UAE's focus on sustainable investments and the consequences for its regulatory environment

Despite that apparent contradiction, the event highlighted the UAE’s consciously displayed commitment to investing in sustainability and increasing associated regulations. And, while the country continues to invest in fossil fuels in the immediate term, our assessment is that the Emirates’ climate-friendly commitments in public will steadily translate into increasingly serious green policies and regulations in practice. As that happens, companies will have to adapt their business practices to remain compliant and continue operating in the UAE.

A serious focus on sustainable investments despite oil and gas supremacy (for now)  

The UAE has made significant commitments to combat climate change, making sustainability part of its national strategy. It has repeatedly made pledges to be a leader in the climate transition, signing the Paris Climate Accords in 2016 and pledging in 2021 to achieve net zero carbon emission by 2050. In line with these commitments, the country has pushed state-owned companies to make their own environmentally-friendly commitments.

In few areas have these commitments been more visible than the financial sector as UAE companies, primarily state-owned entities, issued more green debt instruments in 2023 than companies in any other country in the Middle East. Emirati firms issued USD 7.95 billion in green bonds and sukuks, with major debut issuers including state-owned powerhouses of the UAE economy.

Even so, the country has been the target of numerous allegations of contradictions between this public strategy and the investment choices of its government and the companies it controls. For instance, while one of its main oil producing companies has pledged USD 15 billion to decarbonise its activities by 2030, it has also ramped up plans to expand its oil production. Similarly, the government has yet to announce rigid nationwide measures to reduce the carbon footprint of UAE households and companies.

Nonetheless, all indications are that the UAE will further increase its financial commitments to sustainability even as it continues to invest in oil and gas in the short to medium term. To achieve its public pledges, it is likely that the country will eventually reduce its reliance on fossil fuels too. But, well before that point, it will continue encouraging companies, both state-owned and privately owned, to pursue environmentally friendly investments.

Increasingly complex regulatory environment…

One way in which we predict the UAE will seek to strengthen its sustainability commitments is by increasing regulation, including by requiring companies to conduct sustainability-focused due diligence on their counterparties and supply chains. It has already applied such measures in other areas, for example to combat money laundering and address failures that caused it to be on the Financial Action Task Force’s (FATF) ‘Grey List’ until 23 February 2024. While the UAE has not yet introduced similar laws to enforce its green finance agenda, we anticipate that it will increasingly look to draw on the existing legislation’s provisions to achieve those ends. 

For context, Law No. 20 of 2018, known as the AML Law, forms the bedrock of the UAE’s framework on combatting money laundering and terrorism financing, and brought long-awaited strength to the Emirates’ efforts to combat financial crime from a regulatory perspective. It outlined some fundamental measures required by the FATF such as the definition of money launderers, the mechanisms of Suspicious Activity Reports, and the supervision of Designated Non-Financial Businesses and Professions (DFNBPs). The AML Law imposed new requirements on financial institutions and DFNBPs to establish comprehensive AML/CTF programs. Among others, these programs must include strict customer due diligence and sanctions screening systems.

While these measures and subsequent amendments brought the UAE closer to international AML/CFT standards, the country has not implemented similar stringent regulations to sustainable finance. Certainly, the country has not, as of yet, conceived a bill as rigorous as the German Supply Chain Law, which took effect in January 2023. The UAE is widely thought to be unlikely to pass similar legislation, given its perceived hesitancy to introduce some of that law’s clauses on labour rights and other human rights.

This being said, the UAE’s Due Diligence Regulations for Responsible Sourcing of Gold is a strong example of the UAE transposing the AML Law to a specific sector of its economy. The regulations, passed in August 2022, set several robust requirements with regard to gold trading in the country. It notably obliges any traders of precious metals and stone to conduct due diligence on their supply chains. These requirements include the identification of any criminal practices (such as bribery, corruption, or money laundering), of ties to public officials or governments, of presence on sanctions lists and watchlists, and the independent verification of ultimate beneficial ownership. We note that the gold trade supply chain regulations do explicitly mention that traders should ensure their supply chains are free of human rights abuses, which is less common in UAE laws pertaining to third party due diligence.

…likely to be applied to sustainability agenda

The UAE’s intent to promote environmentally friendly investments and its more stringent regulations relating to third-party due diligence are anticipated to lead to similar regulations focusing on sustainability. As investments in sustainability increase, the country could transpose the AML Law to sustainability as it did with the gold trade, or re-purpose some of the due diligence requirements for climate-friendly investments and operations. In fact, it will be difficult for the country to continue fostering a green economy – and image – in the absence of such regulations, without incurring more allegations of contradictory policies and practices when it comes to sustainability.

If, and when, the UAE does implement third-party due diligence relating to sustainability, a correspondingly robust enforcement mechanism is to be expected. Since 2018, fines issued by Emirati financial regulatory authorities for violations of the AML Law have increased in frequency and in monetary value. The Ministry of Economy, for instance, issued fines or suspended over 130 DNFBPs in Q1 2023 for non-compliance with the AML Law and associated regulations, including the gold supply chain regulation. More recently, the Dubai Financial Services Authority (DFSA) fined a Swiss-headquartered wealth management company over USD 3 million for AML failings, including customer due diligence.

Companies operating in the UAE or seeking to do so will need to adapt to these new regulations at the risk of coming under the scrutiny of the country’s authorities. The UAE’s strategy to be a leader in the fight against climate change and its subsequent push for a greener economy will require companies to enhance the scope of their due diligence practices to include their supply chains. They will have to do so either by committing more resources to their internal compliance departments or by contracting expert business intelligence consultancies with a proven track record in the field of sustainability.

To discuss this article or any other risk and compliance, integrity due diligence, or investigative dispute, please get in touch with one of our experts at info@riskadvisory.com.

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