The Securities and Commodities Authority (SCA) of the UAE has issued a decision on the regulation of green and sustainability-linked Sukuk and bonds. The mandates specified that sustainable Sukuk and bonds must comply with International Capital Markets Association (ICMA) principles.
According to Dr Maryam Al-Suwaidi, CEO of the SCA, the initiative is one of the government’s 2022 climate transformation mandates and represents a qualitative approach to sustainability.
While we have seen sustainable Sukuk issuances coming out of the jurisdiction, with Dubai Islamic Bank issuing two sustainable dollar Sukuk facilities worth US$1.75 billion in the past few months, the lack of standardization in the space has been an inhibitor.
According to the UAE Ministry of Climate Change and Environment, the lack of standardization of identifying eligible green projects and lack of sustainability metrics have been major challenges in the region.
“From a supply perspective, there may be issuers that already have portfolios of suitable green projects but are unaware that they can seek financing by accessing the green fixed income markets.
When faced with potential reputational risks if their interpretation of what constitutes as ‘green’ is challenged, companies, financial institutions and public institutions may shy away from an inaugural issuance,” read the ministry’s 2022 situation analysis report on the UAE green Sukuk and bond landscape.
As per the new mandate, issuers must clearly disclose their criteria and methodology for identifying eligible projects. They are also required to disclose their exclusion criteria as well as their risk management approach.
Further as part of the SCA’s standardization efforts, issuers are required to obtain a second opinion report to verify that its sustainable instrument complies with ICMA principles.
They are also required to ensure that their sustainable Sukuk and bond frameworks are accessible to investors and that the sustainable aspects and alignment of their instruments are clearly stated in their prospectus.
In the management of proceeds, issuers must create a separate bank account for proceeds to be channeled toward eligible projects. Unused proceeds earmarked to sustainable projects are also required to be disclosed to investors.
According to the authority, the mandate to disclose the use and management of the subscription proceeds will facilitate the assessment of the environmental impact of the sustainable investments.