The Islamic finance industry, valued at nearly $3 trillion globally, has the potential to support climate action through its focus on tangible assets. To explore opportunities in driving action within the sector, the Global Ethical Finance Initiative and the UK Islamic Finance Council convened an Islamic Finance power roundtable, co-hosted by S&P Global and King and Spalding.

With the aim of leveraging Islamic finance to address climate change and promote sustainability, discussions covered topics such as green sukuk opportunities, Islamic financial institution engagement in global initiatives, and approaches to climate finance. This blog post delves into the key insights and findings shared during the roundtable, shedding light on the weaknesses, positives, roadblocks, and potential opportunities for Islamic finance.

Current Observations: Weaknesses in Reporting and Commitments

During the roundtable, participants highlighted several weaknesses in reporting, commitments, and disclosures within the Islamic finance sector when compared to the conventional sector. It was noted that reporting efforts should place greater emphasis on Islamic finance’s role in addressing social issues. By focusing on social impact and sustainability, Islamic finance institutions can strengthen their commitment to the Sustainable Development Goals (SDGs) and align with global sustainability frameworks.

Positives and Roadblocks

Despite the challenges, there were positive developments discussed during the roundtable. Corporate and sovereign sukuk issuance has been on the rise, indicating growing interest and investment in the Islamic finance market. Additionally, initiatives such as green home financing and commitments to the SDGs showcased the industry’s dedication to sustainable practices.

However, several roadblocks were identified. The dominance of petrodollar-based industries in the jurisdictions driving demand for Islamic finance products presented a hurdle for engaging in net-zero commitments. The notion of pre-certification and reluctance to go beyond existing standards also hindered progress, and the combination of Islamic standards and additional ESG requirements posed a double burden. Furthermore, smaller-scale institutions faced difficulties in making commitments due to limited resources and market reach. However, it was observed that despite these challenges, engagement in sustainable practices within the Islamic finance sector is growing steadily.

Opportunities for Islamic Finance

The roundtable discussion explored opportunities for Islamic finance institutions to play a significant role in various areas. Firstly, as long-term investors, Islamic finance institutions are well-positioned to prioritise sustainability and social impact. Therefore, there is an opportunity for conventional finance to learn from Islamic finance’s approach, particularly in establishing social impact funds. However, some participants criticised the sector for falling short of its ideals on social impact, with regards to poverty alleviation and workers’ rights.

Regional infrastructure support was identified as an area requiring attention, with limited bankability of opportunities. The need to translate national synergies into practical action was also emphasised. Additionally, adaptation-driven products were seen as crucial for appealing to Islamic finance and the wider market. Net-zero commitments alone are not sufficient, and a focus on solutions that address climate change impacts is necessary. Islamic financial institutions should also actively pursue the restructuring of financial practices to address the connection between rising national debt and environmentally harmful practices and industries.

Financing and Demand

The roundtable discussion highlighted the evolving landscape of Islamic finance financing and demand. While sustainability-linked sukuk and funds sector products experienced greater demand due to disclosure requirements and investor interest, the demand for green Islamic finance securities still lags behind conventional offerings. This is primarily due to the higher costs associated with Islamic finance and the challenges posed by reporting and standards for small and medium-sized enterprises.

Generational demands were identified as a significant driver for increased fund demand, with millennials leading the way. However, the lack of subsidies in some jurisdictions was deemed unattractive for Islamic finance investments. Nevertheless, the sukuk market was perceived to offer more opportunities compared to traditional banking and lending environments.

The Islamic Finance Roundtable provided valuable insights into the challenges and opportunities facing the Islamic finance industry. While weaknesses in reporting and commitments were acknowledged, positive developments such as increased sukuk issuance and a commitment to the SDGs demonstrated the industry’s potential. Overcoming roadblocks and capitalising on opportunities will require greater engagement, alignment with sustainability frameworks, and the development of adaptation-driven products. By embracing these changes, Islamic finance can position itself as a driving force in promoting sustainability and social impact within the global financial landscape.

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