Is the finance industry going to help the world transition away from fossil fuels?
For the first time, negotiators at the 2023 UN climate summit that was held in Dubai, agreed to transition away from fossil fuels. Now, nations and finance institutions must find a way to meet the goals set out at COP28.
Christian Kunz
Published: 21/12/2023
5 min read
Nations at the COP28 climate summit in Dubai agreed on a roadmap for “transitioning away from fossil fuels”, which marked a first for a UN climate conference.
COP28 negotiators also agreed on commitments to triple renewables capacity, double energy efficiency by 2030, and made progress on climate finance.
“Many vulnerable countries are drowning in debt and at risk of drowning in rising seas. It is time for a surge in finance, including for adaptation, loss and damage and reform of the international financial architecture,” UN chief António Guterres said during the conference.
Across the world, and in Dubai where the summit was held, finance organisations are exploring ways they can help fund the transition away from fossil fuels.
Sustainable finance in the UAE
“Just as there is a growing awareness amongst consumers to consider their carbon footprint, fair production, and biodegradable qualities of products while making their purchasing decisions, investors are also becoming more conscious of backing companies that align with their social and environmental values, rather than just economic gain – now more commonly known as the triple bottom line,” according to a report titled Unlocking the Potential of ESG Innovation in the UAE and Across the World.
Ahead of COP28, green bond sales surged in the UAE, with issuance in the Gulf states reaching $14.6 billion year-to-date, Bloomberg reported citing their own data. During COP28, the UAE announced initiatives to make sure it stays on that path.
Sustainable finance in DIFC
In Dubai, Dubai International Financial Centre (DIFC) is home to Nasdaq Dubai, which hosts the largest ESG Sharia-compliant sukuk market in the world, accounting for about 64% of the world’s dollar-denominated sustainable sukuk. A sukuk is a Sharia compliant bond-like instrument, and Nasdaq Dubai is also responsible for 46% of the world’s sustainable sukuk issued in all currencies.
During COP28, DIFC announced its COP28 legacy programme for the industry that will demonstrate the financial centre’s commitment to remain the region’s champion for climate change, sustainability and transition finance. DIFC’s Sustainable Finance Catalyst programme will create the first global hub for sustainable finance knowledge in the Middle East, Africa and South Asia region, triple sustainable and Islamic financing raised from Dubai to $100bn and upskill 1mn sustainability professionals from Dubai. By 2030, this ambition will allow DIFC and its clients to collectively increase its GDP contribution to the economy.
As the commercial hub of the UAE, Dubai has a key role to play in transitioning the economy away from fossil fuels. Financial institutions in DIFC have a collective responsibility to move the economy towards net zero through adopting policies of their own and providing funding to help other businesses move the needle towards zero emissions.
In 2019, DIFC created the Dubai Sustainable Finance Working Group to facilitate the emirate’s transition to becoming the most sustainable financial hub in the Middle East, Africa and South Asia. Back then, it was a first-of-its-kind initiative and several other activities have followed to stimulate action within the finance industry.
DIFC has also rolled out a Sustainable Finance Framework, which S&P Global recently examined and found to be in line with five distinct international standards.
The framework sets out fundraising principles for investments in its environmental and social projects that enable sustainable business operations. As a leading global financial centre, DIFC’s Sustainable Finance Framework demonstrates action, and further aligns with the United Nations Sustainable Development Goals, which require consistent finance flows to enable sustainable development.
Regulators in the UAE, including the federal government and the Dubai Financial Services Authority (DFSA), are working closely together to create a comprehensive and pragmatic regulatory framework that highlights the UAE’s approach to sustainable finance, according to a briefing paper from UAE law firm Hadef and Partners.
The need for sustainable finance
Sustainable finance is designed to support economic growth while reducing pressures on the environment to help reach climate objectives. As of 2021, the United Nations Development Programme identified a need of a combined $5.8 trillion in financing by 2030 for 78 countries to meet their set climate goals. That doesn’t include investment that developed countries must make to reduce their carbon emissions or costs incurred to address the impact of extreme weather events. In 2021 and 2022, global climate finance approached $1.3 trillion annually.
“DIFC firmly believes that the industry must provide more finance to tackle climate issues and sustainability more broadly. Taking action to support the climate emergency mitigates risks for organisations and provides opportunities,” the DIFC Governor Essa Kazim wrote in an open letter to the global financial services industry.
He outlines five concrete actions DIFC is taking towards increasing sustainable finance including: mitigating risks, capturing opportunities, future proofing organisations, increasing revenue generation, and enhancing brand reputation.
“At DIFC, we will continue to lead by example. Earlier this year, we became the first financial centre in the region to announce its green finance framework. Other initiatives underway include our decarbonisation strategy, approach to sustainable procurement, and baselining ESG measures for disclosure and governance,” said Kazim.