The Abu Dhabi Global Market (ADGM) recently announced the implementation of one of the first sustainable finance frameworks in the region that will come into force with immediate effect. The framework encompasses rules on sustainability-oriented investment funds, discretionary-managed portfolios, bonds, and sukuks, as well as requirements for environmental, social, and governance (ESG) disclosures by ADGM-domiciled companies.
This follows significant industry feedback and support through public consultation, reinforcing the UAE’s position as a leading sustainable financial hub in its “Year of Sustainability” as it prepares to host the COP28 later in the year.
The implementation of the framework follows in the footsteps of other jurisdictions, such as the European Union’s implementation of the Sustainable Finance Disclosure Regime (SFDR) in 2021 and recent proposals from the United Kingdom’s Financial Conduct Authority to introduce Sustainability Disclosure Requirements and the US Securities and Exchange Commission to introduce ESG-related proposals.
The measures are part of a broader range of sustainability-related regulations in the UAE, which aim to accelerate the growth of a sustainable finance ecosystem in the jurisdiction and help channel capital into projects and activities that advance the country’s transition to net-zero greenhouse gas emissions.
This LawFlash details five key features of the Sustainable Finance Regulatory Framework (Framework) as its relates to asset managers in particular, which distinguishes the ADGM as a hub for sustainable finance.
The ADGM spearheads the adoption of a harmonised taxonomy through the introduction of three new designations—“Green,” “Climate Transition,” and “Sustainability Linked”—across funds, managed portfolios, bonds, and sukuks. These designations set out the minimum criteria for environmental sustainability that applicable securities and other financial services products may choose to seek adherence to. The designations are voluntary (i.e., on an opt-in basis) and issued by the Financial Services Regulatory Authority (FSRA) upon application or notification.
Upon receipt of a designation, a person may use the relevant mark corresponding to the designation received in its communications, subject to receiving appropriate permission from the FSRA.
The objective behind developing a standard for green-labelled financial products and services is to help investors identify investments with a sustainability objective in a way that effectively mitigates the risk of greenwashing (i.e., when a company purports to be environmentally conscious but actually is not making sustainability efforts).
For example, a manager promoting an “ADGM Green Fund” would indicate that the fund is pursuing green objectives that seek to meet the FSRA’s requirements for an ADGM Green Fund. This would include seeking to meet the relevant “Green Fund Investment Requirements” (as described below) and taking measures to mitigate the risk of greenwashing.
Only those products that meet all of the relevant criteria may use the designations “Green,” “Climate Transition,” and “Susbtainability-Linked” in relevant documentation and promotional materials.
Any fund or portfolio seeking to obtain a green-labelled ADGM designation must meet two conditions: (1) the “Investment Requirement”, which is the requirement for investments to meet a minimum criteria for environmental sustainability by reference to agreed taxonomies worldwide (as further described in the below subsections); and (2) the “Attestation Requirement” (as described below in the “Attestation Requirements as to Compliance” section).
Similar requirements apply for debentures and sukuks, which are outside the scope of this LawFlash.
Green Investment Requirements and Acceptable Taxonomies
The purpose of the “Green” designation is to provide a framework for investments in assets whose activities are already environmentally sustainable.
The Investment Requirement for an ADGM Green Fund or Green Portfolio is that they invest in predominantly “Eligible Green” assets, being assets that are (1) considered environmentally sustainable or equivalent under an “Acceptable Green Taxonomy” or (2) included in or otherwise track an EU Paris Aligned Benchmark.
An ADGM Green Fund or Green Portfolio may choose any published, credible and independent green taxonomy as an “Acceptable Green Taxonomy” benchmark against which to review its assets. At present, the following taxonomies are considered “acceptable” by the FSRA: (1) the EU Green Taxonomy; (2) the ASEAN Sustainable Finance Taxonomy; and (3) the Common Principles for Climate Mitigation Finance Tracking. In due course, other taxonomies, such as the UAE green taxonomy (once published) may also be considered acceptable.
The purpose of the “Climate Transition” designation is to provide a framework for investments in assets whose activities assist the transition of an economy towards lower carbon emissions or becoming more environmentally sustainable, but that do not currently meet zero or near-zero emissions standards.
The Investment Requirement for an ADGM Climate Transition Fund or Climate Transition Portfolio is that they invest in predominantly “Eligible Climate Transition” property or portfolio assets. These include assets/shares that are (1) aligned with an Acceptable Climate Transition Taxonomy (defined below) or equivalent, (2) issued in accordance with the ICMA Green Bond Principles, ICMA Sustainability-Linked Bond Principles, EU Green Bond Standard, or Climate Bonds Initiative, (3) included in or that track an EU Climate Transition Benchmark, (4) issued or otherwise provided by an entity that in the reasonable opinion of the manager (in the case of funds) has issued credible net-zero emissions targets and strategies and is on course to meet the net-zero emissions targets; or (5) an investment intended to facilitate the transition of real estate or infrastructure assets to become more environmentally sustainable, in the reasonable opinion of the manager (in the case of funds).
An ”Acceptable Climate Transition Taxonomy” is any classification system (published, credible and independent) that identifies economic activities assisting the transition of an economy towards lower carbon emissions or becoming more environmentally sustainable, but do not currently meet zero or near-zero emissions standards.
A standalone Climate Transition Taxonomy has not yet been published. However, it is understood that one or more may be forthcoming.
The second requirement for an ADGM fund or portfolio to obtain and maintain a green-labelled ADGM designation is the “Attestation Requirement.” This is the requirement for a third party (or, in limited instances, such as where the fund is a Qualified Investor Fund (see the ADGM Fund Rules), the fund manager itself) to attest, on an ongoing basis, and at least annually, to the product’s compliance with the applicable Investment Requirement.
The Attestation Requirement represents another milestone in the efforts of investors and regulators to get companies to provide investors with enhanced and standardised climate-related disclosures. The Framework states that the attestation must specify that, among others, the applicable Investment Requirement has been adhered to during the period reviewed and as of the date of the attestation.
Moreover, such attestation must be delivered annually to the investors (in an annual report or similar) and must be capable of being relied upon. The Authorised Person (i.e., the person who holds the Financial Services Permission (each of the foregoing as defined in the ADGM Financial Services and Markets Regulations 2015 (FSMR)) and who is therefore responsible for the fund or portfolio) must keep records of the due diligence process it has undertaken to confirm that the assets meet the Investment Requirement criteria at the time of acquisition and on an ongoing basis. Beyond this, the Framework does not currently prescribe a particular attestation standard to be used.
The ADGM has created a designation mark to recognize and acknowledge products and services that meet its minimum standards. Upon receipt of a designation, the product may use the relevant ADGM Green, Climate Transition, or Sustainability-Linked logos in relevant communications, subject to receiving appropriate permission from the FSRA.
The objective is to provide investors with the assurance that the products meet ADGM’s minimum standards and ultimately to encourage investors to invest in the green transition with confidence, providing a boost to the financing towards net zero.
New mandatory ESG disclosure requirements (ESG Disclosures Framework) shall apply to any ADGM-domiciled company that meets the following conditions:
Any ADGM entity not meeting the aforementioned conditions may choose to comply with the provisions of the ESG Disclosures Framework on a voluntary basis. Moreover, the following entities are exempt from the ESG Disclosures Framework: (1) foundations; (2) limited liability partnerships; (3) general and limited partnerships; (4) restricted scope companies; (5) public listed companies that already make equivalent disclosures in accordance with listing requirements; (6) investment companies; and (7) branches of foreign companies.
Under the ESG Disclosures Framework, companies falling within the ESG Disclosures Framework must include in their annual accounts such “information necessary for an understanding of the development, performance and position of the overall assets managed or administered by the company by reference to an international framework relating to environmental, social and governance matters” (see Section 399B(2) of Chapter 4A of the Companies Regulations 2020).
Importantly, companies may choose not to provide this information where they submit to the ADGM Registrar a clear and reasoned written explanation for not doing so. The ADGM has committed to a periodic review of the ESG Disclosures Framework and so it remains to be seen whether the ADGM shall continue to retain its existing “comply or explain” ESG disclosure model, which market participants have welcomed as being generally a less onerous model than its European counterparts, or eventually look to move to a mandatory ESG disclosure requirement in the future, in line with the EU SFDR.
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