Introduction

Green and sustainability-linked bonds are financial instruments designed to support environmentally friendly and sustainable projects. These bonds have gained significant traction in recent years, particularly in the United Arab Emirates (UAE), which has emerged as a leader in the regional green bond market. Green bonds and sustainable financing have emerged as critical mechanisms to finance climate-friendly projects as mankind focuses toward a green and sustainable future. These instrument enables an organization to fund environmentally oriented projects while still satisfying its corporate objectives. The UAE has introduced numerous regulations, incentives, and initiatives to promote investment in alignment with Environmental, Social, and Corporate Governance standards (ESG) as an effort to cement its long-term vision of becoming a regional hub of sustainable finance.

This article presents an overview of the UAE regulatory framework on green finance highlighting key insights for businesses wishing to tap into the vast and growing opportunities for sustainable growth.

Green and Sustainability-Linked Bonds

Green bonds are tradable financial instruments where the proceeds are exclusively used to finance or refinance projects that have positive environmental benefits. These projects can include renewable energy, energy efficiency, pollution prevention, sustainable management of natural resources, and biodiversity conservation. The UAE has seen substantial growth in green bond issuances, with the total value reaching approximately AED15.45 billion in 2023. Green bonds are more or less like any other bond except that their proceeds are used exclusively to fund sustainable projects revolving around pollution prevention or mitigation, environmentally sustainable management of living natural resources, land use, clean transportation, and sustainable management of water and sanitation. It provides an opportunity for issuers and investors to be active players in the sustainability agenda while pursuing their financial objectives at the same time.

Sustainability-linked bonds differ from green bonds in that their financial and structural characteristics are tied to the issuer’s achievement of predefined sustainability objectives. These objectives are measured through key performance indicators (KPIs) and are outlined in the issuance documentation. The performance of these bonds is linked to the issuer’s ability to meet specific sustainability targets within a set timeframe.

The Securities and Commodities Authority (SCA) in the UAE has established a comprehensive regulatory framework for green and sustainability-linked bonds and sukuk. This framework includes:

Use of Proceeds: The proceeds from green bonds must be allocated entirely to environmentally friendly projects. For sustainability-linked bonds, the proceeds are tied to the issuer’s sustainability performance targets.

Project Evaluation and Selection: Issuers must clearly communicate the environmental sustainability objectives of the projects financed by green bonds. They must also adopt methods to mitigate material risks and verify compliance with the International Capital Market Association (ICMA) principles.

Management of Proceeds: Issuers are required to manage the proceeds in a sub-account, separating them from other funds. They must also disclose the remaining balance of unallocated proceeds to investors.

Reporting and Disclosure: Issuers must provide regular reports on the use of proceeds, the projects financed, and their environmental impact. This includes semi-annual reports to the SCA and disclosures to investors.

Incentives: To encourage the issuance of green and sustainability-linked bonds, the SCA has extended fee exemptions for companies listing these bonds. This exemption applies to registration fees, which are calculated at a rate of 0.01% of the value of the issue, up to a maximum of AED 30,000. This initiative aims to promote sustainable investment and financing for environmentally friendly projects. The exemption was applied throughout 2023 and 2024, although the SCA is yet to extend this for the year 2025.

The UAE is in the process of stabilizing and establishing a policy framework to promote sustainable finance. The crucial governmental financial regulators such as the SCA, the Abu Dhabi Global Market (ADGM), the Dubai International Financial Centre (DIFC) have been driving this agenda to implement frameworks willing to promote green bonds and ESG-aligned investments.

Opportunities for Businesses

Green bonds offer opportunities for companies which go over and above just easy access to finance; they stand for the business commitment to sustainability. Companies that issue green bonds gain an access to Investors-Eyeing Sustainability, as investors around the world are increasingly placing a premium on companies with strong sustainability credentials. They also strengthen the corporate reputation, which makes the company attractive to various stakeholders and able to align with regulatory requirements in different jurisdictions.

In 2023, the UAE topped the regional green bond market with sales reaching $10.7 billion, accounting for 45% of the total MENA issuances. The year also saw a significant number of debut issuances from various entities, including DP World, Sharjah government, TAQA, Emirates NBD, Masdar, Mubadala, and others. Green sukuk issuances in the MENA region totalled approximately $6.5 billion, representing more than half of all global green sukuk.

Green and sustainability-linked bonds are pivotal in driving sustainable development and environmental conservation. The UAE’s regulatory framework and incentives have positioned it as a leader in the regional green bond market, fostering a robust environment for sustainable investment. These bonds not only support the country’s sustainability goals but also enhance its competitiveness on the global stage.

As investment opportunities in green finance continue to rise, it is paramount that companies and their legal advisors remain abreast of any developments within the regulations and the market. In doing so, by adhering to the principles of sustainable finance, businesses not only enable themselves to comply with regulations but also contribute to a greener and sustainable future.