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Dubai financial services authority: Climate and environmental risk management

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As the world suffers more frequent occurrences of extreme climate events, and transitions to a low-carbon economy gather pace across the globe, the need for financial institutions to understand, assess and address climate and environmental financial risks becomes more urgent. 

The task of delivering orderly climate transition and being prepared to face the adverse impact of climate changes needs to be within the lens not only of individual firms, but also the financial regulators who are watchful for signs of firm or systemic instability. 

Since this topic came onto the agendas of international regulatory bodies in 2017, the DFSA has benefitted from its engagement with the other members of the Network for Greening the Financial System (NGFS) to formulate the very first supervisory guidelines on climate and environmental risk management. Subsequently, we have witnessed the Basel Committee on Banking Supervision (BCBS) incorporate climate-related risk into its overall principles underpinning its prudential framework. 

In the insurance sector, the DFSA is also a member of the Sustainable Insurance Forum (SIF), a platform for insurance supervisors and regulators to share knowledge and discuss matters related to embedding climate risk in insurance supervision and regulation. In this task, SIF has established a strategic partnership with the International Association of Insurance Supervisors (IAIS), which has positioned climate change as a key theme in its strategic plan for the coming years and published several papers related to climate-related risks in the insurance sector. 

We have also seen many initiatives emerging in the investment sphere, including from the International Organization of Securities Commissions (IOSCO) and the United Nations, which emphasised the responsibility of asset managers and investors in understanding and communicating ESG and climate-related risks while pursuing ESG-minded investment goals. Similarly, the ESG ratings and data providers have been encouraged to step up their game in terms of assessments and ensuring transparency, given how essential ESG and climate-related data are to the financial community. 

In the UAE, these topics have featured on regulatory agendas since 2019, primarily through what is now the UAE Sustainable Finance Working Group (SFWG). The SFWG comprises Federal and financial free zone regulators, relevant governmental bodies, and ministries, as well as securities exchanges within the UAE. 

The SFWG published its Guiding Principles on Sustainable Finance in early 2020, which represents the members’ commitment to encourage their regulated entities to integrate ESG factors in the firm’s risk management and governance. The SFWG 2021 High Level Statement on Sustainable Finance which set out a roadmap with goalposts related to developing frameworks on operationalising the ESG governance and risk management by and in partnership with the financial industry, which is currently ongoing. 

Within DIFC, the DFSA has launched its own initiative, DFSA ESG Hub, to serve as a discussion and consultative platform on ESG matters to benefit both DIFC firms and the DFSA. Under this initiative, the DFSA convened the Task Force on Sustainable Finance (TFSF), which since November 2021 furthered the conversations on ESG topics among Task Force members, many of which, including climate risk supervision, we had initiated in our discussion paper ‘Championing sustainable finance in the DIFC’. 

Following a series of discussions and TFSF meetings in 2022, we are delighted to present a collection of short essays as an anthology on Climate and Environmental Risk Management authored by members of the TFSF. This contributes to the evolving debate on how best to embed, identify, measure, disclose, analyse, address, and mitigate the physical and transition risks stemming from climate change as well as broader environmental risks in the UAE. 

Given the diversity of contributors, a variety of perspectives ranging from the banking industry, investment, financial data provider and rating industries are represented, which add value to the discussion about this topic. 

We hope that the views, insights and the current practices presented by the authors will contribute to raising awareness and building capacity, while serving as a useful benchmark in the UAE and beyond. In particular, the authors grappled with a range of vital aspects related to climate and environmental risks considerations, such as how best to embed them in their organisational structures and corporate governance; and, importantly, how these risks impact business and investment strategies and how they are reflected in the firm’s overall risk appetite. 

The challenges related to risk identification and measurement methodologies across geographies, including data gaps, metrics and model availability as well as scenario diversity are also usefully discussed. Lastly, concerns related to effective utilization of these risk analyses across geographies, client transition readiness, and the standard and disclosure disparities relating to various ESG risks and carbon emissions highlight other challenges encountered by firms.

Click here to read the report in full.

Photo credit: IRENA

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