The role of standards and regulations in green investments

Transparency and accountability in financial decisions lead to ethical and responsible investment practices

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Global initiatives such as the Paris Agreement underscore the urgency of sustainable practices in combatting climate change. In the Middle East, many countries have embraced this imperative with policies that are making substantial strides towards sustainability.

The UAE cabinet, for instance, issued 60 policies, initiatives and decisions on sustainability and climate change in 2023. As well as hosting the Cop28 global climate summit at the end of last year, the nation has established the Net Zero 2050 Charter and National Framework for Sustainable Development.

Similarly, Qatar launched a national climate change action plan in 2021 aimed at achieving a 25% reduction in greenhouse gas emissions by 2030. Saudi Arabia has also announced its goal to increase the contribution of renewable energy to its energy mix by 50% by 2030.

As countries set binding emission-cutting commitments, companies must prioritise routine reporting and active management.

Delaying action is not an option, Hussam Abdel Al, senior director of origination and head of sustainable finance, investment banking at Mashreq, told a forum on sustainable asset management, hosted in Dubai by Mashreq Al Islami and MEED.

“Immediate efforts to reduce greenhouse gases are essential to achieve net-zero carbon emissions by 2050, necessitating proactive management and ongoing accountability well before the deadline,” he said.

Addressing the need for standardised frameworks, the forum highlighted the importance of regulations in combatting greenwashing and fostering transparency and accountability in sustainable practices.

Sustainability frameworks

Sustainable finance involves directing capital towards projects that yield environmental and social benefits. Yet without established guidelines, it will be challenging for consumers, investors and stakeholders to differentiate genuine sustainability initiatives from marketing tactics.

The risk of misallocation or unintended use of funds also exists, potentially undermining the intended positive impact.

To address these concerns, companies must define sustainable finance frameworks and adopt a structured approach to utilise funds dedicated to green initiatives.

The emphasis on defining these processes resonates with the broader movement towards corporate social responsibility and sustainable business practices.

“The goal is to cultivate long-term sustainability practices rather than superficial initiatives,” said Katarina Hasbani, director of strategy and advisory at AESG.

Hasbani stressed the importance of integrating principles into core operations, adding: “Without clear frameworks, companies may struggle to demonstrate accountability, transparency and adherence to ethical standards.”

This would not only affect their credibility, but also hinder the overall progress of sustainable finance initiatives.

Established standards, methodologies and data validation procedures can guide collaborative efforts in establishing a strategic sustainability framework, Hasbani explained.

Internationally recognised sustainability frameworks, such as the Global Reporting Initiative (GRI) and the Task Force on Climate- Related Financial Disclosures (TCFD), play a crucial role in helping companies achieve ambitious targets and report on performance.

The GRI helps firms understand and report on their impact on the economy, environment and people in a comparable and credible way.

Similarly, the TCFD assists organisations in disclosing climate-related financial risks and opportunities in line with its recommendations.

Hasbani advised proactively adopting leading practices to help gain competitive advantages ahead of tighter policies.

“By increasing the credibility of their sustainability efforts, corporations can also facilitate better evaluation by financiers,” Abdel Al added.

Sustainability-linked finance, according to Abdel Al, plays a pivotal role in assessing the credentials of a project and determining its eligibility under established frameworks.

“As global and regional stakeholders increasingly scrutinise sustainability performance, they are pressuring governments and industries to strengthen policies driving action on climate change and sustainable development goals (SDGs),” he added.

In response to these pressures, regulatory bodies in the UAE and abroad are likely to mandate reporting against frameworks for high-emission industries, starting with carbon emissions data collection.

These market and policy trends imply that sustainability disclosure aligned with international standards will become a regulatory and competitive necessity across high-impact industries and supply chains within the next decade.

Regulatory requirements

Regulations increasingly require businesses to accurately represent their commitment to sustainability, preventing misleading practices and fostering transparency in environmental messaging.

Several countries have already implemented regulations to ensure financial institutions and asset managers integrate sustainability considerations into their investment decisions.

For example, the European Union’s Sustainable Finance Disclosure Regulation (SFDR) requires financial firms to disclose how they integrate environmental and social factors into their investment processes. This regulation promotes transparency and empowers investors to make informed decisions based on a company’s sustainability performance.

The Middle East is making similar progress in establishing sustainable finance regulations.

The UAE Sustainable Finance Working Group, which collaborates with local financial institutions to develop sustainable finance guidelines, is a good example.

Meanwhile, the Abu Dhabi Global Market’s Financial Services Regulatory Authority has implemented its Sustainable Finance Agenda to encourage the incorporation of environmental, social and governance (ESG) factors through disclosure against international standards.

Islamic financial institutions, such as Kuwait Finance House, have also adopted banking principles that align with sustainable finance practices, showcasing their commitment to responsible asset management.

While voluntary actions have merit, clear regulations are needed to mandate transparency and drive meaningful change at scale, noted Mashreq’s Abdel Al.

Acknowledging the positive strides taken by the UAE government, he said: “The government’s recognition of the necessity for clear regulations is evident in its exploration of ways to establish carbon disclosure requirements for key economic activities, including buildings, transportation, manufacturing and utilities.”

This is demonstrated through initiatives such as the creation of the Emirates Green Building Council that promote sustainable practices in construction.

Additionally, the introduction of the UAE National Climate Change Plan 2017-50 reflects the government’s effort to regulate carbon emissions across different sectors.

As companies navigate the complexities of sustainable and responsible business operations, awareness and consideration of these evolving standards have become integral to strategic decision-making.

Green risks

Greenwashing poses a significant barrier to addressing the climate crisis. It occurs when companies exaggerate or falsely advertise their commitment to eco-friendly practices, aiming to appear more environmentally responsible than they genuinely are.

A coordinated effort is required to overcome this challenge.

“Increased transparency through standardised disclosure practices and independent validations can help build credibility,” said Hasbani. “Well-defined policies must, therefore, be implemented, establishing guidelines for substantiating sustainability commitments.”

This approach will help prevent superficial claims and foster a more consistent evaluation of sustainable investment activities.

It also supports comparative benchmarking that can drive continuous improvement. Such harmonised oversight is integral to guiding capital allocation toward authentic solutions.

While ESG disclosures can benefit companies, they also enable greater scrutiny, Abdel Al noted.

“Without sufficiently ambitious targets and performance tracking, even well-meaning efforts risk allegations of superficial ‘greenwashing’ that inflict more damage to a brand than benefit them,” he said.

Hasbani added that including meaningful key performance indicators and framework targets will help demonstrate progress. She suggested a balanced approach that prioritises steady yet meaningful improvement to avoid allegations of shallow reforms.

Strategic goals

Achieving sustainability ratings is a commendable goal for any organisation, but approaching this with a strategic mindset is essential.

Rather than targeting unrealistic key performance indicators, companies should focus on small, incremental steps towards sustainability, prioritising achievable milestones within reasonable timeframes, Hasbani explained.

“Reporting efforts should start with optimising the more significant aspects of a company’s operations, such as energy use, water management, waste reduction, pollution impacts, labour practices and diversity.

“Organisations must also stay informed as policies evolve and adjust practices to comply with the updated reporting requirements and performance standards. The aim should be establishing an ongoing evaluation and improvement process,” Hasbani added.

As climate change impacts intensify, the Middle East is following global trends towards tighter sustainability policies and alignment with established frameworks to accelerate progress on emission reductions and UN SDGs.

Speakers at the Mashreq Al Islami Sustainable Asset Management forum noted that mandatory reporting and performance standards are on the horizon.

“We believe it is inevitable that reporting requirements will become mandatory over the next few years,” Abdel Al said, indicating that carbon disclosure will likely become compulsory for high-emission industries in the UAE within the next few years.

Hasbani added that sustainability reporting expectations are already in place for publicly traded companies through stock exchanges, each with its own set of defined criteria.

“However, the trajectory of the regulatory landscape indicates a broader and more robust framework is taking shape. This evolution is not limited to disclosure expectations; it extends to developing comprehensive policies and legislative requirements.”

Cop28 has placed regional sustainability efforts under an international microscope.

Hasbani added that hosting the climate forum will expedite the strengthening of regulatory frameworks.

“Moving forward, the onus is on governing bodies to adopt a more rigorous approach in mandating transparent reporting and quantifiable achievement of emissions reduction targets across all industries,” she added. 

27 February, 2024 | .By Sarah Rizvi