‘One day there will be the last barrel of oil’, say Gulf economists

Abu Dhabi Global Market’s regulatory approach could offer a regionalised solution to a global problem

Environmental, social and governance regulation is notoriously complicated and piecemeal. Though the legislation is progressing, there are various overlapping, and often competing, initiatives emerging from different jurisdictions.

To address this proliferation of regulations and frameworks, the Abu Dhabi Global Market’s proposed sustainable finance regulatory framework could offer a promising solution. The new proposal and the green, social and sustainability bond market developments were both topics of discussion at an OMFIF roundtable with Philippe Richard, executive director of international affairs at the Financial Services Regulatory Authority of ADGM.

ADGM’s proposed framework would allow some flexibility as to which green taxonomy and disclosure and reporting standards companies adhere to. Entities can also choose to disclose ESG metrics according to either the Task Force on Climate-related Financial Disclosures or International Sustainability Standards Board frameworks. A ‘comply or explain’ framework means that, for now, the regulatory framework will be rolled out on a voluntary basis.

Correspondingly, within the ADGM framework, a fund wishing to be designated as ‘green’ ‘may choose any published, credible and independent green taxonomy as a reference against which to choose its green assets’. A list will be provided of acceptable taxonomies for sustainable activities, which will include taxonomies from the European Union, Association of Southeast Asian Nations and United Arab Emirates and any other taxonomy which ADGM ‘consider[s] acceptable’ once the regulatory framework and guidelines are approved and published.

The development of a UAE finance taxonomy, which is underway with the UAE Sustainable Finance Working Group, takes into consideration the details of taxonomies from the EU, China, Asean and other regions and puts a specific focus on transition. The hope is that the UAE taxonomy could also be taken up by more jurisdictions in the region.

The draft framework is intended to ensure that regulation is not just an enforcement tool but also incentivises the economic players towards the climate transition. ‘We want to ensure that this is not simply financing the green but also greening the finance,’ stated Richard. The framework also contains provisions for green funds as well as climate transition funds and a proposal for a new ‘designation mechanism’ for green bonds and sustainability-linked bonds.

A mix of green bonds and Islamic finance – a green sukuk, a Sharia-compliant financial instrument with climate-focused use of proceeds – is gaining more traction in the region. Green and sustainable bond and sukuk issuances by Gulf Cooperation Council countries in 2022 reached a record high of $8.5bn, with Saudi Arabia being the leading issuer.

Ahead of COP28, the UAE authorities have been encouraging the sale of green bonds. Several banks have issued green bonds or green sukuks. First Abu Dhabi Bank raised $600m in green bonds and both Aldar and Majid Al Futtaim issued $500m each in green sukuk. Most recently, the Commercial Bank of Dubai is set to raise $500m through green bond sales. Much more capital is needed to transition the region away from fossil fuel dependency, but these issuances are a first step.

Though there is a growing understanding that ‘one day there will be the last barrel of oil’, as noted by one roundtable participant, the existing climate finance in the Middle East is still limited. But greening finance is rising on the agenda, with countries taking steps for diversification from fossil fuels. As COP28 comes to the region, hosted by the UAE this year, all eyes are on the Middle Eastern states and their approach to a net-zero transition.

As climate financing ramps up, so do the complexities of sustainable finance regulations and taxonomy frameworks. Until more robust global standards are agreed upon and implemented, the ADGM’s flexible approach could offer one way to progress the climate financing agenda.

Katerina Atkins is Programme Coordinator at the Sustainable Policy Institute, and Taylor Pearce is Senior Economist at OMFIF.

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