself. The momentum toward a sustainable future must not be lost and achieving this goal requires us to all engage and participate in increasing the acceleration of this adoption. While a gearshift has already begun, regulators and market participants are only at the beginning of their journey towards enabling net zero. ADGM will continue to hasten efforts as it drives toward making net zero a reality.