The UAE is set to draw the world’s attention in 2023 with its efficiency in climate change policy and sustainability as the country is preparing to host the United Nations Climate Change Conference (COP28).
A leader in decarbonisation in the Middle East, the UAE is the first country in the region to sign the UN Paris Agreement and the first country in the region to commit to net zero carbon emissions by 2050, as part of its “UAE Net Zero 2050” strategic initiative announced in October 2021.
The UAE has cemented its position as an investment bright hub for companies operating in the low carbon space, with significant local growth opportunities in areas such as alternative fuels production, smart city development and renewable energy technology.
More needs to be done
While these factors have helped the UAE become a leader in sustainability-related investment, the UAE’s broader ESG-related regulations have not kept pace. The UAE currently lags global leaders such as the EU, the UK and the US with regard to ESG reporting requirements for companies and ESG-related taxonomies.
That being said, the UAE authorities will likely make significant progress implementing new ESG regulations in 2023, galvanised by the impending November-December COP28 event.
A dive into UAE’s three-pronged roadmap for ESG regulations
The UAE’s strategy towards ESG regulation is being coordinated by the Sustainable Finance Working Group (SFWG), which was established in 2019 and is coordinated by the Abu Dhabi Global Market (ADGM) and the Financial Services Regulatory Authority (FSRA).
The SFWG released a statement in 2021 outlining a roadmap for sustainable finance in the country, including plans for ESG regulations. It is a three-pronged strategy based around disclosure, governance and taxonomy, as summarised below.
The SFWG published the “2022 Public Statement on Collaboration on Sustainable Finance in the UAE” in November 2022, which outlined the ongoing efforts and progress made with the roadmap. Much of the progress registered over the last year has related to benchmarking exercises and gathering information on international standards and best practices. The most concrete progress in implementing new ESG policies thus far has been with regard to “Strengthening sustainability disclosure”. This has been driven by the UAE’s stock exchanges.
Stock exchange initiatives driving ESG disclosure
Stock exchanges have been the main driver of greater ESG disclosure requirements in the UAE thus far. Joint stock companies listed on the Abu Dhabi Securities Exchange (ADX) and Dubai Financial Market (DFM) are mandated to publish ESG reports as a condition of listing. This has been the case since the 2021 UAE Federal Securities and Commodities Authority (SCA) Circular No. 326.
These stock exchange initiatives in the UAE have been supported by the UN Sustainable Stock Exchanges Initiative (SSE), of which both the ADX and DFM are members. The SSE has been a powerful tool for developing and implementing ESG reporting requirements across the world in recent years. The SSE provides a model guidance template for exchanges to begin developing their own guidance, as well as bespoke technical assistance and advisory services to stock exchanges. In September 2015, when the Sustainable Stock Exchange launched its model guidance for exchanges, fewer than 10% of the world’s stock exchanges were providing guidance on reporting ESG information for their market. As of October 2022, 67 of the 120 global exchanges tracked by the Sustainable Stock Exchange had written ESG reporting guidance.
Looking to the wider GCC region, Bahrain, Kuwait, Qatar and Saudi Arabia have all also adopted ESG guidance in their stock exchanges. All of these stock exchanges have aligned with global reporting benchmarks such as GRI (Global Reporting Initiative), SASB (Sustainability Accounting Standards Board) and the TCFD (Task Force on Climate-related Financial Disclosures).
What’s next in the UAE ESG regulatory space?
Development of the UAE’s Sustainable Finance Taxonomy will likely become the key focus of ESG regulations going into 2023.
Sustainability taxonomy would classify activities and entities according to their level of sustainability. Such taxonomy is essential for development of the sustainable finance industry in the UAE. In November 2022, the ADGM and FSRA published plans to significantly expand the number of sustainable finance products available on the ADX. However, development of products such as an “ADGM Green Fund” and “ADGM green bonds” will only be possible with a complementary taxonomy for deciding which firms and activities qualify for these green designations.
According to the SFWG’s updated November 2022 roadmap, the design of taxonomy for the UAE will be “informed by a survey, benchmarking of other live taxonomies and insights from third party experts”. In short, the taxonomy remains in the consultation phase and does not have a concrete date for finalisation. However, significant progress is expected by the COP28 conference at the end of 2023.
Benefits of expanding ESG regulations
Development of ESG disclosure regulations in the UAE will help future-proof investment in the region from impending ESG regulations in major economies including the EU, US and UK.
A pipeline of regulations will increasingly require firms operating in these economies to measure and report on the ESG profile of their international activities. Among others, these regulations include the EU’s Sustainable Finance Disclosure Regulation (SFDR), the US’ Climate Disclosure Bill and the UK’s Sustainability Disclosure Requirements.
By increasing local reporting of such ESG metrics by local firms, the UAE authorities are reducing the risk that emissions data gaps deter US firms from investing in the UAE or partnering with UAE-based firms.
Source: Scale Of Earth With C02 On One Side, And Fresh Leaves On The Other by sirinapa wannapat from NounProject.com