In 2020, the UAE announced mandatory sustainability reporting for listed companies. It is important to understand how this mandate fits into UAE’s wider sustainability objectives and how the requirements of sustainability reporting in UAE will benefit the businesses to profit and gain trust of shareholders, investors, and creditors.
2023 can be termed as a watershed year for UAE’s commitment to its sustainability and net zero goals. A few landmark moments of 2023 define the next era of progress in the sustainability domain for the country.
In January 2015, the UAE Cabinet approved the UAE Green Agenda 2015-2030. This is an overarching framework for creating a Green Economy and consists of five strategic objectives:
In 2019, the Dubai Financial Market (DFM) launched its 2025 Sustainability Strategic Plan to promote ESG best practices among listed companies and become the region’s leading sustainable financial market by 2025, this is backed up by the comprehensive UAE Sustainable Finance Framework (2021 to 2031).
The plan is developed in partnership with international partners and national stakeholders, the framework should help deliver on UAE’s climate goals and help foster an ecosystem for a green economy. Pillar 1 of the framework aims to create an enabling environment for diversified and innovative sustainable finance products. One recommendation of the framework is the establishment of working groups to learn from best practice and develop industry wide consensus on the direction of sustainable finance as well as ESG reporting. Similarly, Pillar 2 of the framework includes a focus on creating a pipeline of climate and green investment. Pillar 3 encourages a greater collaboration between R&D in academia and private investments for green innovation.
At AGS, these are areas we hope to impact by collaborating with our partners and adding value for our clients.
Presently, the UAE’s National Committee on SDGs (United Nations Sustainable Development Goals) is actively aligning the work of all its ministries to achieve the SDGs as part of the Cabinet’s UAE Centennial Plan 2071 – a five-decade national development plan and We the UAE, 2031 – a decade long socially focused plan. This all ties in with ‘The United Arab Emirates’ First Long-Term Strategy (LTS) to achieve net zero by 2050.
This strategy was released in 2023, and it aims to guide the nation’s climate actions to enable a “sustainable future that is built on the principles of innovation, collaboration, and inclusion”, according to HE Mariam bint Mohammed Saeed Hareb Almheiri, UAE’s former Minister of Climate Change and Environment.
“ADX has made a formal commitment to drive sustainability in financial markets by becoming a partner exchange of this United Nations led Sustainable Stock Exchanges (SSE) initiative.” said H.E. Khalifa Salem Al Mansouri, Acting Chief Executive of ADX.
In 2020, the UAE Securities and Commodities Authority (SCA) issued the Corporate Governance Code. This change included requirements for Public Joint Stock Companies (PJSCs) listed on the Abu Dhabi Exchange (ADX) or Dubai Financial Market (DFM) to adhere to specific ESG disclosure requirements by publishing an annual sustainability report.
In 2023, the UAE’s SFWG, whose members include ministries (the Ministry of Finance, Ministry of Economy, Ministry of Climate Change and Environment, the Office of the UAE’s Special Envoy for Climate Change), and financial regulators (Central Bank of the UAE, Securities and Commodities Authority, Financial Services Regulatory Authority of Abu Dhabi Global Market, Dubai Financial Services Authority), and UAE exchanges (Abu Dhabi Securities Exchange, Dubai Financial Market, and Nasdaq Dubai) issued its third public statement. This statement outlines expectations around How companies manage climate-related financial risks (Workstream 1), as well as ESG reporting requirements outlined in its Principles for Sustainability-Related Disclosures for Reporting Entities (Workstream 2). Finally, Workstream 3 of the statement summarizes the need for Design principles to guide and underpin the UAE’s Taxonomy Development, aiming to create a common sustainability language across the UAE.
This move is progress towards much greater transparency and an opportunity for the best companies to grow sustainably and with better access to pronounced capital arrangements.
According to PwC’s Middle East Report 2023, 70% of survey respondents state that they already report on ESG, with a quarter doing so in a stand-alone ESG report. According to the ADX, sustainability reporting can enhance competitiveness, build trust and reputation, and encourage investment due to better risk management and transparency.
Appendix A of the ADX’s ESG Disclosure Guidance lists 31 ESG indicators that are considered essential to report in alignment with the Sustainable Stock Exchanges (SSE) Initiative and the World Federation of Exchanges (WFE). The indicators are also mapped against Global Reporting Initiative (GRI) indicators and the Sustainable Development Goals (SDGs).
The UAE’s SCA adopted Global Reporting Initiative (GRI), as the mandatory standard for listed companies when disclosing non-financial performance. For non-mandated companies, the ADGM supports the International Sustainability Standards Board (ISSB) and remains flexible to adoption of global standards for ESG disclosures, as deemed appropriate by organisations. All reports must outline a company’s long-term strategy, impact on ESG, and the wider economy.
In 2022, the Abu Dhabi Global Market (ADGM) was the first international financial centre globally to become carbon neutral and identified Sustainable Finance as a key strategic priority in the same year. ADGM has also proposed its Sustainable Finance Regulatory Framework, which could facilitate the uptake of ESG-related initiatives among UAE businesses. Furthermore, the vast majority of large UAE companies are calling for strengthened ESG legislation.
There are a number of challenges when it comes to reporting ESG performance. These include limited awareness of its importance to sustainable value creation, as well as the costs associated with reporting by investing in new systems, processes, and personnel to implement effective reporting. However, the benefits far outweigh the costs. For instance, performing an ESG materiality assessment can help a company to steer investment to activities that will resonate with stakeholders such as investors or consumers. Intangibles like ‘brand loyalty’ make up 48% of the world’s stock market value, and in the US its 90%. ESG excellence is therefore essential for business success. This is an opportunity which UAE’s SFWG aims to tap and identifies it as a key driver of its aim to bolster transparency through sustainability reporting, adding strategic value via a double materiality approach to sustainability factors. Indeed, the integration of sustainability in investment decisions has gained importance for commercial banks, as they seek to roll-out AED 1 Trillion in sustainable finance till 2030 in UAE.
Roughly 70% of Middle East respondents in a CEO survey by ADGM consider it moderate to very important that investors with an interest in their market adhere to ESG standards. Similarly, ADGM itself hopes to transition into a “thriving centre” for green debt, with Workstream 3 of the SFWG calling for a ‘Taxonomy of Sustainable Activities’ that could help investors delineate sustainable investments from others.
In 2023 sustainable bond issuance in the Middle East more than tripled compared with the same period in 2022, reaching $15.4 Billion in the first half of 2023, with the trend set to continue in 2024 according to S&P Global. The better the UAE can define sustainable, the easier it will be for investors to join the party. Companies can best prepare for success by doing this themselves and this starts with an ESG materiality assessment to align business success with the ESG indicators identified by ADX for successful sustainability reporting.
UAE is setting out a benchmark for other stock exchange regulators for sustainability reporting. This along with the recent work on climate action such as work to enable the flourishing of climate transition funds could lead to further and more stringent reporting requirements very soon.
For instance, businesses in the Middle East may soon be impacted by global developments such as the implementation of new International Financial Reporting Standards (IFRS) accounting standards and European Sustainability Reporting Standards (ESRS). Companies that wish to benefit from a just climate transition should take initiatives to lead the transition themselves. The opportunity lies in placing the onus of sustainability reporting on sustainability initiatives driven by the priorities and ambitions of organisations, rather than industry-wide regulations by the government which runs the risk of policy generalisation.
