ADGM Sustainable Finance Framework
What ADGM sustainable finance rules and guidance ask of Authorised Persons and green product issuers
The article sets out the FSRA role in ADGM, the instruments behind its sustainable finance framework and the standards it follows. It covers climate-related risk disclosure, voluntary designations for green products, climate-related financial risk management and capacity building, with a table of who each requirement reaches. It ends on penalties, costs and keeping up with rule changes.
Reviewed by Mohamed Noureldin, Founder, Managing Partner & Senior Legal Consultant
An issuer of a green bond or sukuk in Abu Dhabi Global Market (ADGM) that seeks an ADGM green designation must meet the detailed requirements of the FSRA Markets Rules. An Authorised Person must consider whether Climate-Related Financial Risk may be material to its business model and strategy. Each of these duties comes from the ADGM sustainable finance framework, but the entities each one applies to are not the same.
Oversight sits primarily with the FSRA
ADGM operates as an independent financial free zone in Abu Dhabi. It is governed by a distinct legal system based on English common law principles. Regulatory oversight is primarily exercised by the Financial Services Regulatory Authority (FSRA), which issues rules and guidance to secure compliance with international standards.
The core legal instruments include the relevant FSRA Rulebooks and the FSRA's Supplementary Guidance – Sustainable Finance Regulatory Framework.
International frameworks behind the rules
ADGM's sustainable finance agenda also reflects compliance with international frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD), the Principles for Responsible Investment (PRI) and the United Nations Sustainable Development Goals (SDGs).
Disclosure of climate-related financial risk
Under FSRA guidance, the reasonable steps an Authorised Person takes to manage material Climate-Related Financial Risk should include disclosure to stakeholders of that exposure and how it is managed.
Entities are required to establish internal governance mechanisms to monitor ESG performance and to ensure transparency for investors and stakeholders.
Green designations and third-party attestation
FSRA Rules govern the granting of designations for products including ADGM Green Funds, ADGM Green Portfolios, and ADGM green and sustainability-linked bonds and sukuks. The designations are voluntary.
Where third-party attestation is required for ADGM green funds and portfolios, the attestation provider must be independent. An ADGM Green Fund may assess its assets against an acceptable green taxonomy, such as the EU Green Taxonomy.
Climate risk in systems and controls, and stress tests
An Authorised Person in ADGM must consider, as part of its systems and controls for identifying and managing risks, whether Climate-Related Financial Risk may be material to its business model and strategy, its financial position or its ability to meet its regulatory obligations.
FSRA guidance states that an Authorised Person should develop climate risk models or conduct scenario analysis, including stress testing, where it is proportionate to do so.
Guidance, workshops and ESG competencies
The framework emphasises the importance of capacity building for market participants.
The FSRA collaborates with international organisations and industry bodies to provide guidance materials, workshops and certification programmes aimed at enhancing ESG competencies.
Which entities each requirement reaches
The table sets each requirement against the entities it applies to and the regulation or guidance it rests on.
| Requirement | Description | Applicable Entities | Reference Regulation/Guidance |
|---|---|---|---|
| Climate-Related Financial Risk disclosure | Disclosure to stakeholders of material exposure to Climate-Related Financial Risk and how it is managed | Authorised Persons | General Rulebook (GEN) |
| Climate-Related Financial Risk management | Consideration of Climate-Related Financial Risk in systems and controls for identifying and managing risks | Authorised Persons | General Rulebook (GEN) |
Penalties, costs and investor expectations
Compliance with ADGM sustainable finance rules mitigates regulatory risks, including potential penalties and reputational damage arising from ESG-related controversies. Institutions are also better positioned to manage transitional risks associated with the global shift towards sustainability, including regulatory changes, carbon pricing and evolving social norms.
Adherence to ADGM ESG standards enhances market reputation and investor confidence, and makes it easier to reach a growing pool of sustainability-conscious capital. The framework supports market participants in meeting global investor expectations, particularly from European and Asian markets. In those markets, ESG integration is rapidly becoming a prerequisite for capital allocation.
In operational terms, entities must invest in strengthening their governance frameworks, upgrading data collection and reporting systems, and embedding ESG considerations into core business strategies. The framework also encourages innovation in sustainable financial products and services, such as green sukuk and sustainability-linked derivatives.
Keeping pace with FSRA and international changes
Sustainable finance regulation is evolving globally. Participants must closely monitor updates to FSRA regulations and international ESG standards, and keep their practices continuously aligned with them. Proactive engagement with regulators and industry bodies is essential.
Our corporate governance advisory services offer practical legal support in this area.
References
- FSRA Supplementary Guidance – Sustainable Finance Regulatory Framework, ADGM, 2023.
- FSRA General Rulebook (GEN).
- Task Force on Climate-related Financial Disclosures (TCFD) Recommendations.
- Principles for Responsible Investment (PRI).
- United Nations Sustainable Development Goals (SDGs).
