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The Securities and Commodities Authority (SCA) issued a decision regulating green and sustainability-linked bonds and sukuk. The decision, issued by board chairman H.E. Mohammed Ali Al Shorafa, indicated that green bonds and sukuk are those whose proceeds are used entirely to finance or refinance, in part or in full, new or existing green and environmentally friendly projects. Sustainability-linked bonds and sukuk, on the other hand, are those that have financial or structural characteristics tied to the issuer’s key performance indicators (KPIs) and predefined sustainability objectives that are outlined in the issuance documentation.
“Issuing green bonds and sukuk is one of the transformational projects for which performance agreements were signed by federal government entities in 2022 in the presence of H.H. Sheikh Mohammed bin Rashid Al Maktoum, Vice President, Prime Minister, and Ruler of Dubai,” said H.E. Dr. Maryam Al Suwaidi, SCA’s CEO. “These performance agreements represent forward-looking quality projects that will enhance the country’s competitiveness, and the transformational projects will greatly impact all sectors over short periods and ensure the implementation of the new government action model of the UAE government.”
She added that this transformational project underpins the UAE government’s efforts to accelerate the achievement of the goal to make the economy the most dynamic and competitive as part of the ‘We The UAE 2023’ vision, which calls for redoubled efforts to help achieve government aspirations and positively affect the society and the different sectors of the economy. She explained that this project is key in supporting the efforts to make the UAE the new global economic hub for the next ten years.
According to the decision, in the case of “green” bonds or sukuk, the issuer must allocate the proceeds entirely towards green and environmentally friendly projects, including those revolving around climate change adaptation, the transition to a circular economy, pollution prevention or mitigation, terrestrial and aquatic biodiversity conservation, energy efficiency, the environmentally sustainable management of living natural resources, and land use.
Investor communication
The decision indicated that issuers must communicate with investors clearly and provide them with information on the environmental sustainability objectives of the eligible green projects, the related eligibility and exclusion criteria, and any other criteria applied to identify and manage risks associated with the projects. It said that green bonds or sukuk should meet the principles developed by the International Capital Market Association (ICMA) by having a written acknowledgement issued from the issuer’s board of directors. It is also possible to engage the services of an independent, objective party with experience in environmental sustainability for this purpose, provided that it applies the ICMA’s verification mechanisms.
As to the management of proceeds, the decision said that the net proceeds should be credited to a sub-account where proceeds from green projects are separated from those from other projects. This should be done in an appropriate manner through a formal internal process linked to the issuer’s investment operations for green projects and through internal guidelines for the verification of the use of proceeds and the method of allocation of amounts to green and environmentally friendly projects.
Disclosure of the remaining balance
The decision said that the remaining balance of unallocated proceeds must be disclosed to investors as well as the use and management of proceeds to facilitate the tracking of funds used in green and sustainable projects, thus enhancing the ability to evaluate the environmental impact of these projects. According to the decision, the green bonds or sukuk framework document should be developed in a manner that makes it easily accessible to investors and should explain that these bonds or sukuk are aligned with the key requirements contained in their prospectus.
Complying with the ICMA principles
The decision stressed that the issuer must comply with the ICMA principles in the case of sustainability-linked bonds or sukuk and must identify the financial and structural features and characteristics that make them sustainability-linked. These characteristics can be changed in the future depending on whether the KPIs selected have led to the achievement of the sustainability-related objectives.
The decision said that the calibration of sustainability performance targets should: express the level of ambition the issuer is ready to commit to, be benchmarked against sector standards, be consistent with the issuer’s overall sustainability strategy, and be time-bound.
Green bond classification criteria
The decision, which enters into force on the date of its issuance, indicated that once green or sustainability-linked bonds or sukuk meet the conditions stipulated in it, they can be classified as green or sustainability-linked. The issuer may submit an application to the SCA to have the issued bonds or sukuk classified as green or sustainability-linked if the conditions are satisfied. The issuer must have its board of directors or an independent party with experience in environmental sustainability issue a certificate if the bonds or sukuk no longer meet the classification criteria and must immediately notify the SCA and the listing market
