Abu Dhabi Financial Services Regulatory Authority CEO Richard Teng says companies would benefit from disclosing environmental, social and governance standards
Abu Dhabi Financial Services Regulatory Authority (FSRA) plans to introduce standards of financial disclosures for Environmental, Social and Governance (ESG) criteria for relevant entities at Abu Dhabi Global Market (ADGM), the UAE capital’s financial center.
The chief executive of the authority said that ADGM is working for the adoption of a taxonomy, which is a standardised set of classifications, in its regulatory framework.
“On top of that, we are also working on ESG disclosure, and that is where we are pushing on the voluntary disclosure for ADGM entities,” Richard Teng, CEO of FSRA told Zawya in an interview on the sidelines of Abu Dhabi Sustainable Finance Forum, which took place in the capital last week.
“If you look at the ESG space globally, the assets under management have grown exponentially. Currently, about $23 trillion are invested in assets with ESG features, and that is set to grow by at least 10 percent per year,” he said.
“So for a lot of those companies looking to raise funds, both disclosure, as well as compliance with the necessary standards, will do them well, since investors are looking at these particular set of facts,” he added.
In September last year, the world’s largest asset manager, BlackRock, partnered with Thomson Reuters to launch an exchange traded fund (ETF) with an ESG focus in developed and emerging markets, in a sign of the growing demand for ESG-related investments.
A McKinsey & Co study published in late 2017 said that ESG investing was no longer a niche market segment as sustainable financing has gone mainstream.
“More than one-quarter of assets under management globally are now being invested according to the premise that environmental, social, and governance (ESG) factors can materially affect a company’s performance and market value.” the study said.
The study also noted that sustainable investing techniques have advanced with less emphasis on ethical concerns and a higher focus on maximising risk-adjusted returns.
The standards of ESG allow investors to screen potential investments, considering the impact of a company’s activities on the environment, the community and its governance practices and blocking investments in entities whose policies are deemed to be harmful. The aim is that standards should help investors avoid companies that are at risk of ESG-related losses, similar to the emissions scandal that plagued automotive manufacturer Volkswagen, or the oil spill by British Petroleum in the Gulf of Mexico in 2010 that wiped off billions of the firm’s stock market value.
A Reuters report published in October last year, citing a ‘US Sustainable, Responsible and Impact Investing Trends’ report published by the Forum for Sustainable and Responsible Investment, said that ESG investment is now being driven primarily by investor ‘self-interest’.
“Money managers are responding to client demand, as well as seeking to improve returns, minimize risk and fulfill their fiduciary duty,” the report said.
FSRA’s Teng said that its next line of work in sustainable finance requires four modern pillars.
“The first pillar is working to integrate sustainable considerations into our system. That part requires us to work very closely with local stakeholders from regulatory agencies, ministries, to standardise a set of classifications of what a sustainable investment is, which will allow for the issuance of products,” he told Zawya.
The second pillar which is one of collaboration, focuses not only at the local front but international one as well.
“At the global front, we have started working with important stakeholders, organisations and like-minded regulators to push the green finance agenda forward,’ Teng said.
The third pillar is raising awareness, knowledge and events to share new ideas in this field.
“The fourth pillar is creating a vibrant, dynamic ecosystem to support sustainable finance to bring about better capital raising, capital deployment and investments,” he said.
“So it requires us to really bring about a marketplace where you have investors in this space issuing blue bonds, green bonds, green loans etc., with those who are seeking finance,” he added.
According to the World Bank, a ‘blue bond’ is a debt instrument designed to raise capital from investors specifically for financing marine and ocean projects with a positive impact on the environment. The recently-coined term stems from the more familiar ‘green bond’ concept of debt instruments aimed at financing environmentally-friendly projects.
Globally, the green bonds market has been growing rapidly over the past few years. Green bond issuance was set to reach between$175 billion to $200 billion in 2018, according to Moody’s Investors Service, with a growth spurt witnessed in the first half of the year. The asset class recorded an 85 percent growth rate between 2016-17, but growth was expected to moderate in 2018 amid a slowdown in the overall bond market, with increasing interest rates.
As to where Abu Dhabi stands with regards to sustainable finance, Teng notes that a broader level, the UAE has been fostering sustainable development in general.
“If you look at the U.N.17 sustainable development goals, they focus on advancing the country’s economy, social development and inclusion, better healthcare, education, and environmental protection. In each of these areas, UAE has been working very early on,” he said.
In a further alignment with sustainable development goals of the U.N., the UAE capital financial market, Abu Dhabi Securities Exchange (ADX), announced during Abu Dhabi Sustainability Week that it joined United Nations Sustainable Stock Exchanges (SSE), a learning platform that encourages sustainable investment, and allows exchanges to improve environmental and corporate governance. SSE focuses its activities and global partnerships to be in harmony with sustainable development goals.
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