Sustainable Finance Practices in the UAE: ESG Investing and Green Financing

Abu Dhabi Global Market (ADGM) recently announced the launch of one of the first sustainable Green financing practices frameworks in the region, with immediate effect. The Framework includes rules on sustainability-focused investment funds, discretionary portfolios, and bonds, as well as environmental, social, and governance disclosure requirements (ESG INVESTING) of ADGM headquartered companies.

This follows significant industry feedback and support through public consultation, cementing the UAE’s position as a leading sustainable finance practices hub in the ‘Year of Sustainability’ as it prepares to host COP28 later this year.

The implementation of the Framework follows in the footsteps of other jurisdictions, such as the European Union’s implementation of the Sustainable Finance Practices Disclosure Regime (SFDR) in 2021 and recent proposals from the Regulator UK Finance to introduce sustainability and securities disclosure requirements and the Exchange Commission to make proposals related to ESG investing.

The measures are part of a broader set of regulations related to sustainable development in the UAE, which aim to promote the development of a sustainable finance practices ecosystem in the jurisdiction and help channel capital into projects and activities promoting the country’s transition to greenhouse gas. Emissions. This LawFlash details the five key features of the sustainable finance practices regulatory framework (the Framework) as it relates to asset managers in particular, making ADGM a hub for sustainable finance practices.

New “Green, ” “Climate Shift,” And “Linked To Sustainability” Product Design

ADGM is leading the adoption of harmonized classification by introducing three new designations: “Green financing,” “Climate Transition,” and “Sustainability Linked” – for funds investment portfolios that are management. These designations define minimum environmental sustainability criteria with which securities and other applicable financial services products may choose to comply. The designation is voluntary (i.e. on an optional basis) and is granted by the Financial Services Regulatory Authority (FSRA) upon registration or notification.

After receiving a designation, a person may use the relevant mark corresponding to the designation received in his or her communications, subject to receiving the appropriate authorization from the FSRA.

The objective behind developing a standard for green-labeled financial products and services is to help investors identify investments with a sustainability objective in a way that effectively mitigates the risk of greenwashing (i.e. when a company purports to be environmentally conscious but actually is not making sustainability efforts).

However

For example, a manager promoting an “ADGM Green Fund” would indicate that the fund is pursuing green objectives that seek to meet the FSRA’s requirements for an ADGM Green Fund. This would include seeking to meet the relevant “Green Fund Investment Requirements” (as described below) and taking measures to mitigate the risk of greenwashing.

Only those products that meet all of the relevant criteria may use the designations “Green,” “Climate Transition,” and “Susbtainability-Linked” in relevant documentation and promotional materials.

Alignment With Agreed International Taxonomies

Any fund or portfolio seeking to obtain a green financing-labeled ADGM designation must meet two conditions:

1. The “Investment Requirement,” which is the requirement for investments to meet minimum criteria for environmental sustainability by reference to agreed taxonomies worldwide (as further described in the below subsections); 
2. The “Attestation Requirement” (as described below in the “Attestation Requirements as to Compliance” section). The same requirements apply to bonds and sukuks, which are beyond the scope of this LawFlash. 

Green investment requirements and accepted taxonomies

The goal of the “Green financing” designation is to provide a framework for investing in assets whose operations are already environmentally sustainable.

The investment requirement for the Green Fund or ADGM Green Portfolio is that they invest primarily in “qualified green” assets, i.e. assets that 

1. are  considered environmentally sustainable or equivalent under “approved green classification” is either 
2. included or otherwise. . to a standard consistent with the EU’s Paris Agreement.

The Green Financing Fund or ADGM Green Portfolio may select any independent, credible, and published green classification as the “accepted green classification” standard for reviewing its assets. Currently, the following taxonomies are considered “acceptable” by  FSRA:

1. EU Green Classification; 
2. ASEAN Sustainable Finance Practices Classification; and 
3. General principles for monitoring climate change mitigation financing. 

Of course, other taxonomies, such as the UAE Green Classification (once published), may also be considered acceptable.

Climate Transition Investment Requirements And Acceptable Taxonomies

The purpose of the “Climate Transition” designation is to provide a framework for investments in assets whose activities assist the transition of an economy towards lower carbon emissions or becoming more environmentally sustainable but that do not currently meet zero or near-zero emissions standards.

The Investment Requirement for an ADGM Climate Transition Fund or Climate Transition Portfolio is that they invest in predominantly “Eligible Climate Transition” property or portfolio assets. These include assets/shares that are 

1. aligned with an Acceptable Climate Transition Taxonomy (defined below) or equivalent, 
2. issued in accordance with the ICMA Green Bond Principles, ICMA Sustainability-Linked Bond Principles, EU Green Bond Standard, or Climate Bonds Initiative, 
3. included in or that track an EU Climate Transition Benchmark, 
4. issued or otherwise provided by an entity that, in the reasonable opinion of the manager (in the case of funds). Has issued credible net-zero emissions targets and strategies and is on course to meet the net-zero emissions targets; or 
5. an investment intended to facilitate the transition of real estate or infrastructure assets to become more environmentally sustainable. In the reasonable opinion of the manager (in the case of funds).

An ”Acceptable Climate Transition Taxonomy” is any classification system (published, credible, and independent). That identifies economic activities assisting the transition of an economy toward lower carbon emissions. Or becoming more environmentally sustainable but do not currently meet zero or near-zero emissions standards. The best bookkeeping services can be found in Dubai. Which is a very well-known hub of firms.

A standalone Climate Transition Taxonomy has not yet been published. However, it is understood that one or more people may come.

Certificate Of Compliance Requirements 

The second requirement is for an ADGM fund or portfolio. Obtaining and maintaining ADGM Green Label certification is the “endorsement requirement.” It is the obligation of the third party (or, in limited circumstances. Such as where the fund is a qualified investment fund (see  ADGM fund regulations). The fund manager itself) to certify, in connection with the continuously and at least once a year. Product compliance with applicable Investment Requirements.

The attestation requirement represents a new step in efforts by investors and regulators to require companies to provide improvements. Standardized climate information to investors. The Framework states that attestation must state that, among other things. The applicable investment requirement has been complied with during the period under review and as of the date of attestation.

Additionally, this certification must be provided annually to investors (in an annual report or similar) and must be reliable. An authorized person (i.e. a holder of a financial services license (each of the above as defined in the ADGM Financial Services and Markets Regulations 2015 (FSMR)). And therefore responsible for the fund or portfolio) must keep records of amounts due. Due diligence processes have been undertaken to confirm that the property meets the criteria. For investment requirements at the time of purchase and on an ongoing basis. Additionally, the Framework does not currently prescribe any specific attestation standards to be used. 

Brand Designation  For Advertising Materials

ADGM has created a designation mark to recognize and recognize products and services that meet its minimum standards. Once designated, a  product may use the  ADGM Green. Climate Transition or Sustainability Link logos in relevant communications provided appropriate authorization has been received from  FSRA.

The aim is to provide investors with assurance that products meet ADGM minimum standards. And ultimately encourage investors to confidently invest in the green transition, thereby promoting Finance moves towards net zero.

ESG Investing Disclosure Requirements For Adgm Companies

The new mandatory ESG investing disclosure requirements. (ESG INVESTING Disclosure Framework) will apply to any ADGM-based company that meets the following conditions:

1. A company with annual revenue of over 68 million USD
2. A company that has:

Financial Services Permission (as defined in the FSMR) to carry on the Regulated Activity (as defined in the FSMR) of:

1. Managing a Collective Investment Fund or 
2. Managing Assets (each of the foregoing as defined in the FSMR). And has assets under management of more than $6 billion at any time during a financial year

Any ADGM entity not meeting the aforementioned conditions may choose to comply with the provisions of the ESG INVESTING. Disclosures Framework on a voluntary basis. Moreover, the following entities are exempt from the ESG INVESTING Disclosures Framework:

1. foundations; 
2. limited liability partnerships; 
3. general and limited partnerships; 
4. restricted scope companies; 
5. public listed companies that already make equivalent disclosures in accordance with listing requirements; 
6. investment companies; 
7. branches of foreign companies.