In an exclusive interview with Marina Bird, Managing Director of ESG News Corp, Lawrence Paramasivam, the Senior Executive Director of Policy & Legal at the FSRA during Abu Dhabi Finance Week (ADFW), highlighted UAE’s Strategic Evolution in ESG Regulation.

The United Arab Emirates (UAE) is solidifying its position as a global leader in sustainable finance by implementing regulatory frameworks aligned with international ESG (Environmental, Social, and Governance) standards. At the center of this progression is ADGM and its financial services regulator, the Financial Services Regulatory Authority (FSRA). The UAE Sustainable Finance Working Group (SFWG), chaired by FSRA, has become a crucial platform for coordinating efforts among UAE regulators, federal ministries — including the Ministry of Climate Change and Environment — and financial exchanges to achieve cohesive ESG initiatives.

Strengthening the Regulatory Framework

In the lead-up to COP28, the UAE SFWG released the Principles for the Effective Management of Climate-related Financial Risks urging financial firms such as banks, insurers, and asset managers to integrate climate-related financial risks into their business strategy and risk management. These principles align with global benchmarks set by the Basel Committee on Banking Supervision (BCBS) and serve as a foundation for enhanced ESG compliance. In parallel, the UAE SFWG also introduced Principles for Sustainability-Related Disclosures for Reporting Entities that encourage transparency and reporting quality on ESG matters. 

ADGM has moved forward apace to implement these national principles by implementing in the Middle East region one of the most comprehensive ESG disclosure requirements for appropriate entities within ADGM to foster transparency and accountability on ESG matters. ADGM’s FSRA has also outlined its ambitions to set out regulatory expectations of financial services firms to manage climate-related financial risks. 

Additionally, the FSRA has developed a markets framework that includes Environmental Instruments (such as carbon offsets) making it the first international financial centre in the MENA region to do so, and created designations for green and climate transition funds and portfolios, green and sustainability-linked bonds and sukuks. 

Key Compliance Challenges for Companies

Despite these advancements, ESG compliance remains complex for companies operating in global markets. One significant challenge is the fragmented regulatory environment. With multiple jurisdictions developing their own ESG standards, global corporations must navigate an array of frameworks. The introduction of baseline standards by the International Sustainability Standards Board (ISSB) marks progress toward international regulatory convergence, but discrepancies persist, particularly between European regulations and those from other markets.

A second challenge is the absence of standardized data. Inconsistent regulatory expectations make ESG data collection and reporting more complex, limiting comparability across regions and industries. This complexity is compounded by the operational difficulty of tracking ESG metrics not only within an organization’s operations but also across its supply chain, leading to resource-intensive compliance efforts.

Legal Risks Associated with ESG Strategies

As ESG considerations become central to corporate strategy, financial institutions must be vigilant about associated legal risks. Paramount to addressing these risks is the establishment of robust corporate governance structures that incorporate oversight of ESG and climate-related ambitions and risks. The FSRA’s expected guidance in relation to climate risk management is expected to further highlight the necessity of these governance structures to manage the impact of climate change on business strategies and risks.

Another critical area of regulatory focus for the FSRA is the risk of greenwashing —misleading claims about the ESG merits of financial products or services. The FSRA has issued guidance to mitigate this risk, mandating that institutions accurately and transparently communicate the sustainability attributes of their offerings. Clear and fair disclosure practices are essential to maintaining market credibility and building investor trust.

Outlook on Future ESG Regulatory Developments

The UAE SFWG continues to expand its initiatives. Among the key projects underway is the design of a UAE sustainable finance taxonomy to provide a set of principles to support classification of sustainable economic activities. This taxonomy will support regulatory consistency and improve ESG reporting comparability.

Transition planning is also at the forefront of UAE SFWG’s efforts, as the UAE advances toward its net-zero 2050 target. Transition plans help organizations outline their decarbonization strategies and align with sustainability commitments. The FSRA will continue to support the SFWG’s ambitions on these fronts.

Conclusion

The UAE’s proactive approach to ESG regulation, led by ADGM and its regulator, underscores its commitment to global sustainability efforts. Through strategic collaboration and development of comprehensive regulatory frameworks, the UAE is not only enhancing its own sustainable finance ecosystem but also setting a standard for other markets navigating the complexities of ESG integration. By addressing regulatory fragmentation, curbing greenwashing, and promoting data consistency, the UAE is creating a robust foundation for long-term sustainable growth.

Lawrence Paramasivam, the Senior Executive Director of Policy & Legal at the FSRA said:

“The UAE recognizes that climate and sustainability goals are continuing to evolve globally. With ADGM’s participation in the UAE SFWG, our aim is to minimize fragmentation of sustainability efforts within the UAE. At the same time, ADGM continues to develop a robust regulatory framework that aligns with international standards and brings into focus sustainability-related risks and opportunities for entities that operate out of ADGM. These developments highlight ADGM’s dedication to sustainability and reinforce ADGM’s position as an internationally leading sustainable finance hub.”