Middle East & North Africa
Andrew TarbuckPartner, Head of Capital Markets
Francis PatalongSenior Counsel
Anna RobinsonSenior Professional Support Lawyer
An emerging imperative in legal due diligence in the Middle East is an increased focus on climate change resilience and sustainability resulting from the climate crisis. Environmental, social, and governance (ESG) factors are becoming pivotal in evaluating transactions. We expect these considerations to become pervasive in 2025. Al Tamimi as an established full-service law firm is ideally placed both geographically and with regards to its lawyers’ expertise to assist investors with carrying out such analyses and preparing for the associated challenges.
Regulatory Landscape
National Regulations: Many countries in the Middle East have introduced stricter environmental regulations, see below for further details. For example, the United Arab Emirates (UAE) has implemented various laws and initiatives aimed at reducing carbon emissions and promoting sustainable development. Saudi Arabia's Vision 2030 also emphasizes environmental sustainability.
International Commitments: Middle Eastern countries are signatories to international agreements such as the Paris Agreement, which commits them to reducing greenhouse gas emissions and adopting sustainable practices. There is also a financial reporting imperative which will be increasingly felt across business (for more on than, listen to our podcasts with Gihan Hyde[1] and Dr Julian Roche[2]).
Due Diligence Focus Areas
Al Tamimi is a full-service law firm and has in place specialist lawyers to cover all areas noted below:
Climate Risk Assessment: Evaluating the potential impact of climate change on the target company's operations has become crucial. This includes transition risks (e.g., regulatory changes, market shifts).
Public reports: In the Middle East there is a marked increase in the ESG reporting obligations of listed companies. The shift from voluntary to mandatory reporting, consistent with other developed markets, will gather pace. ESG reporting is mandatory for public companies in the UAE (other than Nasdaq Dubai). Other Middle East Stock exchanges have issued ESG disclosure guidelines (e.g. Bahrain Bourse) which are not mandatory but provide an expectation of compliance and will have an impact on benchmarking between companies between those that disclose in accordance with the guidelines and those that do not.
Sustainability Practices: Due diligence will scrutinize the target company's sustainability practices, such as energy efficiency, waste management, and resource conservation. Companies with strong sustainability practices will command a premium.
Environmental Compliance: Legal due diligence will carry particular emphasis on ensuring that target companies comply with local and international environmental regulations. This includes assessing permits, licenses, and any past or ongoing environmental litigation.
Impact on Transactions
Valuation Adjustments: Companies that are non-compliant with environmental regulations or have significant climate risks will face valuation adjustments. Investors will assess climate risks when determining the value of a target company.
Deal Structuring: Transactions will be structured to include specific covenants or warranties related to environmental compliance and sustainability. This can include commitments to achieve certain sustainability targets post-acquisition.
Reputational Considerations: Companies are more aware of the reputational risks associated with poor environmental practices. Due diligence now often includes an assessment of the target company's communications strategy and reputational risk management.
Regulation
The table lists examples of specific regulations that have been introduced in the region:
Country
UAE
The UAE has implemented the Green Economy Initiative and the UAE Energy Strategy 2050, which aim to increase the contribution of clean energy and reduce carbon emissions.
Saudi Arabia
Saudi Arabia's Vision 2030 emphasizes environmental sustainability, with initiatives like the Saudi Green Initiative, the Circular Economy Initiative, and the National Renewable Energy Program.
Qatar
Qatar National Vision 2030 includes goals for environmental development, focusing on sustainable development and reducing environmental degradation.
Iraq
Iraq has been working on improving its environmental regulations, including laws on pollution control and natural resource management.
Bahrain
Bahrain has introduced the National Energy Efficiency Action Plan and the National Renewable Energy Action Plan to promote energy efficiency and renewable energy.
Egypt
Egypt's Sustainable Development Strategy (SDS): Egypt Vision 2030 includes environmental sustainability as a key pillar, with laws focusing on pollution control and resource management.
Kuwait
Kuwait has implemented the Kuwait Environmental Protection Law, which includes strict regulations on pollution control and waste management.
Jordan
Jordan has introduced the National Climate Change Policy and the Renewable Energy and Energy Efficiency Law to address climate change and promote sustainable energy.
Oman
Oman has implemented the National Strategy for Adaptation and Mitigation of Climate Change and the Oman Vision 2040, which emphasize environmental sustainability.
Future Proofing
Increased Scrutiny: As environmental regulations continue to evolve, the scrutiny on environmental and climate risks during due diligence will increase. This will likely lead to more comprehensive and detailed assessments.
Integration of ESG Metrics: The integration of ESG metrics into financial analysis and due diligence processes will become more standardized. This will help investors make more informed decisions based on a holistic view of the target company's risks and opportunities.
Increased reporting requirements: we anticipate additional reporting regulations to be implemented making review of compliance more efficient and accurate.
One of the most promising and urgent initiatives in the legal industry is The Chancery Lane Project (TCLP). This is the largest global network of lawyers and business leaders using the power of climate contracting to deliver fast and fair decarbonisation – all done pro bono. TCLP have written over one hundred climate clauses, an extensive glossary and a suite of tools to help decarbonise contracts.
The TCLP glossary is the bedrock on which the climate clauses rest and is a core document. Most of the clauses are based on English law but there is a concerted effort to internationalise and transpose the content into other legal systems.
Al Tamimi & Company has collaborated with TCLP to help translate the glossary into Arabic. We are also engaged on a transposition exercise to recapitulate many of the original TCLP clauses into versions suited to each of our jurisdictions.
The increased focus on environmental and climate risks in legal due diligence in the Middle East reflects the broader global consensus on climate change, sustainability and responsible investment.
The TCLP clauses are freely available for anyone to incorporate into commercial agreements and legal documents to encourage rapid decarbonisation and reduced climate impact. They have been written and peer reviewed by sector and legal specialists to provide high quality, commercially viable climate solutions. A climate contracting approach constitutes the glue which will hold together various climate initiatives – each contract represents an opportunity for a company and its legal team to make a difference. (For a more in-depth exploration of TCLP and its purpose, listen to our podcast).[3]
In conclusion, the increased focus on environmental and climate risks in legal due diligence in the Middle East reflects the broader global consensus on climate change, sustainability and responsible investment. As regulations continue to tighten and the importance of ESG factors grows, this focus is likely to become even more pronounced in the future and it is important for investors and sellers to have suitable specialised lawyers to assist in evaluating these areas.
[1] COP Talks Episode 2: Decoding ESG Reporting & Sustainability: An Expert's Perspective by Tamimi Talks (spotify.com)
[2] https://www.linkedin.com/posts/al-tamimi-%26-company_esg-esg-ksa-activity-7108090483637133314-mAAb/
[3] COP Talks Episode 3: The Chancery Lane Project Hardwiring Net Zero by Tamimi Talks (spotify.com)
Jody WaughManaging Partner
Ali AwadPartner
Sarah El SerafySenior Counsel
Kamarya El YaagoubiProfessional Support Lawyer
The financial landscape in the UAE is undergoing a significant transformation, driven by regulatory changes that aim to enhance the competitiveness, resilience, and stability of the financial sector. These changes include the New CRM Regulations that strengthen the credit risk practices of Licensed Financial Institutions and the shift in SCA regulations that lower entry barriers and simplify operational requirements for investment entities. This article delves into the implications of these developments, highlighting the opportunities and challenges that lie ahead.
The Shift in SCA Regulations: A More Accessible and Dynamic Market for Investment Entities
The Securities and Commodities Authority (“SCA") of the UAE has recently announced a series of regulatory changes that are set to reshape the investment environment. These changes, coupled with the introduction of the GCC Fund Passporting Framework, are poised to create a more dynamic and accessible market for investment entities.
The GCC Fund Passporting Framework, scheduled for implementation at the beginning of 2025, aims to create a unified market for investment funds across the GCC countries. By allowing funds to be marketed and sold across member states with minimal regulatory barriers, the framework is expected to enhance cross-border investment flows and provide investors with a wider range of investment opportunities.
Additionally, the new passporting regime eliminate the need for investment entities to appoint service providers, such as custodians, in the target country. This change simplifies the operational requirements for investment entities, reducing costs and administrative burdens. However, it is important to note that there is still a requirement to appoint a promoter, ensuring that there is a local presence to facilitate market entry and engagement.
One of the most significant aspects of the SCA's regulatory shift is the reduce the regulatory obligations to encourage UAE offering. This change means that fund management entities will need to comply with lower capital and ongoing licensing requirements. This move is expected to lower the entry barriers for smaller and emerging financial entities, fostering greater diversity and innovation within the market. These changes are aiming to encourage the UAE local funds market which was mostly driven by the regulatory restriction to promote foreign public funds in UAE. Alternatively, SCA is very supportive to encourage the setup of UAE master–feeder fund structures to feed into foreign public funds.
New CBUAE Credit Risk Management Regulations: A More Resilient and Stable Banking Sector
The Central Bank of the UAE (“CBUAE”) has recently issued comprehensive regulations and standards (the "New CRM Regulations") aimed at enhancing the credit risk management practices of Licensed Financial Institutions. These new regulations, effective one month from the date of publication in the Official Gazette (the New CRM Regulations were published on 31 October 2024 i.e. those are now in effect), are designed to ensure the financial resilience and stability of the banking sector in the UAE.
Governance and Oversight
The new regulations emphasize the importance of robust governance structures. The Board of Directors of each LFI is required to regularly review and approve the credit risk management strategy, framework, and significant policies. This includes setting risk appetites, approving material credit facilities, and ensuring comprehensive stress testing programs are in place.
Credit Risk Management Framework
LFIs must implement a well-documented and effective CRM framework that covers all key steps of the credit risk lifecycle, including origination, underwriting, approval, monitoring, portfolio management, recovery, and provisioning. The framework must be consistent with the LFI's risk appetite and profile, and it should include methodologies for early identification and measurement of credit losses.
Credit Underwriting and Approval Process
The regulations mandate a comprehensive credit underwriting process supported by adequate policies and procedures. This includes governance of credit approval, setting credit limits, conducting due diligence, and ensuring proper documentation. The decision-making process must involve a credit committee or individuals with appropriate sanctioning authority.
Classification and Provisioning
LFIs are required to classify credit facilities into three stages based on their current and expected creditworthiness. Provisions must be estimated and documented for each credit facility, with regular reviews and updates. The regulations also set minimum provision levels for different stages of credit facilities, ensuring that LFIs maintain adequate reserves to cover potential losses.
Credit Risk Mitigation
The regulations allow LFIs to account for credit risk mitigation techniques, such as collateral and guarantees, when determining provisions. However, the valuation of collateral must reflect net realizable value, taking into account prevailing market conditions and associated costs.
Non-Performing Assets and Write-Offs
LFIs must establish strategies to manage non-performing assets and avoid maintaining elevated stocks of such assets. The regulations require timely write-offs of exposures when there is no reasonable expectation of recovery, ensuring that financial statements accurately reflect the institution's financial health.
Impact on Financial Institutions
The new regulations aim to enhance the risk management practices of LFIs by ensuring that they have robust frameworks and processes in place. This will lead to better identification, measurement, and mitigation of credit risks, ultimately contributing to the stability of the financial system.
The emphasis on governance and oversight will increase accountability at the Board and Senior Management levels. LFIs will need to ensure that their risk management practices are aligned with regulatory requirements and that they are regularly reviewed and updated.
The shift in SCA regulations and the introduction of the New CBUAE CRM Regulations represent a new horizon for financial institutions in the UAE.
Additionally, LFIs may potentially obtain credit risk mitigation opinions to ensure that any credit protection arrangement under the relevant transaction documents meets the relevant criteria for eligible credit risk mitigation set out in the New CRM Regulation (similar to the position under the Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms as amended) which is applicable to many international financial institutions outside the UAE.
Implementing the new regulations may pose operational challenges for some LFIs, particularly those with less mature risk management practices. Institutions will need to invest in systems, processes, and training to ensure compliance with the new requirements. Moreover, LFIs need to assess the impact of the New CRM Regulations on their debt recovery processes and proceedings in UAE Courts.
Conclusion
The shift in SCA regulations and the introduction of the New CBUAE CRM Regulations represent a new horizon for financial institutions in the UAE. By creating a more accessible and integrated market for investment entities, and a more resilient and stable financial sector, these developments are set to drive growth, innovation, and competitiveness within the financial sector.
Financial institutions that strategically navigate this evolving landscape stand to reap significant benefits, positioning themselves for long-term success in the dynamic UAE market. As the implementation date approaches, it is crucial for financial institutions to stay informed, adapt to the regulatory changes, and seize the opportunities that lie ahead.
Matthew HeatonPartner, Head of Office and Banking & Finance - Qatar
Green financing is a way of funding projects and activities that have positive effects on the environment and society. This concept is becoming more popular worldwide as people, businesses, and governments look for ways to combat climate change and promote sustainability. The Middle East, particularly the Gulf Cooperation Council (GCC) countries, has a great opportunity to benefit from green financing and reduce its reliance on fossil fuels.
Advantages of green financing in the Middle East
The Middle East has several strengths that make it well-suited for green financing:
Abundant renewable energy: The region has plenty of renewable energy resources like solar and wind power. Projects like the Mohammed bin Rashid Al Maktoum Solar Park in Dubai and the Noor Abu Dhabi solar power project are examples of how the region is harnessing these resources.
Private financing models: The Middle East has a successful history of privately financed power generation projects, which can be applied to green financing.
Islamic finance: The region's strong Islamic finance sector aligns well with green financing principles, adding an extra layer of trust and governance.
Growing demand for sustainability: There is an increasing demand for sustainable products and services, driven by a young and urban population, supportive government policies, and global trends.
Cumulatively, this could have a huge impact. Green investments in key GCC industries could contribute up to $2 trillion to the GDP by 2030. These investments could create over 1 million jobs and green projects can attract foreign direct investment (FDI) – a goal for all countries in the region.
Recent developments
Green financing in the Middle East has seen significant progress:
Green bonds: In 2024, the region issued $16.7 billion in green bonds, mainly driven by the UAE and Saudi Arabia. These bonds fund renewable energy, water conservation, and sustainable infrastructure projects.
Growing green financing commitments: UAE financial institutions have pledged to mobilize AED 1 trillion for sustainable finance by 2030, aligning with the country's climate goals. Banks, funds and investors are also increasingly focusing on sustainable financing, increasing both appetite and options for borrowers and lenders alike.
Saudi initiatives: Saudi Arabia is financing major green projects like NEOM and sustainable tourism in Al-Ahsa, supporting its Vision 2030 goals to diversify the economy.
Challenges
To fully capture the benefits of green financing, the governments of the GCC need to address several key challenges:
Regulatory framework: Establishing clear and consistent regulations for green financing will provide certainty for investors.
Capital markets: Developing the capital markets will increase the availability and diversity of green financing options.
Transparency: Ensuring transparency and accountability will prevent greenwashing and build trust in the market.
Strategic Priorities
To accelerate green financing, the GCC governments should focus on four strategic priorities:
Promoting environmental sustainability: Governments should enact policies that incentivize and support green projects and activities, such as carbon pricing, subsidies, standards, and targets. For instance, the UAE's Energy Strategy 2050 aims to increase the contribution of clean energy to 50% by 2050. They should also phase out inefficient subsidies for fossil fuels and water, which distort the market and encourage wasteful consumption. The Dubai Financial Services Authority has published its own Green Bond Best Practice Guidelines to offer infrastructure and guidance in relation to green issuances in the capital markets.
Creating a green sovereign wealth fund: Governments should establish a dedicated entity that can act as a credible and catalytic partner for international and local private investors, and provide seed capital, guarantees, and certification for green projects and activities. This entity should balance environmental impact and financial performance and risk and leverage the region's competitive advantage in renewable energy and Islamic finance. For example, a government-owned green bank can attract significant private investment, multiplying the initial government stake. The recent green sukuk transactions have provided a timely advance in the region's use of sustainable finance, and with other issuers looking to establish ESG finance frameworks, the prognosis for ESG sukuk in the region remains positive. Green bond issuances in the region reached $16.7 billion in 2024, a significant increase driven by the UAE and Saudi Arabia. These instruments fund renewable energy, water conservation, and sustainable infrastructure projects.
Strengthening capital markets: Open-up and deepen capital markets by privatizing assets, attracting investors, and developing green financing instruments like green bonds and sukuk (Islamic bonds). For instance, the Dubai Financial Services Authority has published its own Green Bond Best Practice Guidelines to offer infrastructure and guidance in relation to green issuances in the capital markets. They should also foster innovation and collaboration among financial institutions, regulators, and stakeholders to create new solutions and platforms for green financing. The establishment of frameworks like the ADGM Sustainable Finance Agenda can further support these initiatives.
Developing standard reporting mechanisms (taxonomies): Governments should adopt and enforce internationally recognized and harmonized frameworks and standards for measuring and disclosing the environmental and social impacts of green projects and activities. For example, the Task Force on Climate-related Financial Disclosures (TCFD) provides guidelines for transparent reporting. They should also ensure the reliability and verification of the data and information and promote awareness and education among the market participants and the public. The use of frameworks to clearly define what an organization views as credible sustainable finance activities is an important tool for avoiding greenwashing and tackling the sustainable development goals of the MENA region.
In a period when economic growth worldwide is muted, investors face the decision of whether to accept lower returns for supporting sustainable projects, the so-called ‘greenium’. In addition, there are the same systemic challenges to sustainable financing in the GCC as elsewhere, with a lack of global taxonomies, the risk of greenwashing (making claims of sustainability when the substance is less compelling) and risk-averse investors.
However, by implementing these strategic priorities, especially in light of the commitments and discussions from COP28, the GCC countries are set to seize the opportunity of green financing and position themselves as regional and global leaders in sustainable financing. This will not only enhance their economic diversification and resilience, but also contribute to their social and environmental well-being and the global goals of climate action and sustainable development. 
