SCA Issues Regulatory Framework for Green and Sustainability-Linked Bonds and Sukuk

The UAE Securities and Commodities Authority (“SCA”) has issued Resolution No. 20/Chairman of 2023 concerning the regulation of green and sustainability-linked bonds and sukuk (“Resolution”). This development closely follows the Master Plan for Sustainable Capital Markets of 2019 which sets out SCA’s strategy for supporting the national sustainability agenda of the United Arab Emirates and includes, amongst others, the development of a legal and regulatory framework covering green investable products. The two main green investment products regulated by the Resolution are (i) Green Bonds and Sukuk (“GBS”) and (ii) Sustainability-Linked Green Bonds and Sukuk’(“SLGBS”).

The Resolution aligns SCA’s regulation of GBS and SLGBS with capital market international practice with its content based on the Green Bond or Sustainability Linked-Bond Principles (“ICMA Principles”) of the International Capital Market Association (“ICMA”). Chapters 1 and 2 of the Resolution prescribe requirements that issuers and obligors of GBS and SLGBS must abide by in order to fulfil the ICMA Principles.

Alignment with ICMA Principles

Under the Resolution, GBS are defined as “bonds or sukuk whereby the entire proceeds of their subscription are completely used to finance a new project or refinance an existing project, wholly or partially, in environmentally friendly green projects in line with the main elements of green bonds and sukuk”.

SLGBS are defined as “having structural and/or financial characteristics linked to the future key performance indicators  of the issuer and the agreed sustainability objectives described in the issuance documents”.

The GBS and SLGBS definitions closely reflect those adopted by ICMA which are widely recognised by the international green finance community. The Resolution also reflects the key components for each debenture under the ICMA Principles, namely:

• for GBS, the (i) use of proceeds, (ii) process for project evaluation and selection; (iii) management of proceeds; and (iv) reporting (including disclosure and prospectus information requirements); and
• for SLGBS, the (i) selection of key performance indicators; (ii) calibration of sustainability performance targets: (iii) characteristics: (iv) reports; and (v) verification.

Nonetheless, the Resolution is not a verbatim implementation of the ICMA Principles as there are subtle differences between the two texts which must be considered in detail. For example, unlike the ICMA Principles, the Resolution makes express reference to ‘carbon removal projects’ in its list of green project objectives under Article 2, but does not expressly refer to clean transportation projects.

Moreover, as the Resolution and the ICMA Principles have a different purpose (the former establishing the regulatory framework for the issuance of BGS and SLGBS and the latter setting out principles for the sector), the Resolution adopts a more practical approach by setting specific obligations to be complied with by issuers and obligors, such as minimum information to be included in the prospectus.

Comparison with DIFC and ADGM Frameworks

Similarly to SCA and other authorities (such as the Central Bank of the UAE, the Abu Dhabi Exchange, Dubai Financial Market and Nasdaq Dubai), the DIFC Dubai Financial Services Authority and the ADGM Financial Services Regulatory Authority (“FSRA”) have endorsed the Guiding Principles on Sustainable Finance in the UAE. With the issuance of the Resolution, SCA has taken the significant step of establishing concrete requirements for the issuance of GBS and SLBS.

It is expected that the ADGM will soon follow suit with the enactment of its framework on sustainable finance which will regulate the designation of GBS and SLGBS. As we covered in our law update article earlier this year, the ADGM proposed regulatory framework will be less focused on ICMA as issuers will have the flexibility to have their GBS or SLGBS conform with the ICMA Principles or, alternatively, an equivalent regime such as the EU Green Bond Standard.

How can we help?

The Resolution features amongst the UAE’s series of regulatory initiatives to promote sustainable finance solutions and increase investor confidence in green and sustainability-linked projects in this steadily expanding market.

At Al Tamimi & Company we work with SCA and are well equipped to advise issuers and investors on the issuance of green and sustainability-linked bonds and sukuk.

This alert was prepared by Marianna Margaritidou.