On Jan. 20, the third Abu Dhabi Sustainable Finance Forum, or ADSFF, took place virtually during Abu Dhabi Sustainability Week. As a flagship initiative by the Abu Dhabi Global Market, or ADGM, the conference brought together over 1,000 attendees from 79 countries, including institutional investors, international agencies, project developers, representatives of financial institutions and regulators. In light of the sustainability week, speakers shared their recent actions to boost economic recovery from the Covid-19 pandemic. The conference highlighted Abu Dhabi’s efforts toward sustainable finance and stressed the importance of a more active approach in their strategies and goals. Some of the major ideas discussed were environmental, social and governance (ESG) investing, as well as green bonds.

ESG investing is investing in companies that score highly on environmental and social responsibility scales as determined by independent ratings conducted by third party companies and research groups. It is calculated on a 100-point scale: the higher the score, the more successful the company is in its sustainability efforts. ESG rating firms — most commonly Bloomberg, S&P Dow Jones Indices or JUST Capital — review company documents including corporate sustainability measures, annual reports and resource management.

The criteria used to evaluate companies are divided into three categories: Environmental (E), Social (S) and Governance (G).

E: Investors assess the impact that a company has on the environment, more specifically looking at its carbon footprint, toxic chemicals in its manufacturing process and sustainability efforts in its supply chain. How does the business respond to environmental challenges? S: Is a company increasing its social impact through LGBTQ+ equality, racial diversity, and inclusion programs? How are the working conditions and human capital management? G: This category studies how the board and management of a company works, such as through assessing tax practices, corruption, bribery and board structure.

ESG is taking an increasingly significant role in companies’ decisions regarding mergers, agreements uniting two existing companies into one new company; acquisitions, company purchases of other companies and divestitures, disposals of subsidiary business units or investments. As consumers demand more sustainability efforts from businesses, financial firms are increasingly paying attention to their contributions to racial inequality, climate change and economic injustice.

ADSFF focused on greener investments in the UAE and emphasized the importance of placing ESG-related practices at the forefront of the economy. As recommended by the UN Sustainable Stock Exchanges initiative, the Abu Dhabi Securities Exchange has issued ESG guidelines for listed companies to foster a sustainable economy.

What does the future hold for ESG investing? PwC, a global consultancy and one of the big four accounting firms, surveyed 300 of the world’s largest investment firms this year. Results show that more than 75 percent plan to become more sustainable by shifting to all-ESG products by 2022. PwC forecasts a compound annual growth rate of 26.8 percent for ESG equity funds — where investors purchase shares of a fund that buys stocks in companies, giving them fractional ownership. With the rapid growth of sustainable finance, there is no doubt that ESG is something to watch.

Bonds represent loans made by investors to borrowers that can be traded in a manner similar to stocks. Green bonds are designated bonds that finance sustainability initiatives and support climate-related or other types of special environmental projects. For example, they may fund projects aimed at energy efficiency, sustainable agriculture or clean transportation. They serve a growing number of investors who wish to profit and remain environmentally conscious at the same time.

The Abu Dhabi Department of Energy (DoE), in collaboration with ADGM and ADX, launched a Green Bond Accelerator initiative in 2020. It aims to establish Abu Dhabi as a regional hub for the issuance of green bonds and green sukuk — shari’a-compliant bonds — for sustainable projects in the emirate as well as across the MENA region. The bonds issued under this initiative by financial institutions, governments and companies are listed on the ADX and only support green and sustainable projects that comply with the DoE’s Green Bond Policy.

Although green bonds have some additional transaction costs to issuers, such as tracking, monitoring and reporting on the use of proceeds, these are offset by several benefits. They can improve a party’s reputation and help diversify a business’s investor base. They provide influxes of cash for projects that may traditionally receive lower investments because of their lower profit margins. Issuers have the opportunity to highlight their green assets to the ESG investors they might attract. However, the issuers may also be risking their reputation if the integrity of the green bond is questioned. Furthermore, the combination of promises to make a social impact with strict restrictions on expenditure may have unintended consequences. Forcing higher expenditure will come with tradeoffs.

To combat greenwashing — which gives the false impression that a company or its products are environmentally sound — climate agencies and proponents of green bond programs are now creating classification schemes for the levels of impact that a green bond may have as opposed to having a single classification. The Green Bond Principles approved by the International Capital Market Association, the Cicero Shades of Green program and the European Union’s Green Bond Standard are key examples. All of these programs are steps in the right direction for standardizing green bonds and have the potential to result in more focused investments that create substantial impact.

Clear metrics, to quantify the impact achieved by different forms of impact investing, are crucial in validating the idea of impact investing for traditional investors. Accurately classifying the projects they will be used for, and the expected impact from them, will be necessary for them to fully find a place in the securities portfolios of investors worldwide.