^{Sustainability} Climate

The first step was to map our corporate lending exposure to net zero relevant sectors, ensuring comprehensive coverage. We then looked at sector materiality, based on outstanding exposure and industry carbon intensities, to identify the most relevant sectors for calculating our financed emissions.

We measured our outstanding exposure, using the PCAF methodology, considering only loans and advances held for financing and bonds invested in at September 2022. Undrawn commitments and off-balance sheet commitments were not considered.

We used a tiered approach for data collection, with the PCAF data quality score hierarchy as shown. For counterparties with disclosed financials, the book value of equity and debt was used to compute the enterprise value including cash.

For more on aligning portfolios and reducing financed emissions, see our 2023 ESG report.

Some of the key challenges when measuring our financed emissions included:

• Lack of client emissions and financial data
• Differences in calculation methodology and reporting by clients
• Attribution and allocation at portfolio level for conglomerates with multi-sector businesses

To address these challenges, we used appropriate assumptions and proxies, such as sector emissions intensities and asset turnover ratios.

We are working to enhance our estimates of financed emissions through improvements in the detail and coverage of customer data. We are also exploring the use of third-party data to improve the overall data quality score.

In preparation for joining the NZBA, we carried out a comprehensive readiness assessment. This involved detailed sessions with internal stakeholders, including members of the Management Executive Committee (MEC), consultation with external climate experts and engagement with industry peers.

The Bank has adopted a robust implementation roadmap to meet our NZBA commitments. We have established a Group-level steering committee comprising stakeholders from our Sustainability, Risk, Corporate and Investment Banking, and Credit departments responsible for overseeing the implementation of the roadmap.

To embark on this journey, we first mapped our corporate lending exposure to net zero relevant sectors ensuring comprehensive coverage. Sector materiality was then conducted, based on outstanding exposure and industry carbon intensities, to identify the most material sectors for financed emissions computation.

Our outstanding exposure was measured, following PCAF standard recommendations, by considering only loans and advances held for financing and bonds invested in as of September 2022. Undrawn commitments and off balancesheet commitments were not considered.

We used a tiered approach for the data collection process with the PCAF data quality score hierarchy as per the table below. For the counterparties with disclosed financials, the book value of equity and debt was used to compute the Enterprise Value Including Cash (EVIC).

Our Green Bond Framework is based on the International Capital Markets Association (ICMA) Green Bond Principles (GBP) and defines the eligibility criteria to finance or refinance green loans. Proceeds from our inaugural USD 500 million green bond will fund eligible green projects, including:

• Renewable energy
• Green buildings
• Sustainable water and wastewater treatment
• Clean transportation
• Energy efficiency
• Pollution prevention and control

Furthermore, we established a new best practice in the sector by including the criteria for defining the top 15% most energy efficient residential buildings in the UAE. This innovative methodology, developed by a specialist green building consultant, is aligned to the EU Taxonomy, the industry benchmark for the classification of green activities. A summary of the methodology can be downloaded here.

Read more about our green bond report, the Second Party Opinion (SPO) from ISS and our case study.

Our sustainable finance commitments are tracked by our Corporate & Investment Banking, Risk, Credit and Sustainability teams, in accordance with industry best practice and guidelines.

Our sustainable finance framework defines our approach and methodology for categorising, tracking and reporting on sustainable financial products and services. These include debt and equity capital markets, treasury and financial market solutions, financing to corporate or retail customers, and Islamic finance.

We are transparent in our definitions and approach towards classifying environmental financing activities against our sustainable finance commitment to lend, invest, and facilitate AED 125 billion (USD 34 billion) by 2030.

Read more about our Sustainable Finance Framework here.

Our sustainable finance portfolio as at 31 December 2023 operates across the following initiatives:

Green/sustainable products and services

In 2023, we launched new products and services to support our corporate and retail customers in their transition to net zero.

For corporate customers, these include:

• Sustainable Call Account
  A new way for corporate customers to manage funds while contributing to their social and environmental goals. Funds in a Sustainable Call Account are allocated to sustainable and green bonds within our investment book, in line with International Capital Market Association principles.
• Carbon calculator
  Developed by Mastercard and Swedish fintech Doconomy, the region’s first corporate carbon calculator supports the sustainability ambitions of businesses by providing data on the estimated carbon footprint of their corporate expenditure using ADCB corporate cards.

For retail customers, these include:

• Green car loans
  Loans for the purchase of electric or hybrid vehicles, including discounts on loan processing fees and interest rates on environmentally friendly vehicles.
• Green home loans
  Our green home loans support environmentally conscious home buyers by offering favourable terms and incentives. This includes discounts on processing fees and other exclusive benefits.
• Green loans
  Lending for major green projects. Examples include projects for Masdar, Aldar and ACWA Power.
• Debt capital markets

Asset management

In line with our Group Sustainability Policy, ADCB Asset Management Limited (AAML) is committed to developing its investment strategy on a robust ESG infrastructure. On-going initiatives include:

• Establishment of an ESG forum led by the Bank’s Chief Investment Officer to oversee the implementation of strategic ESG initiatives
• Development of a responsible investment policy
• Creation of a digital dashboard to tag and monitor performance of ESG funds in our portfolio

ADCB Sustainable Finance Prograss Vs. Target(by category)

ADCB assesses various E&S risks and opportunities and their impact in the short, medium, and long term. We use this information to inform decision-making and business strategy, as well as financial planning.

The Banks sets E&S risk appetite indicators to support its strategic plans. These are a mix of qualitative and quantitative criteria, such as:

• Exposures to restricted sectors as defined in the Group’s ESRM policy
• ADCB’s own operational emissions footprint from Scope 1, 2, and 3 (business travel)
• Progress against the sustainable finance target of AED 125 bn by 2030

The E&S risk appetite statement is monitored quarterly and reviewed and approved annually by the Board Risk Committee.

A materiality assessment is conducted annually by the credit risk management department. This aims to gather insight on exposure and materiality of different E&S risks and to proactively manage the identified risks.

This helps to identify the critical risks and material issues relevant to our stakeholders. The materiality assessment focuses on high, medium, or low risks emanating through transmission channels as defined in the ESRM Policy.

The Bank has developed sector-specific addendums for high-risk activities as an extension of the ESRM Policy. These form part of the enhanced due diligence process for assessing counterparties and transactions.

E&S risk assessment at the counterparty level begins with front line units conducting screening against the ADCB exclusions and restricted lists, followed by determining risk exposure of potential customers through the E&S scorecard.

The scorecard includes quantitative and qualitative assessments, providing a combined risk rating outcome for customers. This assessment is completed at the onboarding phase of new customers and as part of the periodic credit review for existing customers.

The scorecard has four risk categories:

• Low: No further action required. Business units proceed with standard credit approval process steps
• Medium: The risk is acceptable. Further due diligence may be proposed to limit the risk of escalation to high or severe levels
• High: The Group performs enhanced due diligence and establishes mitigation measures
• Severe: No engagement and exit from the client relationship, unless approved as part of the exceptions and exemptions mechanism

ADCB conducts climate scenario analysis and stress tests to assess the impact of material climate risks on the Bank’s lending portfolio. The findings enhance awareness of climate risk in the Bank.

As data quality and accuracy improves, this information will be used in the future to guide the Bank’s strategy and risk appetite.

In 2023, ADCB carried out the following climate stress tests:

• Portfolio level top-down approach (internal assessment)
  Leveraged climate risk scenarios designed by Network for Greening the Financial System (NGFS) to assess impacts of both transition and physical risks related to ADCB’s corporate portfolio.
• Bottom-up approach (as mandated by the Central Bank of UAE)
  Assessed the impacts of scenarios prescribed by the Central Bank of UAE, on customers operating in climate-sensitive economic sectors. These scenarios are based on NGFS scenarios and tailored to the UAE economy.

The stress test exercises support the promotion of climate analytics awareness and capability assessment in data gathering, modelling and measuring climate-related financial risks across the Bank. The observations and lessons learned from these exercises will shape our approach to climate risk stress tests and scenario analysis in the future.

ADCB’s inaugural climate stress tests were a significant step for the Bank in measuring the potential impacts of ESG and climate risks. We recognise this is still an evolving topic and the Bank is enhancing its internal processes and capabilities.

Furthermore, ADCB acknowledges the clear synergies between climate stress testing and our NZBA commitment to decarbonise our portfolio, both of which require more sophisticated capture of customer-level data.

We will review annually our operating model for stress testing and scenario analysis to adopt industry best practices and adhere to regulatory requirements.

As we advance towards higher levels of sophistication, the Bank acknowledges that it is critical to assess portfolio sensitivities to physical risk in elevated climate risk sectors, particularly commercial and residential real estate.

1. Reducing energy consumption in office buildings

In 2023 we signed an agreement with energy services company RESET to evaluate the energy usage and efficiency in our Abu Dhabi office buildings. Actions included:

• Replacing major heating, ventilation, and air conditioning equipment with smart energy models
• Using energy-saving LED lights, and operating dimmer systems
• Installing activity sensors for lighting
• Installing a building management system

2. Information technology

We are moving from heavy power consumption switches in our data centres to fixed-form switches with reduced power demands. This has resulted in approximately 20% lower power consumption, helping to reduce our carbon footprint.

We are also transitioning to cloud-based virtual servers. These consume 90% less energy than physical servers, which should enable us to reduce the number of server racks centres by 10%. This will help to achieve a 10% saving in data centre energy consumption by December 2024, along with a 25% reduction in data centre carbon footprint.

The Bank provides low power consumption virtual devices for most ADCB employees. These virtual devices consume 6 to 50 watts of electricity compared to 150 to 350 watts used by desktop devices.

ADCB has well-defined procedures for collecting, sorting, and disposing of the general and recyclable waste we produce.

The Bank employs an environmental services provider to collect and dispose of waste (both general and recyclable) in line with guidelines from Tadweer, the Abu Dhabi waste management company. This waste is then sorted, weighed, and all data is recorded before being transported to the disposal site - landfill or recycling station.

We are committed to reducing the amount of waste we produce. We have installed separate recycling and general waste bins, together with a variety of in-house initiatives to segregate bottles and cardboard from general waste. We also ensure that all end-of-life IT equipment is destroyed appropriately through our certified e-waste partners.

Through increased digitalisation, including mobile banking and e-statements, we have significantly reduced our paper consumption.

In 2023, the Bank continued to reduce the number of printers used in our buildings. We are removing low-utilisation printers from our offices, helping to reduce the amount of wastepaper produced. All printers are programmed to enter ‘sleep mode’ from 5pm to 7am every day, which has reduced the daily power consumption of printers by almost 55%.

We continue to raise awareness among our employees and encourage them to reduce paper consumption as much as possible. At the same time, we have expanded our efforts to recycle the wastepaper we still generate.

In 2023, we developed a sustainable procurement plan to incorporate sustainable sourcing principles into our Group-wide procurement policy.

We have also updated our vendor questionnaire template with ESG criteria. This will set our ambition and guide our engagement with vendors who do not meet minimum our ESG requirements.

All members of the Bank’s central procurement team have been trained on sustainable procurement to raise awareness and aid implementation.

Our procurement department has implemented an entirely paperless procure-to-pay system through which all contracts are managed. This ensures a transparent and auditable online process for procurement activities such as tendering, contracting, payments and invoicing.

The procurement department is also leading a project to transition from physical to digital business cards throughout the organisation.

ADCB collaborates with multiple strategic partners to support our sustainability goals. We regularly monitor and evaluate the market to expand our network of external partnerships on ESG topics.

We continue to grow the number of green partnerships with suppliers. Through the Mastercard Sustainable Card programme, all our cards are verified for their recycled content by the Card Eco Certification (CEC) scheme. In 2023, a CEC Statement of Compliance confirmed that our plastic cards are made of 86% recycled PVC material, while our metal cards contain 54% recycled material.

The Bank actively seeks to partner with local suppliers, with 96% of our procurement budget spent within the UAE.

In Egypt and Kazakhstan, we adopt a similar approach and will continue to work closely with local suppliers, actively engaging with them on relevant ESG issues.