The world is struggling with systemic challenges including slow economic growth, lack of infrastructure, inadequate technological development and a growing youth population. The economic impacts of these developments are far-reaching, and require targeted responses if countries are to meet their Sustainable Development Goals (SDG) commitments. In fact, the huge financing requirement to implement the SDG has increased from billions to trillions of US$, exceeding the capacity of any single institution or state. The public sector alone will not be able to close such important gap.
UAE has demonstrated its commitment to the pursuit of a sustainable growth pathway, including addressing climate change, through signing the Paris Agreement in 2016 and championing a number of initiatives, such as the UAE Green Agenda 2015-2030, the National Climate Change Plan (2017-2050), the Dubai Declaration (2016), and the Abu Dhabi Sustainable Finance Declaration (2019).
The UAE Guiding principles on sustainable finance aim to facilitate the country’s transition to a more sustainable economy and help organizations to develop strategies which re-orientate and diversify the economy, help mitigate risks of reduced global demand for oil, adapt to the physical risks of climate change and explore the new investment opportunities it presents. These voluntary principles represent the shared views of the financial regulatory authorities in the UAE including the Central Bank of the, Dubai Financial Services Authority and the Insurance Authority.
Summary of the Guiding principles
Principle 1: Integration of ESG Factors into Governance, Strategy and Risk Management
Financial companies are encouraged to incorporate ESG factors into their governance, risk management framework and strategies by:
- Identifying and considering opportunities, as well as any associated risks and threats, afforded by ESG-compliant investing.
- Integrating consideration of opportunities and risks from ESG factors at all levels of organizations’ businesses, strategy and financial planning where such information is material; and
- Enhancing the organization’s ESG performance through the development and enhancement of suitable products, services and otherwise promoting sustainability in all organizations’ activities.
Principle 2: Minimum Eligibility Requirements
This principle clarifies the minimum components that should be present in a product categorized as ‘sustainable.
- Process for Project Evaluation/Selection
- Use of Proceeds
- Management of Proceeds
- Recording, disclosing and reporting:
Principle 3: Promotion of Appropriate ESG-Related Reporting and Disclosures
This principle seeks to encourage financial organizations to produce timely and relevant information on key ESG metrics. Such reporting would aim to disclose ESG-specific risks, processes, initiatives and performance, in accordance with internationally recognized reporting standards of financially, environmentally or socially material information
The way forward
UAE Sustainable finance taxonomy
The Guiding Principles encourage issuers to rely on internationally recognized standards and taxonomies such as the Principles for Responsible Banking, the Principles for Responsible Investment and The Green Bonds Principles. In the future, the UAE Authorities shall adopt a specific taxonomy Sustainable finance for in the country.
Moving from voluntary to compulsory
The Guiding Principles are so far voluntary. Next steps may include more compulsory guidelines and policies, to encourage the UAE financial firms to develop strategies to incorporate ESG considerations into their core business activities.