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 ESG label.  

As is customary in the Middle Eastern financial centres, inspiration for new pieces of legislation is taken from the legislative environment in the main financial centres 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 European Union’s Sustainable Finance Disclosure Regime (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 recognise the EU Taxonomy Regulation as well as the EU Climate Benchmark Regulation, 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 that applicable securities and other financial services products must adhere to, 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”, i.e. 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” 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 standardised 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 paper, 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.   

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Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable investment.

Regulation (EU) 2019/2089 on EU climate transition benchmarks, EU Paris-aligned benchmarks and sustainability related disclosures for benchmarks.

The ASEAN Sustainable Finance Taxonomy and Common Principles for Climate Mitigation Finance Tracking are also considered as acceptable taxonomies

Discussion Paper N0. 1 of 2024 – Enhancing the Sustainable Finance Regulatory Framework for ADGM