Recent Developments Concerning ClimateRelated Financial Risks in UAE

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The United Arab Emirates (UAE) has continued to progress in recent times. Moreover, it has played an active role in strengthening its commitment to climate action. Since the ratification of the Paris Agreement in 2016, UAE is playing an active part.

In recent years, the UAE has launched domestic acts and initiatives. They have introduced the UAE Green Agenda 2015-2030, the National Climate Change Plan of the UAE 2017-2050, and the UAE Net Zero by 2050 Strategic Initiative.

The most recent and latest move by the UAE is the launch of a consultation on “Principles for the Effective Management of Climate-Related Financial Risks”. It was introduced by the UAE Sustainable Finance Working Group (SFWG) eight months before it hosted COP28. Advocates and Legal Consultants in Dubai, are the authorities to understand and grabbing the legal knowledge.

The SFWG was established in 2019. It also includes the Ministry of Finance, the Ministry of Economy, the Ministry of Climate Change and Environment, the Office of the UAE’s Special Envoy for Climate Change, the Central Bank of the UAE, the Securities and Commodities Authority, the Financial Services Regulatory Authority of ADGM and the DFSA, the Abu Dhabi Securities Exchange, the Dubai Financial Market, and Nasdaq Dubai.

SFWG is introduced to cater to the needs of financial firms. Moreover, the Principles are specifically drafted to cater to a wide spectrum of financial firms. They also cater to the needs of the banking and insurance sector. It remains at the discretion of each financial service regulator to determine the financial firms in scope and how to apply the Principles to them.

This will enable financial firms to identify and take strategic steps. The steps needed to develop and deploy new and more sustainable approaches and technologies. This will ultimately strengthen business models as a result. Moreover, it will improve both business and sustainability metrics.

Most importantly, enhanced risk management is critical for financial firms. This will help in identifying and managing the risks better. Furthermore, it will enable them to demonstrate this to their clients and supervisors.

The Principles have been developed in consideration of several international standards. They are expected to implement climate risk management.

The financial industry has a crucial role to play in addressing climate change. As climate-related risks and opportunities increasingly impact financial institutions. It is equally essential that they take proactive measures to identify, assess, and manage the risks involved.

In this regard, the International Organization of Securities Commissions (IOSCO) has recently released a set of draft principles for the management of climate-related financial risks in the financial sector.

Principles Designed:

These principles are designed to help financial institutions identify, assess, and manage climate-related financial risks and opportunities. They are intended to be a guide for financial institutions to integrate climate considerations into their overall risk management frameworks and business strategies.

The IOSCO principles are structured around seven key principles, each of which addresses a critical aspect of climate-related financial risk management.

The first principle emphasizes the importance of leadership from the top of the organization in driving the integration of climate considerations into the business strategy. Boards and senior management of financial institutions are encouraged to consider material climate-related financial risks while establishing the organization’s overall business strategy.

The first principle is “Oversight and responsibility of climate-related financial risk exposures.” This requires the board and senior management of financial firms to have an appropriate understanding of the organization’s climate-related financial risk exposures. They should also know their potential impact to facilitate effective oversight.

The second principle highlights the need for a clear assignment of climate-related financial risk management responsibilities within the organization. The board is expected to assign these responsibilities throughout the organization, ensuring that all relevant stakeholders understand their roles and responsibilities.

The third principle focuses on the incorporation of climate-related financial risks into the organization’s risk management framework. Boards and senior management are expected to oversee the development and implementation of processes. They identify, assess, measure, mitigate, monitor, and report on climate-related financial risk exposures.

The fourth principle emphasizes the importance of monitoring and reporting on climate-related financial risks. Financial institutions are expected to have internal reporting systems capable of monitoring material climate-related financial risks. They also produce relevant, accurate, and timely information to inform effective board and senior management decision-making.

The fifth principle highlights the need for the incorporation of climate-related financial risks into capital and liquidity adequacy processes. Financial institutions are expected to incorporate material climate-related financial risks in their internal capital. It also plays its part in liquidity adequacy assessment processes.

The sixth principle focuses on scenario analysis of climate-related financial risks. Financial institutions are encouraged to develop and implement climate-related scenario analysis frameworks. This may include stress testing, in a manner commensurate to their size, complexity, risk profile, and nature of activities.

Finally, the seventh principle highlights the importance of engaging with stakeholders on climate-related financial risks. Financial institutions are encouraged to engage with stakeholders, including investors, clients, and regulators, on climate-related financial risks and opportunities.

Overall, the IOSCO principles provide a framework for financial institutions to integrate climate considerations into their overall risk management frameworks and business strategies. The principles are designed to be flexible, scalable, and adaptable to the diverse needs of financial institutions.

Financial institutions are encouraged to review the IOSCO principles and provide feedback to IOSCO on how they can be improved and enhanced. Stakeholders have until May 1 to comment on the draft Principles. A final version of the principles is expected to be released during the second half of 2023.

In conclusion, the integration of climate considerations into the risk management frameworks and business strategies of financial institutions is essential. It is vital to effectively manage climate-related financial risks and opportunities.

The IOSCO principles provide a valuable guide for financial institutions to achieve this objective. Therefore, financial institutions must take proactive measures to integrate these principles into their operations.