Why demand for sustainable finance is growing

ADGM Academy 13/07/2020

Why is sustainable finance important for ADGM, and for the MENA region more broadly?

At Abu Dhabi Global Market (ADGM), sustainable finance has been a strategic priority since its inception, and we’ve solidified our commitment over the last two years through numerous efforts. We have continuously striven to develop a vibrant and thriving sustainable finance hub, which is active internationally in driving capital towards sustainable solutions and investments. Environmental and social objectives are at the heart of ADGM’s agenda and sustainable finance plays a key role in achieving these objectives.

Our work is closely aligned with commitments made by the UAE government as well as the Emirate of Abu Dhabi – in particular, their continuous endeavours to meet the UN Sustainable Development Goals (UN SDGs) and the climate change aspirations set out in the Paris Agreement. A significant amount of capital is required to ensure that not only the UAE, but the MENA region as a whole, is on a low-carbon and sustainable trajectory. We have made considerable progress and have seen many exciting opportunities emerge in this regard. Yet, much is to be done.

In particular, diversification away from oil and gas has been at the core of the UAE’s economic strategy since the nation’s establishment. For financial markets, we act as a main driver of investment in the clean energy transition, further facilitating a sustainable future. ADGM plays a critical role in this diversification by contributing to the growth of the sustainable finance industry through the facilitation of new financial products and services.

Does the Covid-19 pandemic and economic downturn affect the priority given to sustainable finance?

If anything, the crisis makes sustainable finance more important than ever. We are seeing corporate, policy and financial leaders call loudly for sustainability to remain at the top of the agenda in the recovery process. Many in the financial industry are concerned about how we deal with both the physical and financial risks, but also the transitional risks we potentially will face. The unprecedented challenges incited by the pandemic have augmented how corporations view sustainable practices and, as a result, have placed them at the fore of their strategic priorities.

It is encouraging to see that many economic recovery plans are now considering how sustainability and being green fits within these stimulus packages. In the financial industry, many actors – particularly large asset owners and institutional investors – are increasingly engaged in driving sustainable finance and ESG-investment forward. While this was certainly happening before, the pandemic has evidently accelerated this trend.

What is ADGM doing specifically on sustainable finance?

Our objective is to create a thriving sustainable finance industry, not only in the Emirate of Abu Dhabi and the UAE but across the wider region. In 2019, ADGM published its “Sustainable Finance Agenda”, which outlined the four main areas regarding financial ESG-specific practices on which we will focus.

First, of course, we need to take action to fully integrate sustainability into financial regulation. We have begun to do this, largely in part through partnering with other regulatory bodies to launch the UAE Guiding Principles on Sustainable Finance, which serves as an educative document on the integration of ESG factors into governance, strategy and risk management functions. Though the principles are voluntary, the regulatory authorities in the UAE are working closely with financial entities to implement sustainable practices to the fullest extent.

What’s more, in 2019, ADGM launched the inaugural edition of its flagship Abu Dhabi Sustainable Finance Forum, congregating thousands of leading professionals from various industries to participate in compelling discussions surrounding sustainable finance. The event served as a launchpad for first-of-their-kind initiatives and announcements, including the Abu Dhabi Sustainable Finance Declaration, the UAE Working Group and the first-ever green REIT.

Our Sustainable Finance Agenda also encourages cooperation with national and international stakeholders. For example, the Abu Dhabi Declaration calls for collaboration and collective action to create a framework for fostering and integrating sustainable finance and its practices into our systems and markets.

In your opinion, what are the biggest challenges faced in the UAE and the region when it comes to sustainable finance?

The UAE has made immense progress over the last few years to achieve its sustainability agenda, and has made significant efforts to promote and reinforce ESG practices across its various industries. The wider MENA region faces a long road ahead regarding the widespread integration of sustainable practices, which calls for increased awareness and advocacy around ESG.

Under our Sustainable Finance Agenda, we prioritise fostering communication, knowledge and awareness of sustainable finance and best practices in implementing ESG practices throughout one’s operations. This is a very important area to continue to progress on, which ADGM continues to advocate for through its many initiatives and endeavours. For instance, through ADGM Academy’s partnership with the London Institute of Banking and Finance (LIBF), we can offer financial professionals an exceptional opportunity to learn about sustainable finance at a deep and granular level.

For those working in the financial industry, sustainable finance is an exciting pathway that an increasing number of professionals are following. This trend will only flourish as more people appreciate that finance is putting sustainability at its core. We want to attract and build talent in this field to create the diversity of institutions, product offerings and services needed to help the UAE diversify its economy and transition away from fossil fuels. To this end, ADGM is providing a robust, reliable and operational platform and ecosystem to support the sustainable finance industry.

Are there examples or case studies from the UAE which illustrate the increasing commitment to sustainable industries and assets? How is this shaping demand for sustainable finance?

Over the past few years, much progress has been made in the UAE thanks to major government-driven projects. One example is the building of Masdar city, which has the goal of becoming the world’s most sustainable eco-city. We have also seen a lot of investment in developing renewable energy capacity such as Noor Abu Dhabi, the world’s largest single-site solar project. As sustainable industries begin to flourish in the UAE, our challenge is to continue building on this momentum. In particular, we must attract private sector investors, both national and international, to ensure a sustainable future for the nation and wider region.

Over time, we expect demand for sustainable finance to grow exponentially. To meet this demand, financial institutions will have to create and offer new products that support the sustainability objectives of long-term investors. These may include climate-linked bonds, green sukuks, investment funds with social objectives, sustainability-linked loans, carbon market instruments, amongst others.

The MENA region must continue to progress its sustainable footprint to draw alongside other developed regions. However, ADGM has already taken important steps forward with its multi-dimensional framework – including the enhancement of financial regulation, education, cooperation and operational capacity. We are well-positioned to encourage the financial innovation needed to facilitate the growth of sustainable finance across the region.