ESG in Abu Dhabi: How does it link itself to Luxembourg?

Introduction

In 2019, the Emirate of Abu Dhabi and the United Arab Emirates (UAE) declared, in the Abu Dhabi Sustainable Finance Declaration, their commitment to address climate change and the pursuit of a sustainable growth pathway acknowledging that climate change affects all economic sectors and all segments of society.

Since then, sustainable finance has remained a strategic priority for the UAE and Abu Dhabi and in 2023, the Abu Dhabi Global Market (ADGM) implemented its sustainable finance regulatory framework (the ADGM Sustainable Finance Framework). This comprises an ESG regulatory framework for sustainability-oriented investments funds focused on an ESG label.  
As is customary in the Middle Eastern financial centers, inspiration for new pieces of legislation is taken from the legislative environment in the main financial centers around the world, from Asia to the US and Europe. In this vein, the implementation of the ADGM ESG Regulatory Framework follows in the footsteps of the EU SFDR, very closely following its standards.

To help investors identify investments with a sustainability objective whilst effectively mitigating the risk of greenwashing, the ADGM has implemented green labels for investment funds which recognize the EU Taxonomy Regulation¹ as well as the EU Climate Benchmark Regulation², creating a regulatory connection between the ADGM Sustainable Finance Framework and the EU SFDR.

To do this, the ADGM Sustainable Finance Framework has implemented two new designations for investment funds: the ADGM Green Funds label and the ADGM Climate Transition label which draw on the requirements of the EU SFDR and set out the minimum criteria to which applicable securities and other financial services products must adhere, to use the label. With Luxembourg as the leading market for investment funds in Europe, there is no doubt that its ecosystem and manner of interpreting and applying these European legislative frameworks will serve as guiding principles in the implementation of the ESG regimes in the UAE.

Any fund or portfolio seeking to obtain one of these designations must meet two conditions: the “Investment Requirement,” that is, the minimum requirements imposed on investments for them to qualify under the framework; and (2) the “Attestation Requirement.”

Investment Requirement

I. ADGM Green Funds

ADGM Green Funds must invest predominantly in “Eligible Green Assets,” being assets that are considered environmentally sustainable or equivalent under an “Acceptable Green Taxonomy.”

In accordance with the ADGM Green Fund regime, the EU Taxonomy Regulation is considered as “acceptable”³ Green Taxonomy by the Financial Services Regulatory Authority (FSRA). Hence, an ADGM Fund can be structured as an ADGM Green Fund if the underlying investments are aligned with the requirements of the EU Taxonomy Regulation.

II. ADGM Climate Transition Funds

ADGM Climate Transition Funds must invest in assets whose activities assist the transition of an economy towards lower carbon emissions or becoming more environmentally sustainable, but that are not at or near-zero emission standards. An ADGM Climate Transition Fund is therefore obliged to invest in predominantly “Eligible Climate Transition” assets. There are several criteria set out which qualify an asset as an “Eligible Climate Transition” asset, one of which is if it is included in or tracks an EU Climate Transition Benchmark under the EU Climate Benchmark Regulation.

Attestation Requirement

This requires a third party to attest at least annually that the product continues to comply with the applicable Investment Requirement. The purpose is to provide investors with enhanced and standardized disclosures.

The ADGM, in a very practical manner, has taken the EU sustainable finance framework as a model for its own ESG legislative framework. This puts Luxembourg, as the leading market for investment funds in Europe, in a strong position as it seems likely that its interpretation and application of the European legislative frameworks will serve as guiding principles for the implementation of the ESG regimes in the UAE. In addition, in its latest discussion paper⁴, the FSRA highlighted the importance of ESG indices in developing passive, lower-cost ESG investment products and we are confident that Luxembourg market players in this area are set to be at the forefront of these developments and may well have a competitive advantage to players from other parts of the world.

The implementation of the ADGM Sustainable Finance Framework ultimately constitutes a strong attraction point for funds players already active in the ESG space in Europe (with Luxembourg at the forefront) as it will permit these groups to expand operations in a new region in a smooth and consistent manner, whilst building on their experience gained in Europe.   

This article was first published in Paperjam.