Jane: [00:0:01] Hello, I'm Jane Goodland and a very warm welcome to the LSEG Sustainable Growth Podcast, where we talk to leading experts on issues that touch on both sustainability and finance. With Cop28 just around the corner, we thought it would be interesting to talk to First Abu Dhabi Bank, which is the largest bank in the UAE. I was lucky enough to meet with Sara Pirzada Usmani, who's the Head of Sustainable Asset and Project Finance for the bank. So let's hear more from Sarah.
Jane: [00:00:32] So hello, Sarah. Really good to see you. And thanks for giving us some time today. Now you have got what sounds like a really, really fascinating job. So let's start the conversation by you telling us a bit more about what's involved in your role.
Sarah: [00:00:45] Thanks, Jane. It's a pleasure to be here today. It is indeed an exciting role. To give you a little bit of an idea, there are four distinct segments in terms of what I'm responsible for. The first aspect is all the corporate, sovereign and FI lending. The second one is asset and export finance, which is predominantly aviation assets and also dealing with export credit agencies. The third one is project finance, which is obviously a very important element given the growth ambitions in the region. And the last but not the least, which is in my view, one of the most important segments is sustainable finance, which essentially cuts across all the other business lines, you know, in terms of loans and bonds. And we provide ESG advisory as well as structuring solutions from a sustainable finance perspective.
Jane: [00:01:38] Big job. Sarah. You must be a very busy lady.
Sarah: [00:01:40] Well, that part of the business clearly keeps me very busy and on my toes.
Jane: [00:01:43] Yeah, I'm sure. Now, in 2021, the UAE committed to be net zero by 2050, and it was the first Middle East and North African nation to do that. Very significant commitment indeed, and particularly because we know that extractive industries such as oil and natural gas account for a very large share of the GDP in the UAE. So can you tell us a bit about kind of some of the key commitments or actions or developments that you've seen from the UAE since that commitment in 2021?
Sarah: [00:02:16] I think, Jane, it's actually important to take a little bit of a step back and actually see how the commitment to Cop and net zero came about. It's important to note that UAE has had an energy strategy for 2050 since 2017. That is when they originally launched this. And since then there have been several sort of efforts that have been made. And of course subsequently the signing of net zero as well at Cop 26. I think UAE has committed to triple the contribution of renewable energy and investment between 150 to 200 billion by 2030. They've also actually tripled the share of renewable energy by 2030. So what they're expecting is 30% of the clean energy to come from renewable energy by 2030. And they have committed to step this up to 50%, which is between renewable as well as nuclear by 2050. And it's also interesting to note that even in terms of the renewable energy installed capacity, I think the original target was 14.2GW from, I think a current capacity of 3.7 as per 2022. They've actually committed to increase that to 19.8GW by 2030. So that is just showing you that the commitments that the UAE is actually making towards this. And of course, it is important to note that they also recently launched the hydrogen strategy, which again, is going to play a very important role in terms of the contribution towards the net zero emissions.
Jane: [00:03:53] Can you tell us a little bit more about that hydrogen strategy at all?
Sarah: [00:03:56] Well, to be honest, it's still at that stage where it is being discussed. We are expecting some announcements to come through and we will have more clarity. But I think this is going to be extremely important for a region like the GCC and for a country like the UAE, because this is actually going to help with the hard to abate sectors here in the region.
Jane: [00:04:18] Yeah, and I think it's going to be really interesting. Obviously Cop28 is just around the corner and it's been dubbed the energy Cop. So hopefully there's going to be some really interesting conversations and progress and commitments made regarding energy, particularly in the region as well. So exciting times and lots to watch out for as we move into next month.
Sarah: [00:04:36] And I think one other thing, Jane, if I may add, actually what just occurred to me, it's also interesting to note, even on the wind side, we've just seen a recent announcement from Masdar, for example, that they've established wind capacity in Abu Dhabi of, you know, 100MW plus across four projects. That is also, you know, another step towards those ambitions, especially because of the low wind speeds here. This is truly the first of its kind to be established here in the UAE.
Jane: [00:05:06] And Masdar, of course, is the I guess it's renewable energy power company of UAE. And they've recently launched, I think it was a green bond, I'm going to say on the London Stock Exchange sustainable bond market. So some very real money going into renewable energy in the region, which is which is really positive to see. Talking of money, let’s turn our attention to your organization, the first Abu Dhabi Bank known as Fab. It's the largest bank in the region. And it's most definitely a pioneer in sustainable finance. It was also the first GCC bank to commit to net zero itself. So I'm keen to really understand a bit more about the bank's ESG strategy and the sustainable finance framework that you've put in place.
Sarah: [00:05:51] Our ESG strategy is actually based on three pillars. The first one being transforming our governance model. Second is transitioning to a low carbon future. And third, capitalizing our social responsibility. So those are the three pillars. But it's very important to note that, you know, fab has actually been at the forefront of sustainability, and I would say leading the way in the region. You mentioned the first green bond in 2017. This was shortly after we issued our green financing framework in 2019. We actually signed up to the Abu Dhabi Sustainable Finance Declaration from ADGM in 2021. We refreshed our ESG strategy, and we committed to lend, invest and facilitate businesses with a value of US dollar 75 billion by 2030 that are focused on environmental and socially responsible solutions, essentially. And to give you an idea, in 2022, we facilitated about 9.1 billion towards that target.
Jane: [00:06:52] Where did all this come from? Because this sounds really impressive. And I think that, perhaps perceptions are kind of different in terms of what's actually going on in the region from outside the region, because I think all of this sounds like fantastic. I'm really curious to know what was the genesis of this strategy and this, kind of real focus on sustainable finance. Where did it come from in the first place?
Sarah: [00:07:16] Well, I think this is the bank's desire to operate as a good corporate citizen, because if you really look at it, we started reporting, you know, our first corporate sustainability report was issued in 2010, and we actually signed up to the Equator Principles, which are the IFC guidelines for project finance transactions, which take care of environmental and social concerns. We signed up to those in 2015, so well ahead of any pressures in terms of net zero or any climate pressures. So this has always stemmed from the bank's desire to be a good corporate citizen and essentially operate in a sustainable manner. So that is how our strategy has evolved. And to be honest, it keeps evolving. So our 75 billion target is actually based on the bank facilitating certain amount of sustainable finance in the region, because we feel that as a financial institution, we need to play our part in terms of facilitating that energy transition, for example.
Jane: [00:08:18] Of course, it's about, the bank playing its part in global challenges, but it is obviously clearly a kind of commercial imperative there as well, because actually, the region needs finance in order to navigate the transition in a, sensible and orderly way. So can we talk a bit more about the committed 75 billion, that's such a big number to lend, invest and facilitate by 2030. How does that play out? What does that actually look like in practice? Can you give us some examples?
Sarah: [00:08:49] There are a number of ways we are facilitating, sustainable finance. And it is through a lot of the advisory work we are advising our clients on in terms of setting up their sustainable finance frameworks. It's about looking into their ESG strategy and trying to align it with their financing strategy. And then of course, we structure solutions based on that, be it raising financing in the bond market or in the, loan market. And of course, there are various ways in terms of how you can raise this financing. These come from the ICMA Green bond or the Social Bond principles, or the sustainability-linked loan bond principles from LMA and so on and so forth. So these are structured in a way that they facilitate certain type of behaviour, be it through the use of proceeds methodology or through sustainability linked loans, which are based on certain KPIs. So it's about either financing certain projects which are classified as green or social or sustainable, or it is encouraging a certain behaviour in organizations to operate in a more sustainable manner through meeting of certain key performance indicators. So there are different ways that we encourage that, business. But ultimately this is also to help the region as well as the institution and our clients to essentially achieve that net zero that the UAE government has set out to do by 2050. And it's actually important to note that we were the first regional bank as well, to have signed up to net zero by 2050 alongside the government, the UAE government.
Jane: [00:10:32] You mentioned a moment ago sustainability linked loans. I happen to know that the bank was one of the first to issue one in the global aviation sector. Can you tell me a bit about that? Because I think that's obviously one of the industries and sectors which probably fall into the hard to abate bucket. So really curious to know what that was about.
Sarah: [00:10:54] So that was indeed a very interesting transaction for one of our aviation clients. And it is structured around certain key performance indicators. And those key performance indicators are actually based on the ESG. And there are, you know, KPIs linking to the environmental side, which essentially encourage the airline to reduce their CO2 emissions through fleet renewals and so on and so forth. And there's some social parameters in terms of certain amount of employment of women in certain jurisdictions or call centres, and also certain amount of training that is being provided to them. And then of course, there is also a governance KPI in it. So the company is actually incentivized to meet those financings through a margin ratchet. So there is, you know, a benefit in terms of when those targets are achieved and there is actually a penalty if those targets are not achieved. So the whole idea behind such a structure is to encourage a positive behaviour in institutions, because then you start, you know, putting ESG at the forefront of decision making. And then you're encouraged to make the right decisions.
Jane: [00:12:11] I think that's really interesting because in fact, you answered the question before I even asked it, which was amazing, which was really about how kind of this shift in capital is incentivized because really, you know, companies could go to traditional debt markets, right, if they wanted to. So why raise a green bond? Why go for a sustainability linked loan? And actually, I think you've answered the question by saying, actually, if we structure them in the right way, then there is an incentive for organizations to kind of follow debt that has some sort of sustainability characteristics and KPIs attached because it's financially preferential to do so. So that's all super sensible.
Sarah: [00:12:47] And also, Jane, it's important to note that it also widens the ambit for a lot of companies because earlier on the focus was very much on use of proceeds and green and not all companies are going to be setting up green projects or social projects. So this actually allows a wider corporate base to also adopt sustainability in the way they operate. They don't necessarily have to build renewable energy projects or hydrogen projects to be able to be sustainable.
Jane: [00:13:18] And have you have you seen kind of lots of interest in that type of debt facility from your client base?
Sarah: [00:13:23] Yeah, there is there is a fair amount of interest, and we've seen a number of sustainability linked loans that have emerged. And we will be seeing a lot more because obviously this is how the sustainable finance has evolved over time as well to include a wider sort of client base. We see a lot of financial institutions as well, adopting similar sort of structures when they raise their financing requirements as well.
Jane: [00:13:49] Great. Can we talk about more about Fab's green bonds? Because I know that the banks issued probably at least 15 and counting of these since 2017. And I'm curious to know why do this? Why issue green bonds? Who's using them? What are the proceeds being used for? And maybe you've got some examples of projects or things that have been facilitated through that funding mechanism just to bring it to life.
Sarah: [00:14:33 ] So I mean, we mentioned this earlier, fab was the first bank in the region to issue a green bond in 2017. Right. And since then we've had several issuances. We also issued our first green bond, which was denominated in euros in 2022. And just recently we also issued the first green denominated sukuk in which was also in AD within this year. So I think this is more about you know, we've obviously been innovative in terms of the way we do our fund raising. It is, you know, very important to highlight that as at March 31st, 2023, Fab Green Bonds supported 16 projects with a total allocation amount of $1.56 billion and an unallocated amount of about 0.7 billion, which is expected to be allocated within 24 months. Now, it's interesting to note what are the eligible categories that you know are as per our own sustainable finance framework? But essentially it is some of the renewable energy projects that we have financed green buildings, energy efficiency projects, clean transportation. We report this on an annual basis. And, you know, the details can be found in our Sustainable Finance report as well. So it's a lot of the projects that are classified potentially as green that are allocated under these bonds.
Jane: [00:15:41] So it's good to hear that, you know, it's not just a case of allocating the money. And then and then, you know, letting them get on with it. It sounds like you're you're quite involved in sort of keeping up to speed with how the money is being used. And what those proceeds are actually turning into in real life and then reporting that, so that there's really kind of great transparency, around the flow of capital. Let's flip from green bonds to kind of perhaps some of the harder to abate sectors. And I know the banks are taking a very proactive approach here when it comes to the emissions associated with the financing that it provides to clients. And you've set an emission intensity reduction target for 2030 for three priority sectors, namely oil and gas, power and aviation. And I understand that those three sectors account for about 80% of, the bank's global greenhouse gas emissions. So clearly, like a really, really important area of your book to look at. So can you tell us a bit more about that? Because I understand that their production based carbon intensity targets. So can you help us understand what does this mean, and how on earth do you set about trying to reduce those emissions?
Sarah: [00:16:52] So I think as part of our Net-zero banking commitment, we had to identify the three sectors which were emitting the most amount in terms of GHG emissions. Now you have to note that, you know, scope one and scope two typically is very small for financial institutions like ourselves. So it's really scope three which can make an impact. So we were the first bank to commit to these targets. And specifically for the three sectors that you mentioned. And, you know, a lot of the methodologies, of course, based on best practice and guidelines by Net-zero Banking Alliance and also recognized by third party providers and also drawn upon the climate and sustainability expertise to essentially come up with these targets. So for oil and gas, for example, we've calculated scope one and two emissions for all the segments of the value chain and also added scope three emissions for upstream and refineries. And we've essentially in line with the International Energy Agency's net zero trajectory, we have set a target to reduce our oil and gas sector emission intensity by 7 to 15% across all three scopes by 2030. Now what is our pathway in terms of achieving that? It's of course supporting our clients in terms of increasing their operational efficiency. For example, you know, minimizing flaring or reducing methane emissions, but at the same time also financing new technology projects such as hydrogen or ammonia projects or even a leveraging our carbon capture, utilization and storage technologies essentially for this sector. So that is how we are going about the oil and gas sector. Now, if you look at power, again, we have committed to a carbon intensity target for our finance power generation activities of about a reduction of about 64% in both scope one and two production intensity by 2030.
Sarah: [00:19:00] So in the same vein, what are the initiatives that will help support this target? Essentially, we are engaging with our clients to support their energy transition, financing clean energy technologies such as solar, wind, green hydrogen, and essentially phasing out coal activities. So that is how we are going about in terms of achieving our power targets. And last but not the least, it's aviation. And I think, aviation, we have included scope one and scope two emissions from airline operators and scope through from lessors. When we have calculated these emissions and again, in line with the International Energy Agency, target for aviation is 15% reduction in finance production intensity by 2030. And we have used a baseline of 2019 because obviously we had the blip in the middle due to Covid. So we have used 2019 as the last full year of proper air traffic. So again currently, for example, what is the bank doing in terms of, you know, working efficiently with this sector? It's about, to be honest, focusing our financing on new technology aircraft and also encouraging the widespread adoption of sustainable aviation fuel. So it's very important to note that the quantity of sustainable aviation fuel, as we commonly call SAF, is actually very limited at this point in time. So our kind of targets are obviously dependent, on these technologies being developed. And of course, we are also dependent on our clients in terms of achieving their goals.
Jane: [00:20:41] Yeah. So I mean a really, really impressive set of targets, but also the effort going into engaging with clients. And that brings me on to, a final kind of point really about how this topic is changing the traditional banking relationship with clients, because I'm sure that if we wound the clock back some years, it would seem extraordinary that we were having this conversation that a bank was talking to its clients about sustainability and how companies should be decarbonizing and kind of changing their models. So tell me a bit about that. In terms of how fab has really shifted to support clients in this new way. And can you tell us a bit more about what that like in practice in terms of those client bank relationships?
Sarah: [00:21:28] So it's very interesting to note, Jane, that since we've been on our journey for quite some time on the ESG side, a lot of the conversations with our clients were driven by the bank itself in terms of creating awareness and educating our clients in terms of what was out there, in terms of the potential requirements for reporting ESG reporting. And, you know, the importance of basically having an ESG strategy and aligning all your financing practices with that ESG strategy. With the shift in the region, with the UAE government having signed up to net zero. It's actually the momentum has been absolutely tremendous. So earlier it was us actively seeking out our clients. But now the pressure is coming from the other side as well. I think more and more of our clients want to ensure that they are operating in a sustainable manner, and essentially they want to see how they can go about it, which is where we provide the advisory services, ESG advisory services, in terms of setting up sustainable finance frameworks and how to align your ESG strategy with your funding strategy. And then, of course, tap the market, be it in the loan format or in the bond format, to obtain sustainable financing.
Sarah: [00:22:50] So it's very important now for corporates, sovereigns and financial institutions to actually ensure that they operate in a sustainable manner. And there is a lot of pressure on potentially disclosures as well in this industry. And I think what will really benefit is if there is a standardization of these disclosures, because that is essentially what investors are looking for. And then essentially setting up some sort of taxonomy as well around it here in the region. Obviously the EU is very well advanced in its journey, but I think this region is moving leaps and bounds heading in that direction. So I think there is still a lot to be done. But the momentum is fantastic. And I think it’s across the board when we talk to our clients and you know, we have we are making every effort to ensure that we continue to create that awareness and continue to play our part in terms of supporting the ambitions of the country in terms of achieving net zero as well.
Jane: [00:23:55] I mean, I think it is really fascinating to see, like you said, the momentum that's behind this movement and what's what's fascinating, I think, is that, you know, in actually a relatively short space of time, we've seen sustainability go from something which was, frankly, not a conversation that the CFO would be having to. Absolutely now, the conversation about how do we finance the business strategy going forward and sustainability really now is front and centre of many of these organizations business strategy. So long may it last, because, you know, we need to get the finance behind the climate transition. And so I’m fascinated by what Fab's doing, because I think it's a perfect illustration of, kind of the coming together of these two worlds of sustainability and finance. So Sarah, thank you so much for your time. I've loved our chat. I've learned so much. There's a lot of numbers in there that need to be scribbling down. So, good luck on your mission and hope to see you again soon. Thanks very much.
Sarah: [00:24:53] Thank you so much, Jane. It was a pleasure indeed. And yeah, look forward to it. Thank you.
Jane: [00:24:59] Thanks.
Jane: [00:25:00] So that's it for this week's episode of the LSEG Sustainable Growth Podcast, which I hope you found as insightful and fascinating as I did. A big thanks to Sarah for sharing her experiences with us. If you're not already following us, then please do so and don't forget to rate us on Spotify, Apple Podcasts, or any other platform. If you've got questions, comments, or someone you'd like us to talk to in future, then do get in touch by email at fmt@lseg.com. That's all from me, but watch out for the next episode very soon.
