Jarred Lloyd, Head of Analytics at 4most, explains Circular C 8/2025, which makes climate-related financial risk management a mandatory prudential requirement for licensed institutions
The Central Bank’s Climate-Related Financial Risk Management Regulation (Circular C 8/2025), effective 8 July 2025, mandates licensed institutions to identify, measure and manage climate risk across governance, capital, solvency, and recovery planning. It also requires transition planning, risk appetite integration, and data management procedures. This signals a departure from voluntary disclosure toward climate risk as a core prudential requirement.
In tandem, national Principles for Sustainability‑Related Disclosures and Principles for Effective Management of Climate‑Related Financial Risk, issued in 2023/24 by the Sustainable Finance Working Group (SFWG), now embed climate risk within strategy, ICAAP, governance, data and scenario analysis frameworks.
Unsurprisingly, UAE banks are swiftly establishing climate risk frameworks, primarily in response to regulatory mandates.
This emerging regulatory framework explicitly includes scenario analysis and stress testing, demanding board‑level oversight within ICAAP. Banks lagging in implementation are required to submit detailed remediation plans mapping gaps and compliance milestones, a move that is directly accelerating market‑wide action.
This is more than just a box-ticking exercise.
Climate risk is now tangible financial risk. Physical hazards and transition shocks are already affecting credit losses and collateral valuations. Global research on expected credit losses (ECL) highlights a pressing need for enhanced data, models and disclosures to capture climate’s impact on borrowers and portfolios. The IMF has urged banks in the MENA region to quantify, disclose and forecast climate risks while boosting resilience in banking and insurance sectors.
UAE banks are maturing in the ESG space, but not fully prepared.
Many assessments remain qualitative, with inconsistent data quality. Integration of climate metrics into credit pricing, limit setting and ICAAP remains uneven, underscoring the role of national regulation and stock exchange guidance (DFM, ADX) prompting firms to enhance the way they factor in climate-related risks.
Meanwhile, business drivers are catching up. Cross‑border investors now prefer climate disclosures to be aligned with ISSB and historical TCFD standards . The EU’s evolving Corporate Sustainability Reporting Directive (CSRD) is progressively establishing global reporting expectations, with direct implications for UAE corporate groups that have European operations or investor exposure.
The international context has also shifted. Voluntary alliances like GFANZ have been restructured after several major banks exited, prompting the coalition to refocus on capital mobilisation rather than ambitious net‑zero pledges, highlighting that regulation and credible modeling outperform mere public relations commitments.
Domestically, the UAE banking sector has committed AED 1 trillion in sustainable finance by 2030, launched at COP28, reinforcing that green and transition finance is institutionalised, not niche.
Early movers will reap rewards.
Robust climate analytics enable precise risk-based pricing, wider access to global capital, and stronger ESG credibility. Basel guidance is clear: climate factors must be built into core risk categories, capital calculations, and liquidity planning, giving climate-focused banks an edge over those treating it as mere compliance.
The UAE now faces a strategic opportunity: to develop a region‑specific, scalable climate risk framework, rather than importing European models wholesale. Creative scenarios should reflect Gulf‑specific challenges, like extreme heat and water stress, as well as local industry transitions (industrial, logistics, real estate).
Leveraging the foundations laid by the SFWG, UAE banks should now operationalise climate risk: embed it in credit, collateral and pricing decisions; invest in geospatial and sector data; and deploy decision‑useful stress tests that steer business strategies, not just compliance audits.
