The Abu Dhabi Global Market – a sustainable financial hub

As a result of the ongoing progress of human civilisation over thousands of years, the world is grappling with a declining stability of the earth’s climate. We are witnessing the tangible effects of a shifting climate on a global scale, and practical action is needed to change the current trajectory, requiring a shift towards a lower carbon environment.

The Paris Climate Agreement aims to limit global temperature increase to 1.5°C above pre-industrial levels by the end of the century. In order to meet this, we would need to halve emissions across the globe within the next 10 years, and achieve a state of net-zero emissions by 2050, as reported by the Intergovernmental Panel on Climate Change.

As a result, many institutions and governments, including the United Arab Emirates (the first Gulf state to do so), have pledged to accelerate action in achieving net-zero greenhouse emissions by 2050. To reach this net zero goal, McKinsey reports that there is a USD $4.1 trillion gap in required investment.

If we are to meet that shortfall then there must be effective facilitators to allow the market to evolve quickly over the upcoming decade. The Abu Dhabi Global Market (ADGM) has positioned itself as a sustainable financial hub, and the world’s first regulated voluntary carbon exchange centre. The Financial Services Regulatory Authority (FSRA) of the ADGM has developed a sustainable finance regulatory framework that aims to:

• Support investment in the transition to net-zero
• Provide clear definitions between Green and Climate Transition Funds
• Establish minimum standards
• Provide for consistency and level the field
• Eliminate subjectivity and deliver certainty

The FSRA’s regulatory framework has been designed to bring sustainable oriented financial instruments into the regulatory perimeter, thereby engendering trust into the field of sustainable finance, and advancing green investment. Sustainable products and instruments include: Green Funds and portfolios, Climate transition Funds and portfolios, Green bonds and Sukuks, and Sustainability-linked bonds and sukuks.

A high-level overview of the framework is set out below:

• Minimum requirements are applicable to financial products or services which have an environmental (in addition to financial) objective, and will be granted a regulatory designation
• Environmental Social and Governance (ESG) disclosure requirements, in accordance with international standards, are applicable to all commercial entities established within the ADGM
• Carbon offsets defined as an Environmental Instrument, and subject to regulatory oversight
• A voluntary carbon exchange centre subject to regulatory oversight

The FSRA’s framework includes a clear delineation between Funds that invest in green assets (Green Funds), and Funds that invest in greening assets (Climate Transition Funds). An overview of the framework for each is set out in the table below.

The need to address climate change and achieve a net-zero carbon future is the clear imperative; requiring a broad and inclusive response. The ADGM’s sustainable finance initiatives are at the forefront of this global effort. The upcoming events in the UAE, including the Abu Dhabi Finance Week 2023 and COP 28, provide significant opportunities for stakeholders to collaborate, innovate, and make a real impact. Details of each of these events are outlined below.

Abu Dhabi Finance Week 2023

Under the esteemed patronage of His Highness Sheikh Khaled bin Mohamed bin Zayed Al Nahyan, the Crown Prince of Abu Dhabi, and Chairman of the Executive Council, the highly anticipated 2023 edition of Abu Dhabi Finance Week – an influential finance, investment, and economic event in the MENA region, will take place between the 27th and 30th of November. Industry leaders from around the world will convene at the event to formulate strategies and promote innovation in their efforts to pursue a sustainable global economy.

COP 28

The Government of the UAE will be hosting the upcoming 28th Conference of the Parties of the UN Framework Convention on Climate Change (COP 28) from November 30th to December 12th. The two week event is an international gathering of representatives from countries across the globe, to discuss and negotiate global climate policies and action plans.

References:

Sustainable Finance Regulatory Framework CP No 6 of 2022

UAE Sustainable Finance Working Group – Guidance: Principles for the Effective Management of Climate-related Financial risks

FSRA Principles for effective management of Climate Related Financial risks CP No 1 of 2023

McKinsey & Company – the net-zero transition report January 2022

Intergovernmental Panel on Climate Change – Global Warming of 1.5 degrees Celsius report