UAE’s ESG Regulators Hope To Minimise Investor Risk

While UAE’s financial regulators formulate and implement banking, credit, and monetary policies for balanced growth, in the case of a more ESG regulatory perspective, the current trends direct the system to monitor risks related to pre-set parameters and how they could potentially affect the financial system.

In March 2021, then-acting chair of the U.S. Securities and Exchange Commission Allison Herren Lee set the stage for the next act in sustainable finance and investing.

"Human capital, human rights, climate change — these issues are fundamental to our markets, and investors want to and can help drive sustainable solutions on these issues," she told an audience at the Center for American Progress. "We see that unmistakably in shifts in capital toward ESG investing … [W]e understand these issues are key to investors — and therefore key to our core mission."

Around the world, ESG’s explosion is echoing in markets and the media, and has thus become a matter of serious concern for regulators — not to mention companies and investors.

In January 2020, the DFSA, and UAE financial regulators and exchanges collectively published a Guiding Principles on Sustainable Finance in the UAE, committing themselves to financial services companies to gently but determinedly pump the brakes, thereby minimising potential injuries to investors jumping aboard.

The Sustainable Finance Road map 2021-24 is said to take into account a range of initiatives, which would further adapt given supervisory practices and proposals for regulatory policy change besides other relevant disclosure frameworks. The ability to micro-manage sustainability-related issues relies heavily on consistent standards as well as transparency and disclosure of sustainability issues.

In 2021, His Excellency Ahmed Jasim Al Zaabi, Chairman of ADGM, while commenting on the UAE core regulators forum said: “Addressing the impact of climate change has never been more critical, and the financial regulators must work together to establish standards and norms that support the development of a sustainable economy with long term value returns.

“As key UAE regulators, we at ADGM are responsible for setting out robust frameworks that promote greater adoption of sustainable financing, to support the nation’s ambitious net-zero objective. Together with our fellow regulators and exchanges, ADGM has issued this Statement to highlight its commitment to catalyzing climate action as we collectively look to sustain the growth of the UAE’s economy.

“We are confident that the implementation of the directives set out in this Statement will have a significant impact on the UAE’s achievement of its various global commitments to sustainability,” he said.

One of the key parameters that need to be addressed is the standardization of ESG-related terminologies which include but is not restricted to the climate, blue, green, impact or sustainable, to establish a viable interpretation of these terms and minimize the risk of “greenwashing” of financial investments.

Greater the transparency and  reporting standards the better the market data comparability on ESG matters. Apart from internal mechanisms, financial regulators must concentrate on consumer protection, the integrity, efficiency and the overall capability at large.

The Dubai Financial Services Authority has tried to introduce a supervisory approach alongside a suitable working regulatory framework for the growth of sustainable finance.

The DFSA currently provides flexibility for issuers in public securities where one can choose to adopt the ICMA’s ESG framework standards or comply with mandatory ESG measures imposed by internal regulators.

The growing need for a robust and uniform regulator stems from the fact that ESG bonds and listings are currently valued at US$11.4 billion with further scope for growth.

Adopting a universally accepted international standard-setting too could help meet market trends, concerns and set emerging standards.

“Financial regulators must focus on consumer protection, the integrity and efficiency of both public and private markets and the soundness of the financial system at large,” says Peter Smith,  the managing director and head of strategy, policy and risk at DFSA.

Identification and assessment of risks which may affect balance sheets and, by extension the physical, legal and transitional activities of financial institutions such as banks, insurers and asset managers means that the need for a strong ESG Regulator is imperative.