Climate-related Financial Risk Management Regulation

CBUAE Classification: Public Climate-related Financial Risk Management Regulation

CBUAE Classification: Public CONTENTS Subject Page Introduction 1 Objectives 2 Scope of Application 2 Article (1) Definitions 3 Article (2) Governance and Risk Appetite 6 Article (3) Strategy 8 Article (4) Risk Management 9 Article (5) Capital 17 Article (6) Enforcement and Sanctions 17 Article (7) Interpretation of Regulation 18 Article (8) Publication and Application 18

1 CBUAE Classification: Public Circular No: 8 /2025 Date: 08/07/2025 To: All Banks and Insurance Companies Subject: Climate-related Financial Risk Management Regulation

Introduction

1. The United Arab Emirates has taken a series of measures in line with its commitment to addressing climate change, including ratifying the Paris Agreement in 2016, developing the UAE Green Agenda 2015-2030, the UAE’s Net Zero by 2050 strategic initiative and the National Climate Change Plan (2017-2050) among other sectoral strategies and policies.
2. The Central Bank promotes the effective and efficient development and functioning of the financial sector in the UAE. In November 2023, the Central Bank issued the Principles for the Effective Management of Climate-related Financial Risks (“the Principles”), and the Sustainability-related Disclosure Principles in June 2024, to enhance the regulatory framework for, and set out the Central Bank’s direction on, climate risk and sustainability disclosure practices in the financial sector of the UAE.
3. Following on from this, the Central Bank is now issuing this Regulation, establishing an overarching framework for Climate-related Financial Risk management. This Regulation aims to ensure that Financial Institutions (FIs) have in place appropriate governance and risk management processes to identify and manage Climate-related Financial Risks.
4. This Regulation is issued pursuant to the powers vested in the Central Bank under the Central Bank Law and the Insurance Law.
5. This Regulation builds on the direction set out in the Principles, and must be read in conjunction with other Central Bank Regulations including, but not limited to, Regulations that address governance, risk management, capital, solvency, and recovery planning as applicable to Banks and Insurance Companies.
6. Where this Regulation includes a requirement to provide information or to take certain measures, or to address certain items listed at a minimum, the Central Bank may impose requirements which are additional to those provided in the relevant article.

Objectives 7. The objective of this Regulation is to establish minimum standards for FIs’ approach to managing Climate-related Financial Risks with a view to: i. ensuring the soundness of FIs; and ii. contributing to financial stability.

Scope of Application 8. This Regulation applies to Banks and Insurance Companies (collectively referred to in this Regulation as Financial Institutions “FIs”). FIs established in the UAE with significant Group relationships, including Subsidiaries, Affiliates or international branches must ensure that this Regulation is adhered to on a solo and Group-wide basis. 9. The Central Bank may expand the scope of application of this Regulation to other Licensed Financial Institutions in due course. 10. The Central Bank may apply the principle of proportionality in the application of this Regulation, whereby smaller FIs or smaller branches of foreign banks and insurance companies may demonstrate to the Central Bank that the objectives are met without necessarily addressing all of the specifics cited in this Regulation.

Article (1): Definitions The following terms shall have the meaning assigned to them below for the purposes of this Regulation: 1.1 Affiliate: an entity that, directly or indirectly, controls, is controlled by, or is under common control with another entity. The term control as used herein shall mean the holding, directly or indirectly, of voting rights in another entity, or of the power to direct or cause the direction of the management of another entity. 1.2 Bank: any juridical person licensed in accordance with the provisions of the Central Bank Law, to primarily carry on the activity of taking deposits, and any other licensed financial activities as defined in the Central Bank Law. 1.3 Board: the FI’s board of directors. 1.4 Central Bank: the Central Bank of the United Arab Emirates. 1.5 Central Bank Law: Decretal Federal Law No. (14) of 2018 Regarding the Central Bank & Organisation of Financial Institutions and Activities, and its Amendments. 1.6 Climate-related Financial Risks: the potential risks arising from climate change or from efforts to mitigate climate change, their related impacts and their economic and financial consequences, including Physical, Transition and Liability risks. 1.7 Critical Functions: activities, services or operations the discontinuance of which is likely to lead to the disruption of financial stability or of services that are essential to the economy due to the size, market share, external and internal interconnectedness, complexity, cross-border activities of an FI with particular regard to the substitutability of those activities, services or operations. 1.8 Financial Institutions (FIs): Banks and Insurance Companies. 1.9 Group: a group of entities that includes an entity (the 'first entity') and: a. any Parent of the first entity; b. any Subsidiary of the first entity or of any Parent of the first entity; and c. any Affiliate. 1.10 Insurance Company: the insurance company incorporated in the United Arab Emirates, and the branch of a foreign insurance company, that is licensed to underwrite primary insurance and reinsurance, including Takaful insurance companies. 1.11 Insurance Law: the Federal Decree-Law No. (48) of 2023 Regulating Insurance Activities and its Executive Regulations, and any amendments thereof. 1.12 Liability Risk: climate-related compensatory claims and/or direct legal actions against FIs. Liability risk can be considered as a separate risk but can also be treated as a subset of physical and Transition Risks. 1.13 Licensed Financial Institutions: as defined in the Central Bank Law. 1.14 Parent: an entity (the 'first entity') which: a. holds a majority of the voting rights in another entity (the 'second entity'); b. is a shareholder of the second entity and has the right to appoint or remove a majority of the board of directors or managers of the second entity; or c. is a shareholder of the second entity and controls alone, pursuant to an agreement with other shareholders, a majority of the voting rights in the second entity. Or; d. if the second entity is a subsidiary of another entity which is itself a subsidiary of the first entity. 1.15 Physical Risk: potential economic and financial losses from climate and weather-related events and the long-term progressive impact of climate change. 1.16 Regulations: any resolution, regulation, circular, rule, standard or notice issued by the Central Bank. 1.17 Risk Appetite: the aggregate level and types of risk an FI is willing to assume, decided in advance and within its risk capacity, to achieve its strategic objectives and business plan. 1.18 Risk Profile: point in time assessment of the FI’s gross (before the application of any mitigants) or net (after taking into account mitigants) risk exposures aggregated within and across each relevant risk category based on current or forward-looking assumptions. 1.19 Senior Management: the executive management of the FI responsible and accountable to the Board of Directors the sound and prudent day-to-day management of the FI, generally including, but not limited to, the chief executive officer, chief financial officer, chief risk officer, and heads of the compliance and internal audit functions. 1.20 Subsidiary: an entity (the 'first entity') is a subsidiary of another entity (the 'second entity') if the second entity: a. holds a majority of the voting rights in the first entity; b. is a shareholder of the first entity and has the right to appoint or remove a majority of the board of directors or managers of the first entity; or c. is a shareholder of the first entity and controls alone, pursuant to an agreement with other shareholders, a majority of the voting rights in the first entity. Or; d. if the first entity is a subsidiary of another entity which is itself a subsidiary of the second entity. 1.21 Transition Risk: the financial risk related to the process of adjustment towards a lower-carbon economy, which can be prompted by, for example, changes in climate policy, technological changes or change in market and social sentiments.

Article (2): Governance and Risk Appetite 2.1 The Board is responsible and accountable for maintaining effective oversight of Climate-related Financial Risks in the FI. 2.2 The Board and Senior Management of the FI must ensure that they have adequate understanding and knowledge of Climate-related Financial Risks, and awareness of relevant developments at global, regional and local levels. In this regard, FIs must 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 FI and the broader financial sector, including by providing relevant training. 2.3 The Board and Senior Management collectively must have a clear and holistic overview of the FI’s exposure to Climate-related Financial Risks. 2.4 The Board must ensure that Climate-related Financial Risks are embedded in the FI’s governance and Risk Appetite frameworks and statements. 2.5 The Risk Appetite component relevant to Climate-related Financial Risks must be reviewed at least on an annual basis with the aim of reflecting relevant new information, data and emerging developments. 2.6 While the Board is ultimately responsible and accountable for overseeing Climate-related Financial Risks for the FI, it may formally and clearly delegate operational functions related to these risks to Board committees or Senior Management. Any delegation of such functions must be documented and accompanied by a clear internal structure of responsibility, scope of authority and escalation and reporting procedures. 2.7 FIs must ensure that structures and roles that are assigned any responsibility for Climate-related Financial Risks have adequate human and financial resources, and relevant expertise, to perform the required function. In this regard, FIs must provide relevant capacity building and training to personnel with the objective of ensuring robust understanding for, and management of, Climate-related Financial Risks. 2.8 FIs must ensure that they develop a robust governance framework for assets and liabilities that are labelled green/sustainable/ Environmental, Social, Governance (ESG)-linked or equivalent “green”. This may include clear criteria, thresholds and/or methods to qualify products and services as green, and dedicated committees that approve green products and services and ensure accurate product labelling. 2.9 In offering green products and services, FIs must ensure that they perform comprehensive due diligence on customers and their businesses (if any) and continue to monitor these transactions with respect to use of funds and adherence to terms and conditions.

Article (3): Strategy 3.1 FIs must assess and monitor the impact of Climate-related Financial Risks on their business environment, business model and activities. 3.2 The assessment of the impact of Climate-related Financial Risks must cover the short, medium and long-term. Upon assessment and after considering existing resources and mitigation measures, the FI must develop suitable measures and/or changes with respect to its business strategy to mitigate the impact of Climate-related Financial Risks, and cascade them down in the FI for implementation at the appropriate time. 3.3 Strategic changes and measures to address the potential effects of Climate-related Financial Risks on any of the FI’s stakeholders and activities in its internal and external environment, may include products and services, business procedures, policies and market presence.