The DFSA, Sustainability and Climate Risk

The Dubai Financial Services Authority (DFSA) recently published its Business Plan for 2025-26. The plan outlines key priorities for the DFSA as it regulates financial services in the DIFC, focusing on market integrity, consumer protection, financial crime prevention and more.

Over a series of upcoming articles, CCL Academy’s training team will consider some of the key themes and developments which are set out in the plan.

In this article, Nigel Sydenham, Director of Compliance Training, explores one aspect of the Business Plan – sustainability - which the DFSA describes as one of its four strategic themes.

The fact that sustainability features in this list (alongside Delivery, Engagement and Innovation) will be no surprise to firms within the DIFC.

In 2023, Ian Johnston, Chief Executive of the DFSA, said: "Over the last few years, sustainability has emerged as a top priority for the DFSA’ and this has been reflected in a range of publications and initiatives on the subject.

The Business Plan sets out the DFSA’s ‘Sustainable Finance Roadmap 2025-2027’ and states that one of the focus areas for 2025-26 is to work with other UAE financial regulators and ministries “to develop a joint UAE approach in areas such as climate risk management, transition planning, sustainability disclosures and taxonomy”.

This article focuses on the first of these – the management of climate risk.

In November 2023, the UAE Sustainable Finance Working Group (SFWG), of which the DFSA is a founding member, issued “Principles for the Effective Management of Climate-Related Financial Risks”. At the time, the DFSA announced that it expected to embed the principles in specific guidance for firms on its supervisory approach and expectations. While the principles are not, currently, binding obligations on firms they clearly reflect the ‘direction of travel’ of the DFSA and other regulators across the UAE.

In line with guidance issued by other international bodies, the principles define climate-related financial risk as “the financial risks arising from climate change, including physical, transition and liability risks.” The principles then go on to outline some general considerations regarding climate risk including, importantly, some of its distinctive features.

While climate risk has similarities with other types of risk, it has several distinctive characteristics which potentially impact on firms’ ability to identify and manage their risk exposure. Hence, for example, the principles state:

“Climate-related financial risks are not bound by timelines and can emerge within the short, medium, and long-term. They can materialize through transmission channels in the balance sheets of financial firms and within the traditional categories of financial risks, including credit, market, operational, underwriting, reputational and liquidity risks.”

In other words, firms need to be aware that climate risk exposure potentially extends over all timeframes, from immediate risks (such as the physical risk of an extreme weather event) through to risks which may only materialize over the long term (such as climate change, which makes certain geographic locations uninhabitable).

Furthermore, some firms will have a direct exposure to climate risk due to assets or liabilities which they hold on their balance sheet. For others, climate risk will materialize through another risk category – for example, a firm may face increased reputational risk if it is perceived as making unsubstantiated claims about its ‘green’ credentials (often known as ‘greenwashing’).

The nature(and degree) of climate risk exposure varies enormously between firms, but in each case it’s vital that the firm has a clear understanding of its exposure, and of the means by which it can be managed.

Climate risk is not an entirely new concept, but some firms are clearly more advanced in their approach to managing this risk. This was illustrated in a recent CCL Academy training course,  in which SEOs and other Senior Managers within DFSA-regulated firms were asked about their firm’s current approach to managing climate risk. Only 30% of those who responded confirmed that their firm had:

 “A comprehensive framework for managing climate risk”.

By contrast, 43% agreed that:

“As far as I am aware, my firm has no specific measures in place to identify and manage climate risk”.

Of course, it’s not possible to know whether this group were representative of DFSA-regulated firms as a whole, but the principles clearly suggest that some firms have more to do, observing that:

“enhanced risk management is critical for financial firms to identify and manage these risks better and to be able to demonstrate this to their clients and supervisors.”

The last point - that firms need to be able to demonstrate the robustness of their approach - is an important one. Even those firms that consider they have an appropriate framework in place would do well to reflect on the question of whether they would be able to demonstrate the robustness of their approach if asked to do so by the regulator, investors or other stakeholders.

The SFWG document goes on to list seven principles, covering various aspects of climate risk management:

1. Oversight and responsibility of climate-related financial risk exposures
2. Incorporation of climate-related financial risk exposures into overall business strategy
3. Assigning climate-related financial risk management responsibilities within the organization
4. Incorporation of climate-related financial risks into risk management framework
5. Monitoring and reporting of climate-related financial risks
6. Incorporation of climate-related financial risks into capital and liquidity adequacy processes
7. Scenario analysis of climate-related financial risks

It’s beyond the scope of this article to consider these principles individually. However, as a general point it’s important to note that, while they recognise the distinctive nature of climate risk, the principles expect firms to incorporate climate risk into their existing risk framework. In other words, the same basic building blocks of risk governance (namely identifying, assessing, managing, monitoring and reporting risk) apply to climate risk as much as to other, more familiar, risks.  

Furthermore, the principles are clear on the need for firms to upskill staff at all levels within their organisations:

“Where required, financial firms should ensure that the board and senior management actively keep up to date to develop and maintain sufficient knowledge and skills to understand and assess the impact of climate-related financial risks on the financial firm and the broader financial sector, including by providing training.

In addition, financial firms should also provide capacity building and training to relevant personnel to enhance management of climate-related financial risks.”

If the group of firms which were represented on our recent training course reflect wider practice, there is clearly room for improvement here. When asked about their firm’s current training on climate risk, only 25% of those who responded agreed with the statement that their firm “has a comprehensive climate risk training programme in place”. By contrast, 45% stated that their firm “currently has no specific climate risk training in place”.

The DFSA has repeatedly stated that sustainability is one of its key priorities, and this is reinforced in its recent Business Plan.

The management of climate-related financial risk is an important strand of the DFSA’s sustainability agenda, and the publication of the SFWG’s Principles are an important guide to the regulators’ expectations.

All DFSA-regulated firms would be well-advised to review their current approach to climate risk and consider whether they are meeting the expectations articulated in the SFWG’s principles.

Our range of training programmes are designed to equip your teams with the practical knowledge and skills needed to “understand and assess the impact of climate-related financial risks”.

If you’re looking for additional training for your firm, Compliance Team, or Senior Management and the Board, get in touch.

Nigel specialises in training boards, senior executives and other staff on the impact of regulation and regulatory change.

He is a CFA Charterholder and Chartered Fellow of the CISI, with over 20 years' of industry experience.

With a background in compliance in private banking and wealth management, Nigel has a particular interest in effective corporate governance and the management of compliance and regulatory risk. His interests also include issues relating to ESG and climate risk, conduct and culture (including non-financial misconduct), and all aspects of financial crime prevention, as well as the impact of fintech on compliance and regulation.

Recent assignments have included briefing multiple boards and executive teams on the Consumer Duty, delivering compliance and ethics training for senior managers and front-office staff and creating a user-friendly risk and compliance handbook for a major bank.