Financial stability is often spoken about as if it were a single lever, pull it, and the system holds.
In reality, it is a web of interdependent pillars that must all function in harmony. An independent central bank, a sound and well‑capitalised banking system, prudent fiscal policy with transparent budgets, trustworthy institutions and rule of law, transparent financial markets and crucially, a diversified and productive economy.
The UAE has made remarkable progress across each of these pillars. Yet the events of April 2024, when the country experienced its heaviest rainfall in 75 years, causing billions of dollars in damage, made one truth impossible to ignore: climate risk is no longer an abstract environmental concern. It is a material prudential risk, and it is now shaping the next frontier of financial stability.
As a risk professional, I view climate change through a very specific lens: it is a transmission mechanism capable of hitting banks, insurers, governments, and markets simultaneously.
Physical risks, floods, heatwaves, storms can damage homes, factories, ports, and power grids. When these losses are severe enough, they cascade into credit impairments, insurance payouts, liquidity pressures, and fiscal strain. Transition risks, carbon taxes, technology bans and shifts in global demand can reprice assets overnight and trigger market volatility. In short, climate risk is financial risk, and the UAE is entering a decisive shift in recognising and regulating it as such.
Two major regulatory developments in the past two years demonstrate this shift clearly.
The first is the UAE’s new Climate Change Law (Federal Decree Law No. 11 of 2024). For the first time, all entities, including those in free zones must monitor and report greenhouse gas emissions, submit reduction plans, and comply with annual targets set by the Ministry of Climate Change and Environment. Non‑compliance carries fines of AED 50,000 to AED 2 million.
This is not symbolic. It pushes the entire private sector into climate accountability. For financial institutions, it means borrower emissions, transition plans, and exposure to high‑emitting sectors are now part of credit and investment risk assessment. Major national champions have already stepped forward: ADNOC aims to cut operational emissions intensity by 25% by 2030; EGA plans to reduce emissions by 421,000 tonnes annually; Etihad Airways is targeting a 50% emissions reduction by 2035 on the path to net zero by 2050.
The second regulatory milestone is the Central Bank of the UAE’s Climate‑related Financial Risk Management Regulation (Circular C 8/2025). Banks and insurers must now identify, measure, and manage climate risks; integrate them into governance, capital, solvency, and recovery planning; conduct scenario analysis and stress testing; and enhance climate‑related disclosures and green product governance.
Banks sit at the centre of climate transmission. That is why climate stress testing is no longer optional – it is part of prudential supervision.
And the projections demand this level of seriousness. The UAE is expected to warm by between 1.3°C and 4.7°C by the end of the century, increasing heat stress, energy demand, and productivity losses. Sea levels along the Gulf coast may rise by up to half a metre by 2050, putting ports, desalination plants, and coastal infrastructure at risk. Storm frequency is projected to increase significantly. Water scarcity, already acute will intensify, affecting agriculture, food security, and industrial operations.
Without adaptation and resilience investment, climate impacts could cost Gulf economies up to 8% of GDP annually by 2050. This is why climate risk regulation is not a compliance exercise. It is a financial stability imperative.
The UAE has long positioned itself as a global leader in clean energy transformation, targeting 50% of power generation from clean sources by 2030. This ambition is not only environmentally responsible, it is economically strategic.
By embedding climate risk into financial regulation today, the UAE is strengthening the resilience of its financial system, accelerating green sector growth, and creating the conditions for long‑term stability.
