Roadmap for sustainable finance in the UAE

Regulators in the UAE have reaffirmed their commitment to the growth of sustainable financing and investment in the UAE by the issuance of a roadmap for building the sustainable finance framework in the UAE. The statement which was issued by the UAE Sustainable Finance Working Group (SFWG) on the sidelines of COP 26, comes on the back of the UAE announcing its net zero by 2050 goal, and was issued in the lead up to the UAE being chosen as the host of COP 28.

The SFWG includes key regulators such as the Ministry of Finance, the Ministry of Economy, the UAE Central Bank, the Ministry of Climate Change and Environment, the Securities and Commodities Authority, the Dubai Financial Services Authority and the Abu Dhabi Global Market amongst others. Given the members of the SWFG and their role in regulating the economy in the UAE, this roadmap offers banks and companies a crucial view of areas where regulation may be introduced going forward and importantly gives them the opportunity to prepare for such regulation.

What does the roadmap say?

The roadmap sets out three actions that the SFWG have committed to, to progress the growth sustainable finance in the UAE while also ensuring that sustainable finance products developed and implemented meet certain standards and sustainable practices. The roadmap is also a crucial step forward in helping the UAE reach its goal of net zero by 2050.

The three key actions to be taken by the SWFG are as follows:

Action 1 - Strengthening sustainability disclosure

This action is intended to implement consistency and best practice around the disclosure of data by companies so that banks and investors have the appropriate data needed for the purposes of investment decisions. The roadmap also appears to indicate that banks and investors themselves may need to make certain disclosures with respect to sustainability risks and exposure to climate-related risks.

Action 2 - Fostering sustainability focused corporate governance

This action states that the SWFG will in 2022 review corporate governance standards in order that sustainability can be embedded in corporate governance structures going forward which will help ensure that companies are taking steps to contribute to the sustainability of the economy.

Action 3 – UAE taxonomy of sustainable activities

The SWFG will develop a UAE focussed “taxonomy” of sustainable activities – essentially a taxonomy would likely seek to set out a common language and criteria for what will be considered as “sustainable” in the UAE, providing certainty to companies, banks and investors alike.

Why is this important for banks and investors?

The sustainable finance sector is growing at an unprecedented rate, and is becoming a major focus for international and national banks and investors in the UAE. To date, however, there have been no mandatory reporting obligations on banks in the UAE with respect to how they consider their sustainability risks and climate change risks in when lending or investing monies. Nor are there any standards or requirements as to which products can be considered as “green” or “sustainable” – this creates a risk of greenwashing and an uneven playing field.

Regulation in this area will give certainty to banks and investors – however this also means that banks and investors should start considering now their approach to sustainable finance and put in place (to the extent that they haven’t already) a strategy and procedures around sustainable products, reflecting best practice, so that they can prepare for the introduction of regulation in this area. Banks and investors should also start considering now how they will collate, review and manage the data that they receive from companies in respect of sustainable finance, and how banks and investors will report on their own sustainability and climate change risks (including mitigation strategies).

It is worth noting that many commentators in this area believe that in 5 to 10 years, the world will no longer be talking about “sustainable finance and investment products” as separate from day to day lending and investment – in fact all future lending and investment will require the disclosure of sustainability and climate change data. Given the pace at which this sector is moving, banks and investors in the UAE need to start preparing for that future now.

Why is this important for companies?

The issuance of the roadmap indicates that there will increasing focus and regulation around how companies manage and disclose their sustainability and climate change risks, particularly for companies who want to access finance or investment. Accordingly, it is crucial for companies to start to consider their material sustainability (environmental, social and governance (ESG)) risks and climate change risks now, and to invest in the creation of a strategy to mitigate and report on such risks, across its business. This goes beyond the issuance of a sustainability report issued by a communications team – this needs to be a strategy integrated across the business and championed by management. Companies also need to consider how they will measure and report on such risks and mitigation strategies, as they can only manage the risks that they measure. Companies that do consider their sustainability risks and integrate a mitigation strategy into their business will not only be in a better position to adapt to new regulation and access investment and finance, they have also been shown to perform better financially in the long term.

How can we help?

Norton Rose Fulbright has been in the Middle East since 1973 and our expert lawyers have experience advising clients across all sectors on ESG and sustainability to help our clients manage their risks effectively while becoming more competitive in the market. We can assist companies with:

• Identifying their key ESG risks and opportunities and helping to devise an ESG and sustainability strategy;
• Advising on corporate governance, boardroom disclosures and shareholder activism;
• Reviewing and advising on how a company can ensure its supply chain is operated in line with the ESG and sustainability strategy;
• Advising on green, sustainable, transition and social financing and investment;
• Advising on environmental law and climate change and liabilities and disputes that may arise;
• Advising on business and human rights;
• Advising on the energy transition and renewable energy projects; and
• Providing risk advisory advice.