As the UAE prepares to host COP28 later this year, global attention is focusing on the nation’s commitment to drive its climate agenda forward and become more environmentally sustainable. Despite fossil fuels being a primary driver of the economy, the UAE continues to demonstrate its net-zero ambitions, particularly through its finance sector. Mashreq Bank, for example, has financed $15.5bn of sustainable and adaptation-linked investments since 2021.
However, the role of finance extends beyond banks and investment firms. Financial services providers also influence the successful embedding of sustainable finance, especially as reporting gains prominence. Understanding the intricate connection between finance and sustainability, and how these two forces continually shape and reinforce one another, is imperative for businesses and governments seeking to achieve their net-zero targets.
What is sustainable finance?
Sustainable finance is the process of considering environmental, social and governance (ESG) needs in all finance-related activities, to support economic growth and sustainable development. It takes various forms, including sustainable investment funds, green banking products and ESG reporting standards. While typically viewed as a voluntary exercise, usually undertaken by big corporations to promote their social contribution, the urgent need for environmental and social action has brought about considerable change.
An important distinction to note is that economic growth is a key tenet of sustainable finance, albeit through a socially responsible lens. A stable economy ensures environmental and social goals stay prioritised. Recent energy price hikes and increased coal use illustrate the risks of economic instability.
Businesses also need financial certainty when investing in climate change initiatives and strategies, balancing their economic responsibilities to shareholders, employees and other stakeholders. An environment that promotes mutual gains can accelerate progress. Urgent, decisive actions are required, and finance can serve as a much-needed catalyst for change.
Why is it important?
As the world continues to battle climate change and environmental disasters, largely due to rising temperatures, collective action is essential. Alignment and transparency are key to successfully tackling climate change. Government frameworks, policy reforms, and targets hold value when businesses can adapt and transparently demonstrate their efforts.
Equally, the ability for individuals to make conscious decisions is also limited if they cannot clearly see the impact businesses are having on the environment and society more broadly. As greenwashing remains a cause for concern among consumers, financial services can protect individual interests by promoting and maintaining honest reporting.
While climate change is a global issue, sustainability extends beyond the environment to address social issues made worse by factors such as COVID-19, rising inflation, wealth disparity and geopolitical conflicts. On a more micro-scale, inclusion and equality agendas also hold prominence. Sustainable finance plays a fundamental role in limiting social fallout while fostering good governance. Banks can ensure their investments are not used in support of any business or organisation that fails to promote social inclusivity, and financial services providers can also push for greater transparency.
Environmental and social sustainability is underpinned by its economics. . Sustainable finance frames the necessary action that is needed to limit the impact of climate change and create a fairer society by highlighting the financial implications of failing to do so. This extends beyond green investments, highlighting the profit and loss impact that climate change and social exclusion brings. For example, as renewable energy becomes more prevalent and fossil fuels scarce, the cost of energy from fossil fuels will become more expensive.
What are the benefits?
Ultimately, everyone benefits from sustainable finance - governments, business and individuals – but success requires contributions from all.
Governments must introduce clear guidelines, policies and targets that support businesses in understanding what they need to do. According to PwC’s 2022 Middle East Report, businesses across the Middle East are not shying away from ambitious ESG targets, but they want clarity and a level playing field. Such clarity will encourage greater transparency and commitments from businesses, which in turn, empowers governments to set more ambitious net-zero targets.
In Middle Eastern countries where fossil fuels are the main contributor to the economy, introducing robust policies that reduce the country’s carbon footprint while also diversifying the economy makes economic sense. Not only does sustainable finance act in the interest of the planet and society, it also aims to future-proof economies.
The UAE’s Approach
The UAE stands out as a progressive advocate for ESG. It aspires to be a global sustainable finance hub with initiatives like Abu Dhabi Global Market’s (ADGM) recently announced sustainable finance framework that concentrates investment on climate-positive initiatives, and mandatory ESG disclosures for companies meeting specific criteria.
As part of this framework, ADGM created innovative financial designations like the Climate Transition Fund or Portfolio. This sets out guidelines 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.
Another innovative product is ADGM’s regulated trading platform for carbon credits, which merges the concept of trading virtual assets with carbon offsetting, and aims to offer financial incentives to organisations to reach carbon neutrality.
What remains clear is financial products and services can effectively steer organisations and individuals toward sustainable practices.
What does the future of finance look like?
Environmental pressures will undoubtedly shape the finance industry. ESG targets are expected to become stricter as the urgency to cut carbon emissions increases. This will see ESG reporting standards evolve and as these standards are refined, chartered accountants will play a pivotal role in maintaining reporting integrity and ensuring businesses report accurately.
Improved transparency through policy reform and reporting standards will enable financial institutions to direct capital towards climate positive projects and organisations. With financial backing, climate-conscious businesses will be able to continue to grow and will likely be more resilient to policy change and new regulations, as well as the physical impacts of climate change. At the same time, business transparency will enable consumers to make informed decisions, driving the necessary revenue growth that makes them more attractive to financial institutions.
In the UAE, the momentum of sustainable finance suggests adoption will only quicken. With some of the UAE’s biggest banks, such as Mashreq and First Arab Bank (FAB), pushing green investment initiatives, businesses seeking capital will soon be required to adapt their practices to become more ESG orientated. Retail banking is also adopting a sustainable finance approach, introducing green bonds and other ESG-linked products, as consumer behaviour becomes increasingly environmentally and socially conscious.
With the UAE aiming to become a global leader across several industries, its progressive stance on sustainable finance is unsurprising. As the world accelerates efforts to reduce carbon emissions, financial institutions will need to use their tools of investment, consulting and reporting to lead the charge. The UAE is well placed to become a beacon for the future.