Financial Services Focus
Mark BrownPartner, Head of Projects,Banking & Finance
Marianna Margaritidou Trainee Solicitor,Real Estate
Climate change and sustainability will be highly visible topics in 2023 as the UAE prepares to host COP28 in November and December of this year. As highlighted in the Second Public Statement on the Collaboration on Sustainable Finance in the UAE, “financing and funding are becoming increasingly critical in achieving [a low carbon and sustainable future]”. Tentative steps are being taken by regulators and market participants in the expansion of the green lending, environmental, social and governance (“ESG”) and finance market as a core enabler and accelerator for the implementation of sustainable initiatives and projects.
According to Bloomberg data, the total GCC green and sustainable bond and sukuk issuances reached a new record of USD8.5 billion in 2022. This reflects broader global trends of the private sector restructuring parts of its existing financing portfolio to lending based on ‘green-finance’ principles. The direction of the market is being supported by the development of industry standards and regulatory policy.
First, industry standards. The Loan Market Association, Asia Pacific Loan Market Association and the Loan Syndications and Trading Association jointly published the Green Loan Principles (“GLPs”) in 2018 and the Sustainability-Linked Loan Principles (“SLLPs”) in 2019. These frameworks set out voluntarily minimum standards which can be deployed by loans and cover, amongst others, the use of proceeds, the process for project evaluation and management of proceeds (in the case of the GLPs), relationship to the borrower’s overall corporate social responsibility strategy and target-setting (in the case of SLLPs) as well as reporting and review. The object of these principles is to mitigate greenwashing via disclosures and identification of the ‘green’ characteristics of investments to encourage investor confidence in credible green companies and projects.
More recently, on 13 December 2022, the European Banking Authority (“EBA”) published its three-year roadmap on sustainable finance (the “Roadmap”), setting out its approach and timeframes for integrating ESG risk considerations in the banking framework. The key objectives identified in the Roadmap focus on promoting transparency and disclosures as well as integrating ESG factors in risk management, supervision, stress-testing, standards and labels, and supervisory reporting and monitoring. The objectives also address prudential treatment of exposures to ESG risks as well as mitigating the risk of greenwashing.
On regulatory policy, one can see both the broad and the specific. For example, ESG disclosures must be published by public joint stock companies listed on the Abu Dhabi Securities Exchange (“ADX”) or the Dubai Financial Market (“DFM) in the form of a sustainability report. A company’s report reflects its long-term strategy in the fields of environment (of which green finance could be included), society, and the economy and governance.
The Abu Dhabi Global Market (“ADGM”) aims to become a sustainable finance hub after publishing the Abu Dhabi Sustainable Finance Declaration in 2019, which has since been gaining wider global attention. During the Abu Dhabi Sustainable Finance Forum, held during January 2023, the Luxembourg Stock Exchange became the first European exchange to officially join the Declaration along with other new signatories.
Tentative steps are being taken by regulators and market participants in the expansion of the green lending, ESG and finance market as a core enabler and accelerator for the implementation of sustainable initiatives and projects in the UAE.
ESG disclosures have also been introduced in the comprehensive regulatory framework (the “ADGM Framework”) published by the Financial Services Regulatory Authority and the Registration Authority of the ADGM. Under the ADGM Framework, companies established in the ADGM which meet the threshold criteria (with exclusions for certain types of entities) must either comply with the ESG disclosure provisions or explain the reasons for non-compliance. Companies which do not meet the threshold criteria have the option to comply with the ESG disclosure requirements on a voluntary basis.
The ADGM Framework is also a first step towards establishing a green labelling system by allowing funds to voluntarily meet the eligibility criteria for obtaining either the ‘ADGM Green Fund Designation’ or the ‘ADGM Climate Transition Designation’ to reassure investors on the green and sustainable characteristics of a fund’s portfolio (green assets are usually assessed by reference to green taxonomies or green-labelled benchmarks described in, for example, the EU Paris-Aligned Benchmark). Further, the ADGM Framework establishes the ‘ADGM Green Bond Designation’ and the ‘ADGM Green Sustainability-Linked Bond Designation’ in order to promote confidence in green debt instruments.
Scroll to the right view the table on mobile
ADGM Green Fund
The fund must invest in ‘green assets’. Green assets are those that (i) align with the green taxonomy and/or (ii) are included in (or track) a Paris-Aligned Benchmark. Acceptable green taxonomies include the Association of Southeast Asian Nations and European Union green taxonomies.
ADGM Climate Transition Fund
The fund must invest in converting non-green assets to green assets over time or, in other words, ‘greening assets’. Greening assets are defined as (i) assets aligned with a Climate Transition Taxonomy; (ii) shares and debt issued by entities that have a published net zero target and a credible strategy towards achieving it; (iii) green bonds and sustainability-linked bonds; (iv) greening real estate assets and infrastructure and (v) assets featured in or that track a Climate Transition Benchmark.
ADGM Green Bond and ADGM Green Sustainability-Linked Bond Designation’
The debenture must (i) be offered in ADGM, although the issuer may be established anywhere, (ii) conform with the ICMA Green Bond or Sustainability Linked-Bond Principles (or equivalent framework); and (iii) be subject to a third party review and verification.
Examples of green project or real estate finance are easily found in the UAE. To name but a few landmark events of 2022,
ADX reached a new milestone with the listing of its first green bond of USD700 million, issued by the Sweihan PV Power Company (the owner of the first full scale solar IPP in Abu Dhabi).
Dubai’s National Central Cooling Company (Tabreed) published its green financing framework enabling it to issue green bonds and loans to finance green projects such as constructing, acquiring and operating district cooling schemes, as well as projects related to energy and water efficiency and wastewater management.
The Abu Dhabi Masdar Green Real Estate Investment Trust signed a financing commitment amounting to USD200 million with First Abu Dhabi Bank PJSC to facilitate further acquisitions and portfolio growth for the development of sustainable income-generating real estate assets.
Elsewhere, Sharia compliance encompasses the principles of social and ethical benefit of investment of the wider society, which closely align with the purpose of sustainable and green finance. According to the PwC report Islamic Finance and ESG Investing: Ready for Convergence? published in August 2022, there is a possibility that Islamic Finance products could be readily certified as ESG compliant providing an easy win under the DFM, ADX or ADGM policies. A recent example of this convergence is the Sustainable Finance Framework published by the Dubai Islamic Bank PJSC to facilitate the financing of green and social initiatives and projects.
Green and sustainable finance solutions, and the underlying policy framework, will aid the mobilization of capital investment and support companies in their efforts towards a low-carbon transition and net-zero economy. The verifiability of green assets as well as ESG disclosures are two sides of the same coin of encouraging confidence in green projects and investments. As the sustainable finance market expands so will market participants’ access to funding to diversify their portfolios and restructure their business models and thus support the UAE’s various initiatives under the UAE Green Agenda 2015 – 2030, the National Climate Change Plan of the UAE 2017 – 2050, and the UAE Net Zero by 2050 Strategic Initiative.
For further information,please contact Mark Brown.
Published in February 2023
