UAE regulators point financial institutions towards a more defined & robust responsible finance approach
- Near-term plans for 2022 will cover a review of disclosure and corporate governance frameworks for compatibility with sustainability
- Unclear timing for the next step of taxonomy development ahead of Common Ground Taxonomy release
- Taken together, these responsible finance developments at the policy & regulatory levels signal work — and opportunity — lies ahead for financial institutions
The UAE Sustainable Finance Working Group has released its Statement on Sustainable Finance, which expands upon the Guiding Principles on Sustainable Finance issued in 2020 with three items where its work continues: disclosures, governance, and taxonomy development.
One of the big changes since the Guiding Principles were released was the announcement of a 2050 Net Zero target for the economy as a whole. For investors and financial institutions, an easy next step is to announce their own Net Zero targets, but the tougher issue now is identifying how we get there from where we are today.
- On these grounds, the new high-level statement from the UAE should provide clarity in the direction of travel. The roadmap outlines three items:During the first half of next year, UAE authorities will evaluate whether sustainability disclosures already reported are in line with national and international best practices;
- Throughout the year, the UAE will review domestic corporate governance standards to see whether they foster embedding sustainability, “focusing on, e.g., risk management, stress testing, and data collection”; and,
- The UAE will develop a national taxonomy of sustainable activities, though “subject to international developments”.
From a high-level statement such as the one just released, it is difficult to pinpoint the policies that could emerge from these exercises. However, financial institutions and investors should take it as a cue to start taking action now if they were previously waiting for policy guidance, because building governance systems to embed sustainability and building internal capacity are becoming increasingly difficult as the shortage of skilled employees in sustainability tightens across the globe.
On the disclosure side, the guidance relating to sustainability disclosures for listed companies was introduced in 2019 by Abu Dhabi Stock Exchange and Dubai Financial Markets. The recency of these releases means they should hold up well against international best practices, although those are evolving rapidly and will be further accelerated by the development of standards from the International Sustainability Standards Board (ISSB).
The challenge with reporting, even in jurisdictions with a longer track record of sustainability disclosures, is that both reporting entities and users of these reports (especially local investors) take time to develop. The newness of the sustainability reporting guidance, and the rapid pace of many elements of sustainability reporting globally, means an uphill climb for the reporting companies and financial institutions who will use the policies.
Therefore, the second and third elements of the roadmap will be critical for financial institutions to anticipate on their own. There have been many examples of financial institutions adapting their governance to build in a sustainability function, and to move, centralize or decentralize its work depending on the particular needs and structure of the institution.
The Sustainable Finance Working Group’s report on corporate governance gaps specific to UAE companies and financial institutions will bring important insights. However, financial institutions having to navigate a wide range of governance structures in working with their customers should be proactive in surveying other best practices to see what forms of sustainability governance bring the greatest value to their own businesses.
Finally, a significant share of the challenge of responding to changes in sustainability expectations is having a single set of definitions that applies for the financial sector as a whole. The language of the roadmap suggests that it will wait and see how emerging taxonomies develop, whether that will be the Common Ground Taxonomy from the International Platform on Sustainable Finance or other similar initiatives.
The proliferation of taxonomies is useful in providing country-specific and relevant taxonomies. However, as the G20 Sustainable Finance Working Group noted in its Synthesis report, “the proliferation of inconsistent approaches could generate market fragmentation, increase transaction costs… and result in a higher risk of green and SDGs-washing.”
In this respect, a wait-and-see approach now as the IPSF moves forward on its Common Ground Taxonomy would align with the G20 SFWG’s first recommendation on taxonomies, to use “the same language (e.g., international standard industry classification and other internationally recognized classification systems), voluntary use of reference or common taxonomies, and regional collaboration on taxonomies”.
There remains a lot to learn about the details and conclusions of the various stock-take reports that are planned under the UAE’s Sustainable Finance Working Group activities in 2022. However, there is enough in the high-level roadmap to make the case for action today by financial institutions and investors on responsible finance, which is much stronger than it was in 2020 at the launch of the Guiding Principles on Sustainable Finance.
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