In today’s increasingly climate-impacted business value chains, companies must always be prepared to deliver sustainable outcomes with accountability and transparency. The onus of growth lies with business owners and leaders. The pressure from stakeholders and key investors is mounting and the demand for delivery of products and services that are ethically compliant and uphold the highest standards of sustainability remains consistent. To grow and evolve, companies and especially large-scale businesses are required to be proactive and pragmatic in their assessments of current and potential future risks.
To ensure that an organisation meets the expectations of its stakeholders while returning profits, it is essential to formulate a robust and holistic Environment, Social and Governance (ESG) strategy that addresses and integrates climate risks. Mitigation of climate related risks is critical in identifying opportunities for growth and future-proofing growth plans.
Organizations that are prioritising integration of ESG considerations into their core strategies are not just fulfilling requirements, they are also safeguarding their long-term viability and resilience. Adopting an appropriate ESG framework is crucial in climate risk assessments and integration. It facilitates the identification and management of potential risks, ensuring businesses can proactively mitigate them.
One of the most prominent ESG reporting frameworks, the Sustainability Accounting Standards Board (SASB) is particularly helpful for its meticulous attention to environmental and social risk impact on financial performance. SASB offers industry-specific standards that highlight material risks, providing companies with a structured way to disclose the management of critical ESG factors. This focus on risk management is essential for helping organizations navigate the complexities of climate change and ensuring their preparedness for potential threats but also remaining aware of opportunities. Leading industry sectors such as finance, energy and real estate, as classified by the Global Industry Classification Standard (GICS), are increasingly integrating climate-related risks into their ESG reporting. To help with the complexities of managing climate change, the GIC’s Climate Signposts (GCS) tool evaluates the likelihood of four climate scenarios- Net Zero, Delayed Disorderly Transition, Too Little Too Late and Failed Transition- using a range of indicators, helping companies to adapt to climate change and lead the transition.
To aid transparency and comparability, the Task Force on Climate-related Financial Disclosures (TCFD), the first widely adopted climate risk reporting guidelines, now forms the basis of many climate reporting frameworks. The TCFD recommends a broad approach when it comes to analysing climate risks, categorising the risks into physical and transition risks. Physical risks refer to potential physical issues arising from extreme weather; while transition risks stem from the shift to a low-carbon economy due to policy, market or behavioural changes. Both physical and transition risks are important for an integrated risk management system that aims to be future facing. Likewise, accurate reporting and advanced climate modelling, such as the Climate Scenario analysis, are crucial for successful risk management, as recommended by the TCFD and identified by the IEA/IPCC/NGFC. In fact, the United Arab Emirates’ Sustainable Finance Working Group (SFWG) have taken their inspiration from the TCFD’s framework to establish a management strategy for climate-related financial risks. While the TCFD framework focuses mostly on climate-related disclosures, the SFWG aims to set minimum standards for ESG reporting across the UAE’s financial sectors, with the TCFD’s principles as a vital foundation.
The UAE has taken important steps towards tackling climate risks. In 2017, the country took a conscious initiative to establish optimal climate-resilience. As a result of this initiative, the UAE launched its first National Climate Change Adaptation Program to assess the impact of climate change on key sectors to identify the most pressing risks. The priority sectors included heath, energy, infrastructure and environment, whereas the risk assessment comprised subjects such as reduced worker productivity due to heat stress, efficiency loss of power plants, and damage to coastal infrastructure.
Since then, the UAE has taken significant steps to reduce these risks, by both physical and non-physical measures. UAE companies must assess and adapt to these nationally identified risks; enhance their resilience, attract investment and maintain competitiveness in a rapidly changing global market. As of 2022, the UAE has mandated ESG reporting for listed companies, affecting 130 organizations, and this reporting is quickly emerging as a powerful force. As a country, the UAE is committed to leading on climate change, with the UAE government’s landmark decision to formally pledge towards decarbonizing the oil and gas sector at COP28 and consistently increasing their use of renewable energy sources. The pledge is already being backed by investments from the UAE’s oil and gas sector into renewable energy sources development and research which is bound to directly impact and transform the country’s value chain of energy systems.
In addition to utilizing TCFD, investors are increasingly prioritizing sustainable and resilient business practices, guided by frameworks such as the Principles for Responsible Investment (PRI). The PRI emphasizes the importance of climate risk disclosure, while the Taskforce on Nature-related Financial Disclosures (TNFD) framework highlights nature-related dependencies and risks. Companies that wish to secure sustained investment must accurately model and report on these risks without resorting to greenwashing. However, UAE companies predominantly report against GRI, SASB and GCC metrics, which, while incorporating some elements of climate risk reporting, do not emphasize it as strongly as the TCFD, TNFD, or CSRD frameworks.
Thankfully, the UAE’s own sectoral climate risk assessment framework consists of the basic elements present in the widely accepted global practices. Consisting of five stages, the framework first acknowledges local climate trends, direct and indirect impacts, their magnitude and likelihood, and finishes by prioritizing risks as well as identifying adaptation measures. This sectoral climate risk assessment is effective, forward-thinking and fit for all sectors. A growing number of sectors are beginning to incorporate climate risk assessments into their strategizing planning and reporting processes. According to a 2023 survey conducted by the UAE Ministry of Climate Change and Environment, approximately 60% of financial institutions have started to align with global standards. In the energy sector, about 50% of major oil and gas companies have started making climate strides. The real estate and construction sectors are also demonstrating their climate consciousness via project designs and sustainability reports. While progress is evident overall, uptake across sectors remains uneven, with some industries prioritizing and advancing in climate strategies more rapidly than others. With continued effort, increased awareness as well as policy support, adoption should gradually become more equal.
Despite positive strides over the last five years, the UAE must act more decisively towards climate action to improve its ranking from 65th in the 2024 Climate Change Performance Index (CCPI). The ranking is predominantly attributed to significant greenhouse gas emissions.
Sectors like supermarket chains in the UAE are particularly struggling to adapt due to factors such as a lack of comprehensive sustainability policy, insufficient supply chain emissions data and reliance on imported goods. According to the 2019 UAE sectoral climate risk assessment, it became clear that climate change becomes a “threat multiplier” and affects multiple sectors simultaneously, by different magnitudes. With the interlinking of sectors, it’s nearly impossible for one sector to lead on climate change without full climate risk integration across all sectors. In addition, traditional business practices and a historical focus on rapid economic growth over sustainability have held back the adoption of advanced risk methodologies.
Several challenges hinder the widespread adoption of climate risk assessments in the UAE. Regulatory frameworks in the UAE are still developing in comparison to more established systems in regions like the EU or the US, where stringent climate regulations drive corporate compliance. The maturity of the market in the UAE is also a factor, as many more companies are still in the early stages of integrating sustainability into their core operations. General awareness as well as the availability of climate risk experts remains limited, impacting the quality and depth of assessments. In addition, the availability and quality of climate-related data pose significant challenges, complicating accurate risk evaluation. While stakeholder pressure is gradually increasing, it is not deemed as intense, when compared to EU or the US. However, government incentives and support for sustainability initiatives led by UAE’s Banks Federation (UBF) and governing financial institutions have shown signs of catching up to the quality and momentum of robust climate risk reporting and establishing the UAE’s climate risk management as a benchmark for the region.
The UAE’s Climate Plan is a comprehensive framework defined by the National Climate Plan as “addressing the causes and impacts of climate change and planning a transition into a greener economy”. The plan includes the management of greenhouse gas emissions, building climate resilience, de-carbonization and advancing economic diversification through innovative solutions. To follow through with this plan and solve global climate challenges, the UAE and subsequently AGS, are leveraging strategic partnerships to address global climate challenges by collaborating with international organizations, governments and private sector stakeholders. With the help of these partnerships, the UAE is enhancing the exchange of knowledge, resources and technologies in the pursuit of effective climate solutions. Due to its significant vulnerability to the harsh effects of climate change, such as the extreme temperatures, scarcity of water and sea level rises, the UAE recognizes the necessity of urgent, impactful action.
The UAE’s approach to tackling climate risk analysis demonstrates proactivity and aligns closely with global progress in this area. By leveraging the UAE Green Agenda and integrating climate change mitigation and adaptation strategies, the UAE not only addresses its own vulnerabilities but also sets an example for other nations. This alignment with international frameworks and best practices underscores the UAE’s commitment to sustainable development and resilience, positioning it as a potential leader in the global effort to tackle climate change.
While the UAE is undeniably making progress in the field of climate change, the regulatory frameworks are also evolving fast. The regulators must focus on increased stakeholder engagements to aid further development of existing frameworks by leveraging local expertise in sustainability. As the regulatory landscape develops, markets mature and general awareness improves, the UAE stands prepared to make impactful strides in combatting climate change. It’s important to understand that the region’s vulnerability towards climate change with its extreme temperatures and limited freshwater resources, are one of the more important regional challenges to overcome when it comes to managing climate risk effectively.
