How do you define “transition finance” internally?
First Abu Dhabi Bank (“FAB”)’s approach to Transition Financing is aligned with our longterm net-zero commitments to position lending and investment portfolios with net-zero emissions by 2050. For projects and activities to have a ‘transition’ label applied, the net proceeds of the transaction should be used to fund or refinance projects and activities that fall within the scope of qualifying categories stated in our Sustainable Finance Framework. The qualifying categories for transition finance are in alignment with the EU Taxonomy, ICMA Principles and the CBI Transition Finance White Paper.
In addition to these requirements, the activities should be aligned with the principles of ‘Do No Significant Harm’ (DNSH) and we require the entity or client to have developed, or be in the process of developing, a credible climate transition strategy that is established by climate science in alignment with net-zero emissions by 2050.
Currently, our framework is exclusively for project/activity-based financing transactions. FAB will seek to expand the framework in the future to assess the eligibility of transition finance given to customers for general business purposes who have a credible, science-based transition strategy in place.
What strategy did you develop for Transition Finance-related goals?
In 2021, we defined our new ESG Strategy with the goal of ensuring that the bank stays ahead of the curve as stakeholder expectations evolve. Our approach to sustainability is guided by three pillars: transforming our governance model, transitioning to a low carbon future and positive social impact. At the heart of our strategy lies FAB’s commitment towards the transition to a net-zero economy in line with the UAE 2050 Strategic Initiative for net zero. FAB is the first bank in the UAE and Gulf Cooperation Council (GCC) to join the United Nations Environment Programme Finance Initiative’s (UNEP FI) Net-Zero Banking Alliance (NZBA). As part of our commitment, we will assist our clients to transition towards a climate-neutral economy through innovative financing and advisory services.
Our strategy towards transition finance is linked to our NZBA target setting, where we deep dive on high GHG emitting sectors across our portfolio, understand the decarbonization pathways and levers and set targets. For example, low carbon hydrogen is a transition lever for energy sector decarbonization.
What targets have you set/are you developing?
FAB has set targets for sustainable finance at a Group level of greater than US$75 billion by 2030. This target is cascaded to business units within the Bank and each unit is strengthening their products and services offering to support the target and our net-zero financed emissions commitment.
We have not defined specific targets for transition finance. As part of our deliverables towards NZBA, we are setting interim emission reduction targets for our highest GHG emitting sectors for 2030. To meet these targets, we have identified business levers and financing opportunities for each sector and transition finance will play a key role in meeting our targets.
What stakeholders did you need to engage with internally in order to get sufficient buy-in to make it feasible to meet your transition finance objectives?
Our ESG strategy and ambitions, along with our commitment to NZBA were endorsed by the Group Executive Committee (EXCO), which has representation from all key business and enablement units across the Bank, and it was approved by the Board of Directors.
As part of transforming our Governance model, we have defined ESG roles and responsibilities across Board and Management Committees and have defined our ESG organizational structure, which includes a specialized Group ESG and ESG Risk team.
Our Sustainable and Transition finance objective are linked with our NZBA commitment, for which we have a dedicated steering committee and working group that includes Business, Credit, Risk, Finance and ESG as the key stakeholders engaged. The emission reduction targets, and financing objectives are endorsed by the Management Committee and approved by the Board.
Were there challenges in terms of integrating the strategic transition finance-related decisions into ongoing business processes?
The reduced maturity of climate strategy among the bank’s clients in the region represents one of the strongest barriers to tackle for a successful integration of any strategic transition finance-related decision into ongoing business processes. We acknowledge that raising awareness of such topics is key to enhance transition finance practices in our geographic area to align the region with best practices at a global level.
We note a heavy lack of regional understanding of how to address key sectors under transition finance efforts, as the region’s economy has been historically supported and tied to the fossil fuel industry.
Also, we identified the low quality and reduced availability of ESG or sustainability data as a large challenge to overcome when aiming to implement transition finance strategies into business, as they can cloud proper assessments and create hurdles to a successful implementation.
Is there anything specific to your size, business model or geographic region which you’d like to highlight?
The UAE became the first MENA country to announce a commitment to reach net-zero emissions by 2050, the first nation in the Gulf to ratify the Paris Agreement in 2015 and the first Arab country to set voluntary clean energy targets. The UAE announced in September 2022 an updated version of the country’s second Nationally Determined Contribution (NDC) with an improvement of the national greenhouse gas emissions reduction target from 23.5% to 31% by 2030. Since its first National Determined Contribution (NDC), the UAE has been flagging sustainable finance as a key sustainability driver and a main enabler of any green transition.
Although the UAE’s economy is very exposed to hard to abate sectors such as oil and gas, aviation or cement and steel, encouraging progress has been noted within the decarbonization process of all these industries. Under the form of carbon footprint reductions and renewable energy record growth, the transition of hard to abate sectors benefited from the right push by public and private finance which backed groundbreaking projects like a carbon-capturing plant in the steel sector, the deployment of sustainable aviation fuel or the construction of the world’s largest solar energy facility.
The UAE plays a key role in a just energy transition worldwide. The world was already facing a profound energy-supply crunch as economies began to bounce back from the COVID-19 pandemic and the Russia-Ukraine conflict made a tight market even tighter, while forcing countries to reassess their urgent near-term strategic energy needs. The country is aware of its privileged position within energy resources and acknowledges that policies aimed at divesting from hydrocarbons too soon, without adequate viable alternatives, would be self-defeating and undermine energy security, erode economic stability, and leave less income available to invest in the energy transition. These realities are guiding the UAE’s approach to the energy transition, which involves continuing to meet global needs while investing in the new energy systems. While the UAE remains a reliable supplier of some of the world’s least carbon-intensive oil and gas, the country will reduce its intensity by a further 25% before the end of this decade, while investing heavily in renewable energy assets.
Read more on FAB’s net-zero targets here.
This case study was originally published in the Net-Zero Banking Alliance Transition Finance Case Studies report (January 2023).
Disclaimer: NZBA shares case studies to promote member banks’ awareness of new approaches, tools, products, services, and transactions related to financing the transition to net zero. Featuring a case study naming a particular bank does not represent an endorsement of all actions from that bank.