How the UAE is becoming a sustainable finance centre

Regulators need to ensure consistent standards, greater transparency and disclosure of sustainability issues

The Dubai Financial Services Authority is actively working to introduce a supervisory approach and regulatory framework for the development of sustainable finance within the Dubai International Financial Centre. Photo: DIFCShow less

Now more than ever, sustainability is of utmost importance. As the scientific community continues to issue stark warnings about the sustainability of our planet and its ecosystems, governments around the world are taking action to prioritise sustainability.

The same can be said for the financial sector. Sustainable finance has evolved beyond socially responsible investing in recent years to include asset management and ownership with environmental, social and corporate governance standards, often linked to the UN’s Sustainable Development Goals, driving investment and disinvestment decisions.

Institutional investors and asset managers are at the forefront of these developments and are taking a more hands-on approach, driven by investor wishes, with the understanding that ESG investments and capital allocation can lead to greater business opportunities and possibly higher returns in the long term.

This is evident in the 2021 Global Sustainable Investment Review, which revealed that the total value of sustainable and responsible investments stood at $35.3 trillion, an increase of 15 per cent in the past two years alone. Anecdotes suggest that more than half of new money into private equity over 2019 and 2020 came with SRI mandates.

We are increasingly seeing practices and tools to support thematic investing and impact investing, including low-carbon indices, green bonds and sustainable funds.

There is also greater focus, under the social component, on companies that adopt diversity best practices.

As environmental and social challenges come into greater focus, there is not a single sector today that will not benefit from or not be affected by sustainable finance.

The role of regulators

From a regulatory perspective, these trends point towards an increasing need to monitor risks related to ESG factors and how they may affect the financial system.

One of the important areas that is being addressed is the standardisation of ESG-related terminologies, such as climate, blue, green, impact or sustainable, to have a more consistent interpretation of these terms and minimise the risk of “greenwashing” of financial products or investments.

Greater transparency, disclosure and reporting standards are also needed to improve market data comparability on ESG matters.

In addition to building their own internal capacity in understanding these new areas, financial regulators must also focus on consumer protection, the integrity and efficiency of both public and private markets and the soundness of the financial system at large.

The Dubai Financial Services Authority is actively working in these areas to introduce a supervisory approach and regulatory framework for the development of sustainable finance within the Dubai International Financial Centre.

For public offers of securities, the DFSA currently provides flexibility for issuers either to adopt an ESG framework based on standards issued by the International Capital Markets Association or comply with mandatory ESG measures imposed by their home regulators.

However, with ESG bond listings – by sovereign issuers, multinational banks and a UAE corporate issuer – now amounting to $11.4 billion, and growing, there is a greater need for us to provide further guidelines to the market.

Our collaboration with international standard-setting groups, such as the International Organisation of Securities Commissions and the International Association of Insurance Supervisors, among others, has helped the DFSA understand new concepts and 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

Peter Smith,
DFSA

These include the identification and assessment of risks, including physical, legal and transitional issues, which may affect balance sheets and activities of financial institutions such as banks, insurers and asset managers.

Supporting the UAE to become a sustainable financial centre

As a global financial centre, the UAE has invested heavily in promoting sustainable finance across all sectors. Its sustainability road map is outlined in its national and green development agendas, including the Dubai Finance Declaration on Sustainable Finance, the UAE Green Agenda 2015-30, the National Climate Change plan 2017-50 and the recently announced Net Zero 2050 Strategic Initiative.

The commitment to sustainability is also a theme at Expo 2020 Dubai. Additionally, sustainability features prominently in the UAE’s contribution to the Ipscp World Investor Week, led by the Securities and Commodities Authority.

In January 2020, the DFSA, along with other UAE financial regulators and exchanges, published the Guiding Principles on Sustainable Finance in the UAE, committing themselves to encourage and support financial services companies in the DIFC. This involves developing strategies to incorporate sustainable practices in their business activities, decision-making, risk management and in the context of exploring new business.

Our soon-to-be-launched Sustainable Finance Road map 2021-24 features a range of initiatives, including the adaptation of supervisory practices and proposals for regulatory policy change, in addition to supporting and promoting sustainability reporting and other relevant disclosure frameworks.

We will also shortly launch the DFSA ESG Hub, which will serve as a platform for multilateral engagement, education and dialogue on sustainable finance within the DIFC and beyond in partnership with bodies such as the DIFC Academy and the Toronto Centre.

Ultimately, the ability to understand and manage sustainability-related issues relies heavily on consistent standards as well as transparency and disclosure of sustainability issues.

The DFSA will take a more active role in enabling the development of sustainable finance in the DIFC.

While drawing from the direction pursued by international standard-setters, the DFSA will adopt a direction that would most benefit the DIFC, Dubai and the UAE, which connects multiple providers and users of financial services worldwide.

Peter Smith is the managing director and head of strategy, policy and risk at DFSA.