The Colour of Money is Green: Sustainable Investment Vehicles in the ADGM
Energy, Utilities, Mining and COP28
The Abu Dhabi Global Market has introduced a sustainable finance framework, featuring the Green Fund and Climate Transition Fund, to foster impactful green investing in the UAE.
Law Update: Issue 363 - Energy, Utilities, Mining and COP28
Mark BrownPartner, Head of Projects,Banking & Finance
Marianna MargaritidouAssociate,Banking & Finance
The foreword to the Global Landscape of Renewable Energy Finance 2023 published by the International Renewable Energy Agency highlights that “annual investments need to at least quadruple to remain on track to achieve the 1.5°C Scenario”. Capturing (and effectively targeting) investments is thus equally as important as capturing carbon in order to foster energy transition and sustainable development. While the success of global efforts in this field depends on the active engagement of all stakeholders (ranging from individuals and households to multinationals and governments), any dynamic strategy to commit capital flow towards green projects and initiatives would also be contingent on the mobilisation of institutional investors and asset managers.
Seeking to position itself as a leading hub for sustainable finance, the Abu Dhabi Global Market (“ADGM”) has implemented its sustainable finance regulatory framework (the “ADGM Framework”) and, amongst others, introduced the Green Fund and Climate Transition Fund investment vehicle categories. By establishing a standard for green-labelled funds, the ADGM Framework has set the stage to encourage and accelerate the increase of meaningful impact investing in the United Arab Emirates (“UAE”).
Seeking to position itself as a leading hub for sustainable finance, the Abu Dhabi Global Market (“ADGM”) has implemented its sustainable finance regulatory framework (the “ADGM Framework”) and, amongst others, introduced the Green Fund and Climate Transition Fund investment vehicle categories. By establishing a standard for green-labelled funds, the ADGM Framework has set the stage to encourage and accelerate the increase of meaningful impact investing in the UAE.
The ADGM Framework came into effect on 04 July 2023 following the stakeholder feedback and industry support received by the Financial Services Regulatory Authority (“FSRA”) in response to Consultation Paper No. 6 of 2022 (the “Consultation Paper”). The ADGM Framework introduced Part 8 to the FSRA’s Fund Rules, which sets out the requirements specific to Green Funds and Climate Transition Funds (“Part 8 Rules”). A fund established in the ADGM may be referred as a ‘Green Fund’ or a ‘Climate Transition Fund’ only if it satisfies the relevant Part 8 Rules and has been granted approval by the FSRA, which can be sought by the fund on an opt-in basis.
The two main pillars of the Part 8 Rules are (i) the investment requirement and (ii) the attestation requirement. The investment requirement looks at the objective of the fund and the nature of assets it invests in. The fund managers of Green Funds or Climate Transition Funds must ensure that, at all times, the fund property both (i) meets the eligibility criteria of the Part 8 Rules and (ii) is not inconsistent with the overall green / climate transition objectives of the fund. According to the attestation requirement, the fund manager must, unless an exception applies (e.g., for qualified investor funds), appoint a third party to attest the fund’s compliance with the investment requirement on an ongoing basis and at least annually.
One of the main distinctions between different categories of collective investment funds is their underlying assets. Under the investment requirement of the Part 8 Rules, a Green Fund must invest predominantly in ‘green assets’ while a Climate Transition Fund must invest predominantly in ‘greening assets’, the definitions of which are set out in the table below.
Designation
Predominant Fund Property
Fund Property Eligibility Criteria under the Part 8 Rules
Green Fund
Green Assets
Assets that (i) are considered environmentally sustainable or equivalent under an ‘Acceptable Green Taxonomy’ or (ii) are included in (or track) an EU Paris-Aligned Benchmark. Acceptable Green Taxonomies include, but are not limited to, EU Green Taxonomy, the ASEAN Taxonomy for Sustainable Finance, and the Common Principles for Climate Mitigation Finance Tracking.
Climate Transition Fund
Greening Assets
(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.
The ADGM Framework is innovative in its distinction between Green Funds and Climate Transition Funds as it is the first globally to establish a separate investment vehicle category for the latter. The formal recognition of the Climate Transition Fund designation demonstrates the ADGM’s pragmatic approach to the complexity and variety of assets. While certain assets fall squarely at the two ends of the spectrum, being inherently ‘green’ (e.g., electric vehicles and solar panels) or inherently ‘brown’ (e.g. fossil fuels), there is a crucial medium class of assets on the rise described as ‘greening’. Greening assets are non-green assets that have the potential to be decarbonized through effective capital investment and asset management. As highlighted by the Consultation Paper, the rationale for creating Climate Transition Funds is to facilitate efforts towards decarbonization of non-green assets while also broaden the scope of impact investing beyond the currently limited quantity of investable ‘green’ assets.
A key challenge of green labelling is the absence of an international consensus on the definition of ‘green’ (and ‘greening’) assets. The ADGM has thus opted for a flexible approach to asset classification by allowing fund managers to choose the most suitable taxonomy in light of the fund’s strategy and objectives.
While some may see this as an opportunity for fund managers to engage in ‘taxonomy shopping’, the ADGM Framework has followed the industry’s recommendation for flexibility at these early stages of the regulation. This is particularly important for the establishment of the Climate Transition Fund category since there are few proposed definitions for greening assets, as noted, by way of example, in the European Banking Federation’s 2021 proposals for recognition of transition finance within the European Union.
Flexibility is balanced in the ADGM Framework by the recognition of established taxonomies and benchmarks (e.g., the EU Paris Aligned Benchmark, the EU Climate Transition Benchmark, the EU Green Taxonomy, the ASEAN Taxonomy for Sustainable Finance and the Common Principles for Climate Mitigation Finance Tracking) as well as sustainable bond principles (e.g., ICMA Green Bond Principles, ICMA Sustainability-Linked Bond Principles, EU Green Bond Standard, or Climate Bonds Initiative) which are all expressly cited under the Part 8 Rules. If an asset does not follow one of these regimes, the onus falls on the fund managers to provide evidence that a particular standard may be considered as acceptable by the FSRA.
Upon receipt of a Green Fund or Climate Transition Fund designation by the FSRA, this can be used in marketing materials and client communications. The objective of the designation is to provide potential investors with a level of confidence that those products and services meet ADGM’s minimum standards and thus aid in the mobilisation of capital investment towards green and greening projects and assets.
The establishment of the Green Fund and Climate Transition Fund designations under the Part 8 Rules is only one aspect of the array of initiatives under the ADGM Sustainable Finance Agenda of January 2019 as well as the broader UAE Sustainable Finance Framework 2021 – 2023 of the United Arab Emirates Ministry of Climate Change & Environment (“MOCCAE”). The 2020 State of Sustainable Finance Report published jointly by ADGM and MOCCAE provided an early overview of the actions taken by UAE public and private stakeholders. Other developments in the UAE and ADGM since its publication include the issuance of the UAE Securities and Commodities Resolution No. 21/Chairman of 2023 concerning the regulation of green and sustainability-related bonds as well as the launch of ADGM’s fully regulated carbon exchange platform making the ADGM the first jurisdiction globally to regulate voluntary carbon credits as financial instruments. It is expected that the ADGM Framework will further enhance innovative measures and efforts within a now established regulatory framework.
ADGM and MOCCAE (2020), State of Sustainable Finance Report, Abu Dhabi, UAE <https://www.adgm.com/documents/publications/en/adgm-state-of-sustainable-finance-report-2020.pdf?la=en&hash=BFFB248A11A70D5D96EA869BF9B49CDA>
European Banking Federation (9 March 2021), Proposals for recognition of transition finance in the EU legislation, Brussels, Belgium<https://www.ebf.eu/wp-content/uploads/2021/03/EBF-paper-on-transition-finance-11-March-2021.pdf>
IRENA and CPI (2023), Global Landscape of Renewable Energy Finance, 2023, International Renewable Energy Agency, Abu Dhabi, UAE <https://www.irena.org/Publications/2023/Feb/Global-landscape-of-renewable-energy-finance-2023>
For further information,please contact Mark Brown and Marianna Margaritidou.
Published in November 2023
