In a bid to solidify trust with environmental, social and governance (ESG)-focused issuers and investors, Abu Dhabi Global Market (ADGM), the emirate’s financial centre, is strengthening its regulatory framework to boost its status as a sustainable finance hub.

ADGM’s sustainable finance ambitions also come as the United Arab Emirates (UAE) prepares to host the 28th edition of the UN Climate Change Conference (COP28) in November and December. Despite being one of the world’s largest oil producers, the UAE became the first Middle Eastern country to ratify the 2015 Paris Climate Agreement as well as the first to pledge net-zero by 2050 in October 2021.

Accordingly, ADGM, and by extension the UAE, is hoping to attract investment and capital to help finance climate-related projects as the oil-rich state seeks to decarbonise its economy.

“Our ambition is to help the UAE realise these goals through the development of ADGM as a sustainable finance hub, where capital is raised and allocated to sustainability-orientated projects and activities that will help achieve the UAE’s net-zero emissions target,” says Emmanuel Givanakis, CEO of ADGM Financial Services Regulatory Authority.

ADGM’s sustainable finance framework

To strengthen and harmonise sustainability regulations, ADGM implemented its sustainable regulatory finance framework (SFF) in July, following a draft proposal in November 2022 and subsequent consultations.

“The framework encompasses rules on sustainability-orientated investment funds, managed portfolios and bonds as well as requirements for ESG disclosures by ADGM companies,” according to an ADGM statement. “The measures will accelerate the growth of a sustainable finance ecosystem in the jurisdiction and support the UAE’s transition to net zero greenhouse gas emissions.”

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ADGM added that to recognise products and services that are aiding the transition, it will confer a designation on those that purport to meet its robust minimum standards, according to the statement.

“It will also permit ADGM’s ‘designation mark’ to be used in marketing materials and client communications,” the statement added. “A designation mark will provide investors with a level of confidence that those products and services purport to meet ADGM’s minimum standards, catalysing investors to channel capital towards the green transition.”

Givanakis says that the SFF is a robust regulatory framework called for by investors and industry practitioners to reduce the potential for greenwashing in investments.

“It [SFF] will build investor trust and thereby channel capital towards those ADGM-based financial institutions that will provide products and services aligned with the framework,” he adds.

ADGM’s SFF follows other jurisdictions such as the EU’s Sustainable Finance Disclosure Regime in 2021, according to analysis by law firm Morgan Lewis. It highlights that the rationale behind the framework is to help investors identify sustainable investments while mitigating the risk of greenwashing.

“By creating the ADGM designation for retail funds or for issuers labelled sustainable bonds and sukuk that are related to widely accepted standards and principles, [ADGM] is encouraging products that give better clarity and consistency with at least harmonisation around existing standards, rather than developing another taxonomy or set of requirements for sustainable issuers,” says Blake Goud, CEO of RFI Foundation, a sustainable finance think tank.

“The only gap here is that by making the use of the designation voluntary, versus making it mandatory, it allows for greenwashing by those not pursuing the designation in ways that are familiar across the market,” he adds.

A standardised framework also opens a path for smaller-sized issuers (which may not have an internal sustainability programme) to market their sustainable instruments to prospective investors.

“This framework opens a new category for issuers that are smaller and do not have international scale and ambition,” says Debashis Dey, a partner at White & Case in Dubai. “It lowers barriers and provides an approved third-party guide for smaller companies and funds. The framework should make ADGM more attractive for inward investment in the ESG space as well as boost the UAE’s drive to be a sustainable finance hub.”

Building a sustainable finance hub

Since 2019, ADGM has been working to become a sustainable finance hub. Its vision is based on four broad pillars: integrating sustainability considerations into the regulatory framework; building cooperation with national and international stakeholders; fostering communication, knowledge and awareness; and creating a sustainable finance ecosystem.

The SFF adds to the reforms ADGM has undertaken, including the regulation of carbon offsets, which paves the way for the world’s first regulated carbon offsets exchange and clearing house in ADGM, AirCarbon Exchange.

Other initiatives include the Abu Dhabi Sustainable Finance Declaration, a voluntary membership-based initiative to increase the depth and quality of green and sustainable financial products. ADGM also hosts events including Abu Dhabi Finance Week, which aim to bring stakeholders and policymakers together.

On a national level, ADGM chairs the Sustainable Finance Working Group, comprised of UAE regulators, federal ministries and exchanges, who are working together to ensure that ESG disclosures are published by financial institutions while also developing the UAE’s green taxonomy.

“These initiatives follow the publication of guiding principles by the group earlier this year to encourage financial institutions to reflect climate-related risks in their risk management practices,” says Givanakis. “These measures will further promote the prospect of attracting FDI [foreign direct investment] into the UAE’s transitioning economy as it advances along a pathway to decarbonise.”

Gearing up for COP28

As the UAE gears up for COP28 hosting duties, policymakers are hoping that in addition to climate discussions, there will ample opportunities for investors in sustainable finance products and companies in the ADGM.

“ADGM stands ready to operationalise the outcomes of COP28 as an international financial centre with its comprehensive SFF already in place,” says Givanakis. “We anticipate COP28 will contribute to acceleration of our own growth as an international hub of sustainable finance, through local and foreign direct investment being channelled into ADGM-based investment vehicles and companies, thereby enabling the transition to net zero.”

Nonetheless, post-COP28, ADGM will likely update and improve its SFF as well as launch more initiatives to support the UAE’s climate commitments.

“Whilst a mandatory taxonomy and ESG disclosure may not be on the agenda, more initiatives are likely in the coming months and years, as the UAE works towards net zero in 2050,” says White & Case’s Dey.