ESG (Environment, Social, and Governance) is more than just a buzzword; it’s a critical framework that will drive actionable strategies in both policy and the corporate world, particularly, finance. The UAE, in 2016, took a significant step by ratifying the Paris Agreement. Further, building on this commitment, the UAE Sustainable Finance Working Group (SFWG) was established in 2019 to drive the country's economic transition towards sustainability and promote the adoption of green finance practices.
Various strategic initiatives, such as the Green Agenda (2015-2030), the National Climate Change Plan (2017-2050), and the UAE Net Zero by 2050 have set directives for SFWG that have helped in spearheading the UAE banking sector to focus on green finance. The 28th session of the Conference of the Parties (COP28) in UAE further cemented the country's commitment to ‘net zero’ and reinforced UAE banks to start mobilizing AED 1 trillion in sustainable finance by 2030.
ESG footprints and sustainable practices
Following the momentum of COP28, UAE banks are integrating ESG criteria into their operations. The notable factor is the massive investment across the GCC in renewable energy, green hydrogen, and other sustainable projects fuelled and supported by UAE and Middle East banks. Energy efficiency, sustainable transportation, and green buildings are other areas of interest. It’s not just the capital allocation or lending for the green or sustainable projects but banks are bringing sustainable practices into their operation and in their relationships with customers and other stakeholders.
Banks are also developing new sustainable finance products linked to sustainability, like green loans, green bonds, sustainability-linked bonds, blended finance, etc. Banks are also advising their partners and customers to help them reduce their environmental impact and improve their social performance. ESG best practices are not only being imbibed by the banks, but they are also trying to induce their clients to adopt them, elucidating their benefits.
UAE: a green finance leader
UAE banks’ commitment to ESG and sustainability has been a driving factor in fundraising and lending whether it is conventional bond issuance or lending; or Islamic finance either in terms of lending or Sukuk. The year 2023 saw UAE emerge as a leader in green finance in the Middle East, accounting for approximately 45 per cent of the region’s total green bond issuances and with sales reaching $10.7 billion – a remarkable 170 per cent increase from the previous year.
Hosting COP28 that year, the UAE experienced a milestone year for green Sukuk, with Islamic issuances constituting over a quarter of the MENA region's total for the first time. Saudi Arabia also made significant contributions, accounting for about 32 per cent of regional volumes, marking a 69 per cent year-on-year increase.
The first nine months of 2024 saw an 18 per cent decline mainly due to higher interest rates and the tapering of the effect of COP28. Around USD6.5 billion Green Sukuk were issued in the MENA region in 2023, more than half of all global green Sukuk. In 2023 and 2024, Abu Dhabi Commercial Bank (USD 350 million) and Emirates Islamic successfully issued (USD 750 million) notable issues of Green sukuk.
Role of DIFC and ADGM
While The UAE Central Bank and the UAE Banks Federation have played a pivotal role in the UAE’s proactive approach in setting goals and realigning financial resources into green and sustainable financial solutions, the role of two financial free zones, Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM) in positioning the UAE as a regional hub for sustainable finance can’t be ignored. Some of the notable raising of finance for the said purposes has been arranged through these two.
There were many significant outcomes for green financing at COP28 and one of them was the announcement of ALTÉRRA, a new climate investment fund (the UAE committed USD 30 billion) located in ADGM which will spearhead financing in emerging markets, including the Middle East.
On the whole, the initiatives towards green and sustainability driven by SFWG and CBUAE’s strategic goals have led sustainable progress. Banks are reaffirming their commitment to sustainability and preparing ESG reports, as well as are in the process of forming Task Force on Climate-Related Financial Disclosures (TCFD). This holistic approach could be considered one of the achievements of SFWG.
Concerns and the way forward
Despite the positive development there are various factors which will decide the fate of the green and sustainable financing. Major concerns for the banks are a lack of clear risk framework, regulations, and reporting requirements, and the lack of differential advantage for the green funding resources.
The ring-fencing of funds raised for green finance and the strict requirements associated with them are considered impediments sometimes. This has also given rise to ‘greenwashing’, which creates not only reputational risk but also frustrates the whole system.
However, the work is cut out and not only the government but various agencies in the UAE are focussed on sustainability and green finance. As the banks will play a pivotal role in the country’s transition to a greener economy, reallocation of their investments from traditional high-carbon sectors to green technologies will be a key requirement.
The author is the Chief Executive Officer of State Bank of India, DIFC, Dubai, with over 21 years of diverse experience in banking and the steel sector. His views are personal and do not represent those of his organization.
