In the last decade, the UAE’s financial regulators have been busy laying the groundwork for the country to emerge as a leading centre for green finance – that is the financing of investments that support environmentally friendly activity.

Green and sustainability-linked bonds and loans are tipped to be one of the fastest growing segments in the global financial services industry as companies begin to integrate environmental, social and governance (ESG) responsibility into their corporate strategies and decision-making processes. Ultimately, this is driven by consumers and investors demanding more ethical and sustainable products.

The UAE has also committed to decarbonising its economy, reducing greenhouse gases by a quarter by 2030 and reaching net zero by 2050. Achieving these ambitious goals will require the full participation of the financial sector to direct capital towards environmentally sustainable and climate-resilient investments.

As such, a raft of top-down initiatives has been undertaken to support and promote sustainable finance in the key financial centres of Abu Dhabi and Dubai.

In January 2020, the UAE published a set of Guiding Principles on Sustainable Finance to catalyse the development of a market for green finance and ensure consistency across the sector.

Based on the UN Agenda for Sustainable Development, the voluntary principles constitute an agreement on the minimum elements of a sustainable finance framework and serve as a guide and encouragement for UAE financial entities to incorporate sustainable practice considerations into their business activities, decision making and financial risk management.

Dialogue and collaboration

 

The guiding principles are the result of constructive dialogue and collaboration among the country’s leading financial institutions and environmental authorities. These include Abu Dhabi Global Market (ADGM); the Ministry of Climate Change & Environment; the Central Bank of the UAE; Dubai Financial Services Authority and Nasdaq Dubai, among others.

With the publication of the guiding principles, ADGM, which chairs the UAE Sustainable Finance Working Group, launched the Abu Dhabi Sustainable Finance Declaration – a promise to increase the availability of green financial products and create a thriving sustainable finance industry in Abu Dhabi, the UAE and the wider region. The declaration has now been signed by nearly 60 public, private, local and international entities.

ADGM has also established a School of Sustainable Finance under its academy to deliver training programmes on sustainable finance. Its aim is to deepen and expand the UAE’s knowledge pool on the subject.

Dubai similarly established a sustainable finance working group in 2019, comprising both government and private sector stakeholders including Dubai Electricity & Water Authority, Dubai International Financial Centre, Dubai Financial Market, DP World, Emirates NBD, HSBC, Majid Al Futtaim (MAF), Nasdaq Dubai and Standard Chartered.

The working group has since published guides for issuers and investors on best practices in the fast-expanding ESG sector and the commercial opportunities it offers. Its ultimate aim is to create the most sustainable financial hub in the region.

Green finance pioneers

The market has responded to these calls to action, and certain UAE companies have emerged as regional pioneers in green finance, notably retailer MAF, and FAB, the UAE’s largest bank.

MAF, which owns and operates 29 shopping malls across the Middle East and Africa, has set itself ambitious environmental targets including halving its greenhouse gas emissions by 2030, halving the volume of waste sent to landfill and being net carbon positive by 2040 (meaning it takes more carbon out of the atmosphere than it emits).

To drive compliance with its sustainability goals, MAF has begun linking its ESG performance with the financing of its operational and capital expenditures. In 2019, the company listed the world’s first benchmark corporate green sukuk (Islamic bond), raising $600 million, followed by a second sukuk of the same size.

Last year, it secured a $1.5 billion sustainability-linked loan – another first for the region – which is dependent on measurable improvements on specific yearly targets. The money has been used to fund investments in renewable energy, energy efficiency, water management and green buildings projects.

FAB, meanwhile, was the first GCC bank to join the UN’s Net-Zero Banking Alliance, in 2021. It has set itself a target of facilitating, investing or lending $75 billion in sustainable and socially responsible finance by 2030.

FAB was the first Middle East and North African (MENA) bank to issue a green bond and has now issued around six green bonds in various denominations. The bank also issued the world’s first sustainability-linked loan in the aviation sector tied to ESG targets, agreeing $1.2 billion for Abu Dhabi’s Etihad Airways.

DP World was the first UAE company to agree a sustainability-linked loan back in 2018 in a bid to incentivise the reduction of its greenhouse gas emissions with a $2 billion refinancing of an existing loan facility.

Leading centres for green finance

 

London is currently the world centre for green finance, according to the 2022 Global Green Finance Index, followed by Amsterdam, while Abu Dhabi sits in 38th position and Dubai 44th, both leading the Middle East.

Abu Dhabi overtook Dubai in this year’s ranking, although Nasdaq Dubai is still the leading listing venue in the UAE for sustainable debt issuances. The first green bonds were listed on the Abu Dhabi Securities Exchange in May of this year.

According to Bloomberg, green and sustainability-linked debt issuance in the MENA region totalled $18.64 billion in 2021, compared with just $4.5 billion in 2020. The sharp increase reflects the growing interest in green finance, however, the region accounts for a very small fraction of the global green finance market, which reached a total of $1.62 trillion in 2021, compared with $765 billion in 2020.

These are still early days for the sector. But with the UAE and the wider region committed to their decarbonisation targets, green finance opportunities will certainly increase in the years to come.

Huge opportunity ahead

 

A study by Strategy&, which forms part of PWC, sees green finance as a $2 trillion untapped economic opportunity for the GCC. To drive the growth of the market, the report recommends each GCC government creates a green sovereign wealth fund.

It is notable that no GCC government has yet issued a green sovereign bond. Egypt, which will host the UN Climate Change Conference COP27 in November 2022, issued the MENA region’s first sovereign green bond in 2020. The UAE is due to host COP28 next year, so it could be a good time to follow suit.

Solar projects, food security initiatives and energy efficiency investments represent obvious opportunities for sustainable finance in the UAE. But with investor appetite for ESG-linked assets growing rapidly, the development of a much broader green finance market will require more companies to set ambitious sustainability goals and, for this, regulatory frameworks that compel firms to take climate risk into account will be important.

Regulation-led growth

 

Enhanced disclosure on ESG performance would encourage listed companies to think more seriously about sustainability and their environmental impact and in turn drive growth in green finance among the private sector.

This is something the authorities have already started to address. Since 2020, the UAE Securities & Commodities Authority has required public joint stock companies to publish an annual sustainability report.

The UAE’s financial regulators are further considering the extent to which ESG reporting will become mandatory. They are currently working on establishing a UAE sustainability taxonomy to help standardise reporting and practices as an initial step towards a sustainable finance regulatory framework.

One of the challenges of green finance is measuring and proving the environmental benefit of capital investments. Introducing mandatory, standardised corporate ESG disclosure requirements with third-party verification – as already exists for corporate financial accounting – would make this easier. And there are a number of technology start-ups looking to assist in this area.

Driven by the strong commitment and clear vision of the country’s leadership, the UAE now stands out as an innovative and forward-thinking financial centre, both regionally and globally. This will almost certainly attract more green capital to companies and projects based in the country, and that can only be a good thing.

https://www.dwtc.com/en/industry-insights/why-the-uae-is-leading-the-way-in-green-finance