Islamic Finance & Faith in the SDGs at COP26

For many, a warming climatic system is expected to impact the availability of necessities like freshwater, food security, and energy, while efforts to address climate change, both through adaptation and mitigation, will similarly inform and shape the global development agenda. The links between climate change and sustainable development are strong. Poor and developing countries, particularly least developed countries, will be among those most adversely affected and least able to cope with the anticipated shocks to their social, economic and natural systems.

As national ministers and heads of state convened in Glasgow, Scotland, to accelerate action towards the goals of the Paris Agreement and the UN Framework Convention on Climate Change (UNFCCC), for the 26th UN Climate Change Conference of the Parties (COP26) the Global Ethical Finance Initiative (GEFI) curated a unique programme to focalise this sustainable development challenge through the prism of Islamic finance, a proxy to the global south.

To raise awareness and drive climate action at COP26 GEFI, a non-profit dedicated to enabling finance to deliver positive change and help achieve the UN's Sustainable Development Goals (SDGs), ran a Path to COP26 campaign. The “Faith in the SDGs” workstream, led by the Islamic Finance Council UK (UKIFC), curated a unique one-day hybrid Islamic finance programme to coincide with the COP26’s finance day (Wednesday 3rd November 2021). Islamic finance experts from across the globe gathered both in-person, at the stunning Ross Priory on the banks of Loch Lomond, and remotely to demonstrate the important role Islamic finance can play in supporting climate action in the global south and beyond.

In the SDGs, UN Member States express their commitment to protect the planet from degradation and take urgent action on climate change. One of the most salient factors that challenge the achievement of the SDGs by 2030 is the shortage of financial resources. Several reports and studies have stated that around US$5-7 trillion dollars are required every year to achieve the SDGs, and with governments and donor agencies unable to meet demand, private sector funding is required.

The natural alignment between the SDGs and Islamic principles together with the size of the industry (currently US $2.5 trillion and expected to reach US $3.8 trillion in 2022[1]) mean that Islamic finance is well placed to create instruments that drive significant capital towards the SDGs and climate action.0  The ambitions of the SDGs are consistent with the objectives of Shariah (maqasid al-Shariah) which aim to bring benefits to mankind and prevent harm as well as ensure sustainability of life on earth. SDG alignment presents a unique opportunity for Islamic financial institutions to showcase the inherent social good and ethical basis of Islamic finance.

One of the key challenges in implementing the Paris Agreement and addressing climate change is the funding required to implement projects that contribute positively to Nationally Determined Contributions (NDCs). Whilst three quarters of countries have adaptation plans in place, financing remains an issue. According to UNEP FI “annual adaptation costs in developing countries are estimated at USD 70 billion” with his figure “expected to reach USD 140-300 billion in 2030 and USD 280-500 billion in 2050”.[2]

 Islamic finance is not limited to Muslim countries and has the potential to support the delivery of NDCs. This could be particularly attractive to the 57 Organisation of Islamic Cooperation (OIC) member states which collectively represent over 1.82 billion people (24% of the total world population) and include several low-income countries that are politically or culturally marginalised.

The GEFI / UKIFC Islamic Finance programme at COP26 provided a high profile platform to explore the role Islamic finance can play in attracting the capital needed to achieve the Paris Agreement and deliver the SDGs.

The first session, delivered in partnership with the United Nations (UN) and UN Economic and Social Commission for Western Asia (UNESCWA), discussed how Islamic social financing instruments can collectively promote the principles of social justice, solidarity, brotherhood and mutuality which can serve to help communities respond to and become more resilient to climate change whether related to food and water shortages, displacement as a result of natural disasters, or environmental education amongst other impacts.

Dr. Rola Dashti, Executive Secretary of UNESCWA noted the heavy debt burden in the Arab region, with eight times more debt received than grants for financing climate projects between 2013 and 2019. She highlighted zakat and wakaf assets (which exceed USD$3trillion throughout Muslim countries) as an importance source of grant funding to support innovation in sustainable development. She also provided details of the ESCWA Climate-SDGs Debt Swap / Donor Nexus Initiative which supports the conversion of national debt servicing payments of foreign debt into domestic investment for implementing climate-resilient projects that advance national SDGs. She asked that we all act collectively to utilise Islamic social funds to support the acceleration of the SDGs.

Dr. Al Meraikhi, Humanitarian Envoy to the UN Secretary-General highlighted the launch of International Dialogue on the Role of Islamic Social Financing in Achieving the Sustainable Development Goals between the UN and the Islamic Development Bank (IsDB) and noted that faith-based organisations have a crucial role in addressing the finance gap to achieve the SDGs.

The next session saw the UKIFC, Her Majesty’s Treasury, Ministry of Finance in the Republic of Indonesia Ministry, Islamic Development Bank, London Stock Exchange Group and GEFI jointly announce the launch of a High-Level Working Group on Green Sukuk (HLWG).

The 3-year initiative will direct investment to reduce greenhouse gas emissions in the world’s regions in most need. The announcement followed work of the Global Islamic Finance and UN SDGs Taskforce and a recent report “Innovation in Islamic Finance: Green Sukuk for SDGs” commissioned by UNDP Indonesia in which the UKIFC estimated that an additional US$30+ billion of capital towards the SDGs can be raised by 2025 through green and sustainability sukuk. To unlock this finance the HLWG has been launched to coordinate international efforts. The report showed how green and sustainability sukuk can be a viable financial instrument attracting billions of dollars of capital for green projects that support the delivery of the Paris Agreement.

The HLWG, led by the founding partners, will bring together expert global stakeholders with the UKIFC and GEFI acting as Secretariat. It will focus on the following objectives:

  • Ensuring green and sustainability sukuk is highlighted at annual COP summits up to and including 2023 to increase awareness of the instrument and proactively encourage the issuance of such sukuk by all market stakeholders (corporates, multilaterals and sovereigns) as a key Islamic financing key tool.
  • Assist and enhance existing established global standard setting bodies and regulatory initiatives run by the UN, IsDB and others (e.g. PRI, NGFS, Transform, PRB) to encourage better alignment of the Islamic finance industry with the global green and sustainability financial movement.
  • Identify and address specific existing challenges for green and sustainability sukuk on the supply and demand side.

As part of the introduction to the session UKIFC Managing Director Omar Shaikh outlined the natural alignment between the principles of Islamic finance and the role that green sukuk can play in channelling finance towards the climate emergency and the SDGs.

John Glen, Economic Secretary to the Treasury and City Minister then highlighted the UK’s strong credentials in green and Islamic finance and positioned green sukuk as an important route to secure investment for sustainable projects. He noted the vital role that Islamic finance must play in the green agenda. Julia Hoggett, Chief Executive, London Stock Exchange plc later welcomed the HLWG as a significant milestone for the development of Islamic finance and sustainable finance globally and stated that Islamic finance is a key component of sustainable finance. She also stressed the need to scale green sukuk to ensure that access to finance in a manner consistent with faith values.

As a pioneer in the issuance of international green sukuk, Sri Mulyani Indrawati, Minister of Finance, explained the Republic of Indonesia’s commitment to using the HLWG to share experiences and provide valuable precedents at the same time learning and applying best practices approaches. With the world recovering from global pandemic, Sri Mulyani Indrawati said that the HLWG provides the urgent momentum for nations, multilateral institutions and corporates across the world to work together to grow sustainably for future generations.

The Islamic Finance programme concluded with a Global Islamic Finance and SDGs Taskforce meeting. The Taskforce is a unique collaboration between the public and private sectors spearheaded by the UKIFC, HM Treasury, IsDB and assisted by GEFI. It brings together global Islamic finance practitioners to explore the opportunities for OIC member states to develop a collective approach to sustainable finance and funding the SDGs and climate-linked NDCs.

The meeting included:

  • An update from Sima Kamil, Deputy Governor of the State Bank of Pakistan who presented on the pioneering work in sustainable banking being undertaken as part of the Pakistan working group.
  • A presentation by Gatehouse Bank, Chief Executive Officer Charles Haresnape on a Guidance Note prepared in partnership with UKIFC and GEFI to provide a consistent approach to reporting and disclosure for Islamic banks signed up to the UNEP FI Principles for Responsible Banking.
  • An update from UKIFC Advisory Board member Sultan Choudhury on the progress of the largest ever global Islamic finance survey on sustainability.

After two weeks of negotiating, the Glasgow Climate Pact was successful in maintaining the focus on 1.5 degrees Celsius as well as creating a 2-year timetable for agreeing to more ambitious and faster NDCs to provide a lever for more progressive countries to ensure slower countries make the step up. Although the agreement to “phase down” coal power angered some it is notable that this is the first COP agreement that has made a direct reference to phasing down fossil fuels.

The Pact urges developed countries to “fully deliver” the $100bn per year goal through to 2025 as agreed in 2009. It also agrees to double the proportion of climate finance going towards adaptation and, despite a lack of progress, it confirms that a “technical assistance facility” will be introduced to support loss and damage in relation to climate change in developing countries.

Whilst private finance is not a substitute for increased public finance, it will be vital in increasing the scale and reach of climate action and enabling the transition. The programme was a high-profile platform for Islamic finance at COP26 and through the practically focused discussions has demonstrated how Islamic finance can be used effectively by developing countries to support NDC’s by attracting investment, at scale, to projects that, in line with the Paris Agreement, reduce national greenhouse gas emissions.

View all of the videos from our Path to COP26 programme at https://www.efx.global/cop26/.

[1] ICD - Refinitiv, ‘Islamic Finance Development Report 2019: Shifting Dynamics’ https://www.zawya.com/mena/en/ifg-publications/231019121250Z/

[2] United Nations Environment Programme (2021). Adaptation Gap Report 2020, Nairobi.


The Wealth of Nations in the 21st Century Launched

During the 18th Century, the Scottish Enlightenment put the Glasgow at the heart of world thinking. Today, as the world comes to Glasgow for the COP26, we ask what we can learn from one of the great pioneers of the Scottish Enlightenment: the renowned economist and former lecturer at the University of Glasgow, Adam Smith.

As part of the Adam Smith at the COP workstream of our Path to COP26 campaign, we have prepared a unique essay series entitled The Wealth of Nations in the 21st Century, looking at the climate crisis through the eyes of Smith. Click here to read the series, see below for a summary or read coverage of the series in Bloomberg.

This work updates Smith’s famous Wealth of Nations for the climate era. Expert authors from the fields of finance, economics, politics, development and central banking have taken the 5 ‘books’ of the original and written 5 essays drawing on Smith’s themes and reflecting on the climate crisis. They consider both how Smith’s thinking can guide our approach to climate action, and what he himself might have thought about the climate crisis.

We are extremely grateful to Lord Meghnad Desai, David Pitt-Watson, Usha Rao-Monari, Prof. Sir Anton Muscatelli, Tan Sri Dr Zeti Aziz, George Gray Molina, Dr Michele Battisti & Dr Craig Smith for sharing their fascinating insights. They have provided a truly remarkably review of the on-going relevance of Smith’s work, applying the Wealth of Nations, as well as drawing on the Theory of Moral Sentiments, to contemporary climate issues.

The essay series, supported by Royal London, will be launched at the University of Glasgow, where Smith once taught, during our Adam Smith at the COP evening lecture series on the 8th, 9th & 10th of December. Sign up now to join us online. Our wish is that the essay series encourages and inspires creative thinking and practical action to leave a small and enduring legacy after this crucial summit.

Foreword

In the foreword, Nicola Sturgeon, First Minister of Scotland, reflects on the importance of Smith to Scotland, and what he might think of the modern economy. “We cannot know exactly how Smith would have responded to the climate emergency, but given his support for reasonable protections against, for example, abuse of monopolies it seems likely that he would have supported regulation to guard against the destruction of the planet,” she wrote, adding that “It is the perfect time to reach back into our past as we look ahead to a future that is cleaner, greener and more just.”

Book I: ‘Of the Causes of Improvement in the productive Powers of Labour’

Lord Desai begins the reimagining of The Wealth of Nations and inspired, or perhaps dismayed, by the contents of Book I, challenges whether Smith has mis-defined the concept of value. Proposing that the conception of value outlined by Smith is a gross simplification of reality which has led future economic thinkers to adopt a theory of value so reductionist in outlook that all free inputs or negative impacts are ignored, as they had no monetary value.

Lord Desai reminds the reader of the flaws of such a reductionist approach, “between sowing and harvesting, there is a time gap where Nature performs the difficult task of ripening seed into crop. The time that creates value is unpaid for.” This critique of reductionism and misinterpretation of value translates equally well to time spent working in the home or caring for family.

Thus, asserts Lord Desi, the definition of ‘value’ remains the key to rethinking 21st century economic calculus, where an approach that applies the principles of cost accounting to including the ‘free’ goods Nature provides us offers a conservative and yet radical pathway to valuing all that is valuable.

Book II: ‘Of the Nature, Accumulation, and Employment of Stock’

David Pitt-Watson guides the reader through Book II which concerns the nature, accumulation, and employment of stock. He begins by broadening the conception of capital to include the services provided by nature, reminding us that Smith never considered that the services of nature as we know them might come to an end. And would surely have noted that if that money is applied in a way which destroys natural capital, it will reduce the prosperity of the world, potentially catastrophically.

He reminds us that for Smith, political economy was a practical question of how to “provide a plentiful revenue or subsistence for the people, or more properly to allow them to provide such a revenue for themselves”. In presiding over the decline of the benign stable conditions which underpin the growth of our civilisations we become responsible for navigating the pathway to net zero. And for those who say achieving net zero is too difficult and too expensive, he hypothesizes of what Adam Smith, the father of modern economics might say. Ultimately wealth depends on the accumulation of capital to make workers productive – if nature withdraws its capital, no prosperous future can await our children – and the economic gains of the last 250 years will all be lost.

Book III: ‘Of the different Progress of Opulence in different Nations’

In revisiting Book III, Usha Rao-Monari explains how the Industrial Revolution catalyzed a dramatic shift in the “opulence of nations”. In a similar way, the rise of the need for net zero economies is changing which development pathways are open to countries. The emission-intensive economies of today will become the “least sustainable countries” of the 2050s, she argues.

Alongside these deeper processes, we are likely to see a ratcheting up of regulatory policies regarding carbon pricing and disclosure standards. This leads us back where we started: research and development, technology, innovation and productivity as drivers of future growth –as they were in the 1770s boundaries.

Rao-Monari argues that Amartya Sen shifted the conversation on progress and development in the 1990s with the concept of human development, or “development as freedom”. This was the idea that progress was not defined not by the accumulation of assets, income or wealth, nor the achievement of a steady state goal, but the capability of each human being to choose both the ends and means of their daily lives.

While Smith is often revered as the Father of Economics, his other distinguished role is being part of the Scottish Enlightenment. The 21st century is once again faced with a period in history where scepticism to authority of all types and the power of reason is in question. Once again, argues Rao-Monari, we are tasked with a simple but powerful challenge: to use evidence, truth and reason to address the problems of our times.

Book IV: ‘Of Systems of political Economy’

In revisiting Book IV, Sir Muscatelli proposes that proposes that Smith’s core insight holds true: “that the system of political economy which is established is dependent on how trade impacts on domestic interests. As trade creates winners and losers, the political economic effects of trade openness and its acceptance among most people will be crucially affected by the success of other policies, including industrial policies and the ability to find employment for those who may be negatively affected, as well as on the role of the welfare state and redistributive policies at large.”

Muscatelli reminds us that Smith saw a close and enduring link between politics and economics, which benefited from analysis that is based on a case-by-case analysis of the impact on incentives and the unintended consequences of the policy. This point, famously illustrated by the metaphor of the invisible hand, is that policies have unintended consequences, and these consequences can be negative as well as positive.

Muscatelli asserts that even an effective and open trade policy is not sustainable in an environment in which some or all of the redistributive policies of welfare states do not generate improving living standards for the poorer sections of the population. Noting that the rise in global trade has contributed to a rise in inequality within individual nations; the potential for social dislocation caused by the rapid decline of specific industries and the added complexity when including environmental factors.

In closing Muscatelli draws on the arguments of Smith to offer three recommendations as we seek to address the climate challenge at COP26. That we consider trade policy in the context of societal and environmental challenges; we recognizing the impact on different groups in society and we revitalise international multilateral institutions to ensure they can handle the challenges ahead.

Book V: ‘Of the Revenue of the Sovereign or Commonwealth’

In reviewing Book V Dr Zeti Aziz, revisits the question of whether there is an optimal arrangement in which the private sector can participate collaboratively with the government in the provision of the public goods.  The duties of a sovereign; to protect society from danger, from oppression and injustice and to provide the supporting infrastructure and public works that were considered as vital for the well-being of the society, remain uncontested.

However, the unheeded warning that proliferation of public companies and the separation of ownership and management would lead to negligence has indeed come to fruition and delivered the anticipated destructive consequences. In response, he proposes that the decades of negligence and plundering of the nature, confer an additional responsibility and accountability on the owners of capital - to ensure the sustainability of our planet.

In closing Dr Zeti Aziz proposes a vision of a 21st century Adam Smith as a strong voice and advocate for the protection of the environment, including to the risks that may have intergenerational implications leading to higher overall costs to our planet and humanity.  In this case, the call would be for urgent action from both the state and the market to deliver an outcome that would allow our progress and prosperity to be enjoyed by future generations.

The Theory of Moral Sentiments

CLosing out the series, Royal London Climate Change Lead, Kaisie Rayner, introduces Smith's earlier and less famous (but no less important) work, The Theory of Moral Sentiments. She argues that this provides a guide for reading The Wealth of Nations, and more clearly brings out the socially-minded Smith.


The Wealth of Nations in the 21st Century launching next week

During the 18th Century, the Scottish Enlightenment put the Glasgow at the heart of world thinking. Today, as the world comes to Glasgow for the COP26, we ask what we can learn from one of the great pioneers of the Scottish Enlightenment: the renowned economist and former lecturer at the University of Glasgow, Adam Smith.

As part of the Adam Smith at the COP workstream of our Path to COP26 campaign, we have prepared this unique essay series entitled The Wealth of Nations in the 21st Century, looking at the climate crisis through the eyes of Smith.

This work updates Smith’s Wealth of Nations for the climate era. Expert authors from the fields of finance, economics, politics, development and central banking have taken the 5 ‘books’ of the original and written 5 essays drawing on Smith’s themes and reflecting on the climate crisis. They consider both how Smith’s thinking can guide our approach to climate action, and what he himself might have thought about the climate crisis.

We are extremely grateful to Lord Meghnad Desai, David Pitt-Watson, Usha Rao-Monari, Prof. Sir Anton Muscatelli, Tan Sri Dr Zeti Aziz, George Gray Molina, Dr Michele Battisti & Dr Craig Smith for sharing their fascinating insights. They have provided a truly remarkably review of the on-going relevance of Smith’s work, applying the Wealth of Nations, as well as drawing on the Theory of Moral Sentiments, to contemporary climate issues.

The essay series, supported by Royal London, will be launched at the University of Glasgow, where Smith once taught, during our Adam Smith at the COP evening lecture series on the 8th, 9th & 10th of December. Sign up now to join us in person or online. Our wish is that the essay series encourages and inspires creative thinking and practical action to leave a small and enduring legacy after this crucial summit.


Embedding the Sustainable Development Goals into commercial, financial products across asset classes

The Global Ethical Finance Initiative (GEFI) will be launching its SDG Financial Products Platform at COP26, showcasing financial products that are aligned to the Sustainable Development Goals (SDGs). The platform will partner with select financial institutions to grow the ecosystem of SDG aligned financial products across a range of asset classes.  

GEFI has been working in sustainable finance for over a decade and has historically focused on advocacy and raising awareness through capacity building and events. We are now moving to deliver practical, private sector led-solutions to drive real change in financial institutions on SDG alignment.  

With COP26 coming to Glasgow in November, there has been a lot of momentum around financial institutions taking action on climate change. There has been an explosion of pledges, frameworks and tools that assist financial institutions in setting and delivering on net zero by 2050. Collective action and enabling initiatives are essential to achieve net zero by 2050 and now is the time for financial institutions to leverage the work that has been done around net zero by 2050 to take action to achieve the SDGs by the earlier deadline of 2030.  

One of the seventeen SDGs is focused on climate action, but there are a further sixteen goals such as ending poverty, improving health, reducing inequality and spurring economic growth that all require immediate action. We need to tackle climate change to make sure there is a sustainable future for our planet, but we also need to achieve the SDGs to ensure that there is shared peace and prosperity for the people and planet, now and into the future. There are challenges to be overcome in private sector integration of the SDGs such as how do we measure and report on impact? How do we consider the holistic impact of a project on the SDGs? Is SDG alignment really driving positive change? These are complex issues and require collective thought and action across financial institutions. 

GEFI believes that this next decade needs to be one of action, there must be a system change to align financial institutions to the SDGs and enabling initiatives need to be developed to support this.  

To facilitate action in financial institutions, GEFI is launching its SDG Financial Products Platform at COP26. The platform is based on the belief that private sector led solutions are required to deliver the SDGs. If the SDGs are to be delivered by 2030, the SDGs need to be embedded in private-sector financial products across asset classes.  

The platform partners with select financial institutions to showcase innovative products that are aligned to the SDGs. The platform and partners work together throughout the product lifecycle to share learnings and build the ecosystem of SDG aligned financial products. In a market of increasing virtue signalling, financial products listed on the platform are prequalified. The platform only partners with financial institutions that demonstrate a genuine commitment to the SDGs and have embedded the SDGs in the product listed. 

The platform is the result of a collaboration between GEFI and the United Nations Development Programme (UNDP) to facilitate the development of private sector solutions that are aligned to the SDGs. 

We look forward to launching the platform at COP26 in collaboration with our key partner Aegon Asset Management who launched its Global Sustainable Bond Fund (“GSSBF”) on 22 October 2021. The GSSBF uses a proprietary methodology that incorporates the SDGs into the appraisal of sovereign bonds, investing in financially strong countries that contribute to the improvements in sustainability targets as defined by the SDGs. Further information on the GSSBF can be found here.   

If you would like to find out more about the SDG Financial Products Platform or would like to apply to become a partner, please contact Natalie Jackson at GEFI (natalie@globalethicalfinance.org). 


“Hope” is the thing with feathers | The Radical Old Idea with Prof. Tim Jackson

In our latest Radical Old Idea, Royal London’s Kaisie Rayner was joined by Professor Tim Jackson to discuss his latest book, ‘Post-Growth: Life after Capitalism’. In a discussion that ranged from Adam Smith to the teachings of Buddhism, to maintaining hope in the face of despair. Professor Jackson called for a complete rethink on how we define prosperity. Watch the full session now on EFx.

While Professor Jackson’s previous book, ‘Prosperity without Growth’, was close to a policy manual for governments, ‘Post Growth: Life After Capitalism’ is a philosophical examination on the failings of our current economic model. Although written during the Covid pandemic and certainly partly influenced by the fallout of the last 18 months, it is more a culmination of years of reflection from one of the world’s leading ecological economists.  

The session started with Adam Smith, the so-called ‘father of capitalism’. Professor Jackson described how the legacy of Adam Smith has been “used and abused” by free-market capitalism. Proponents of lassez-faire capitalism seized on the ‘invisible hand of the market’, as evidence that Smith would be an advocate of today’s economy.

Professor Jackson disagrees, arguing that Smith would have been appalled by the modern markets, and their domination by monopoly power. Smith believed markets relied upon trust and community, and that the state had a fundamental role in countering unrestrained self-interest. The power wielded by conglomerates over governments today was something Smith warned against, not something he would have lauded.

In his book, Professor Jackson also mentions another great thinker who has had one of their ideas take on a life of its own, psychologist Abraham Maslow. Maslow’s 'hierarchy of needs' has been used as evidence that a linear relationship exists between fundamental human needs such as food or shelter, and social or psychological needs.

Without the former, humans do not engage with the latter. Maslow later upturned this hierarchy – something which has been lost in history. Social and psychological needs are not ‘nice to haves’ but fundamental to human wellbeing. Our physical needs can be secondary to our social needs – a lesson reinforced by our experiences over the last 18 months.   

Professor Jackson also spoke of how Buddhism and capitalism start in the same place – the recognition of suffering. The message of capitalism is to escape from this suffering, to struggle to ensure we escape poverty and ensure that we are not the worst off in society, turning life into a competitive endeavour. The recent trend of billionaires to conquer space is perhaps a manifestation of our existential anxiety to get as far away from suffering as possible.

By contrast, Buddhism teaches to face suffering head on and with compassion, not to escape it. We can learn from Buddhism in many ways, finding joy in being human and not from the material consumption essential for a society dependent on growth. If we can change our definition of prosperity to mean health and balance rather than having more, we will see a powerful transformation at every level.  

To finish, Kaisie asked Professor Jackson if he still has hope for humanity. To answer, he drew on the poetry of Emily Dickinson: 

“Hope” is the thing with feathers

That perches in the soul

And sings the tune without the words

And never stops - at all 

 Something in the human soul means that hope will not abandon us. Hope must however turn to action, and action is the antidote to despair.


Allocate new multilateral finance to developing countries, says COP26 President Alok Sharma

We need to allocate new multilateral finance to developing countries, says COP26 President Alok Sharma. On 11 July, COP26 President Alok Sharma told an audience in Venice that "climate change is the greatest challenge that we face", and "to keep that 1.5 degree limit within reach, we must halve global emissions by 2030, and these efforts depend on finance. Without it, the task ahead is near impossible."

One of the UK government's key aims for COP26 is to "get finance flowing to climate action, both public finance and private finance", with a particular focus on emerging markets and developing countries, "where the need is greatest".

Sharma claimed it was "essential that developed countries deliver the $100billion a year that they have promised to developing countries", a sum that promises to be a major sticking point in the upcoming negotiations. Agreed at Copenhagen, the failure to deliver on this promise has seriously damaged trust from developing countries in industralised countries' committment to global climate action.

One solution to this is a $650bn allocation of Special Drawing Rights (SDRs), a multi-currency lending facility, being prepared by the IMF. The G7 has argued that they want to "channel almost a sixth of the newly allocated SDRs to support healthy, green and resilient recoveries from Covid-19 in the poorest and most vulnerable countries", said Sharma, calling for a more ambitious level of SDR recycling than during the aftermath of the Global Financial Crisis.

The Reading West MP urged Multilateral Development Banks (MDBs) to take action, suggesting that "every MDB should set a date by which they will align with the Paris Agreement, as the World Bank and the EBRD have done." We will be working with the Islamic Development Bank on our Path to COP26 campaign.

"Every MDB should meet their climate finance targets, increasing them where possible, and develop plans to mobilise more private finance", said Sharma. This will be key to overcoming the significant barriers that still exist to investment in emerging markets, which can seem too risky to attract large-scale institutional capital, despite the enormous investment opportunities.

The COP26 President urged MDBs and private financial firms to "increase their collaboration, and scale-up blended finance initiatives and technical assistance, and to improve the conditions for investment within countries, and build pipelines of high-quality, bankable projects". One initiative in this vein has been the IsDB's Transform Fund, which Hayat Sindi, Scientific Adviser to then President of IsDB, spoke about during our SDG financing panel at Ethical Finance 2021.


The case against a growing economy

Anyone who believes in indefinite growth in anything physical, on a physically finite planet, is either mad or an economist

When Boulding spoke those words in the 1970s, the environmental movement was but a shadow of what it is now. In the decades since, climate change has moved from fringe concern to being at the centre – rhetorically at least – of how we think about our economies. As the problem of climate change takes centre stage, so the question of growth has followed, with countries including Scotland, New Zealand and Bhutan have made moves towards going beyond GDP in their national accounts.

They are still very much in the minority; since the industrial revolution, finance and economics have taken a constantly growing economy to be both a fact of life and an ideal state of being, something to take for granted and to strive for. But there have been voices of dissent. Before he was tragically killed, Bobby Kennedy had raised concerns about the idea of limitless growth. As Prof. Tim Jackson notes in his excellent new book Post Growth: Life After Capitalism, the younger Kennedy had, in a 1968 speech, raised concerns about the accuracy of GDP measuring social wellbeing, and the impact that pursuing it would have on the planet and its people.

Prof. Jackson, Director of the Centre for the Understanding of Sustainable Prosperity (CUSP) will be appearing in an interview with Kaisie Rayner, Climate Change Lead at Royal London on 14 July at 14:00 BST as part of our Radical Old Idea series. In the spirit of that series, inspired by the Scottish Enlightenment, the ideas discussed go back even further: John Stuart Mill professed a sympathy towards a steady state economy in 1848’s Principles of Political Economy, at the start of the industrial revolution.

Despite the constant presence of economic growth since the industrial revolution, it has changed over time. The 5% rates of growth typical in Western countries during the “golden age of capitalism” immediately following World War II had given way to rates of just 1-2%, even before the Global Financial Crisis.

Why is this? Labour productivity has been in decline. While it grows, social tensions between classes can easily be resolved. As the pie grows, we can all content ourselves with a growing slice. When it stops growing, getting a bigger slice for yourself becomes a zero-sum game. In fact, it is arguable that the astonishing growth rates of the post-war period were in fact only possible due to an increasing exploitation of the natural environment.

Since the 1980s, the social contract that characterised post-war capitalism has been broken, as the embrace of neoliberalism by Thatcher and Reagan removed any restrictions on uninhibited profit. Smith would have disagreed, railed against “those who live by profit” – a Radical Old Idea indeed – and advocated state regulation to guard against their capture of the economy. It had lead to a finance system that, as Lord Turner stated in the wake of the financial crisis, includes a lot of “socially useless” activity, focused on pursuing and capturing rents, not allocating capital to where it is most needed.

Can we continue to grow? 1972’s Limits to Growth pushed this question towards the mainstream. Fundamentally, as Jackson argues, people do not like being told their lives are limited. The idea of limits is anathema to most economists. Green growth is the preferred solution. But is it possible? There is, after all, “no growth on a dead planet”, as Jackson states.

So far, we have not decoupled economic output from material input to a great enough degree. Relative decoupling has been achieved: the carbon intensity of economic activity has fallen by a third since the 60s, but this is not enough. To reduce our impact on the planet, we have to decouple faster than we grow, and that is not happening. The solution, according to Jackson, is a reimagining of what prosperity means, moving beyond simple expansion of material wealth.

Indeed, there have been serious questions raised about whether expanding material wealth truly does entail “true” prosperity. The Easterlin Paradox was the remarkable finding by economist Richard Easterlin that, beyond a certain amount, raising average national income does almost nothing for happiness. Once you cross a threshold of roughly $20,000 per person (which suggests that growth is still important for the poorest countries), and extreme poverty and basic needs are taken care of, an ever-increasing average fails to deliver any meaningful progress.

The work of Pickett and Wilkinson in The Spirit Level perhaps goes some way to explaining this – the pair find that equality, rather than material increases, is a more reliable driver of contentment in industrialised economies. Another explanation lies in the idea of “the hedonic treadmill”, introduced by Philip Brickman and Donald T. Campbell, which suggests that humans quickly adjust to new luxuries, moving them from novelties to things they cannot live without, and losing any increase in happiness in the process.

The challenge for humanity – for finance, and for economics – is to find something other than growth to pursue, and to deal with the social consequences of limiting growth. To return to talk of pensions after discussing the future of the economy might seem mundane, but it is important.

To hear Prof. Tim Jackson in conversation with Royal London Climate Change Lead Kaisie Rayner on Wednesday 14th July, exploring these ideas in the context of the pension industry, click here to sign up. We are looking forward to a provocative debate. Tim's latest book Post Growth can be purchased at https://politybooks.com/bookdetail/?isbn=9781509542512.


UK must make its Green Finance ambition work for the whole planet

The UK government has committed to establishing the UK as a global green finance hub, and to propagating consistently high standards around green finance globally. This is a very encouraging move ahead of COP26. At GEFI, we believe very strongly that international cooperation and, in particular, engaging with the global south will be key to developing credible plans for a global net zero economy.

As our co-founder and director Omar Shaikh said:

We welcome the ambition to make the UK a leader in green finance. But Net Zero is a global game and we must use the UK’s financial services position as a global leader to take the opportunity of COP26 to make the green transition fair for every citizen of our shared planet.

Our recent flagship Ethical Finance summit saw a full day devoted to a series of global showcases, bringing in perspectives on sustainable finance from regions including South Asia, West Africa and South East Asia; see our EFx platform to watch all of these and more.

The development and implementation of TCFD and TNFD frameworks must play a crucial role in government and regulatory strategies to ensure climate and biodiversity risks are not only recognised but are measured and reported on by financial institutions. Such developments will drive green finance globally as capital is diverted towards mitigation and adaptation investments.

The emergence of global frameworks provides best practice standards, consistency and transparency the finance sector has been seeking and, in so doing, reduces the threat of greenwashing. You can watch the new TNFD Co-chair Elizabeth Mrema and Mikkel Larsen of DBS Bank, one of the key institutions developing TNFD explain the new nature-focused framework at Ethical Finance 2021.

Ultimately, the financial sector must play a pivotal role in delivering a Net Zero economy, but it cannot do so without international collaboration.

COP26 represents the perfect opportunity for the finance sector to work with governments on a global stage. As the curtain gets set to rise in less than 17 weeks, the UK government must lead from the front to inspire others to commit to a Net Zero and nature positive economy that guarantees both the survival and prosperity of the whole planet. The need to raise awareness and inspire practical action has driven GEFI to convene a powerful group of financial services institutions and stakeholders through our Path to COP26 campaign.

Alongside programmes driving Finance for Nature, and integrating faith perspectives with the SDGs, the campaign aims to unlock the power of ordinary people’s pensions to deliver a better future for everyone, and position both Scotland and the UK at the heart of a global Green Finance that works for the whole planet, ensuring that people (and not simply profit) are allowed to prosper.


Partnership agreed enabling bankers to become a ‘force for positive change’

Partnership agreed enabling bankers to become a ‘force for positive change’

The UK’s largest professional body for bankers has agreed a partnership to promote ethical investment across the globe.

The three-year agreement will see the Chartered Banker Institute and the Scotland-based Global Ethical Finance Initiative (GEFI) work towards positive change in the sector.

They will use the COP26 summit in Glasgow in November as the catalyst to encourage financial institutions to finance the transformation needed in the economy.

The strategic alliance will support bankers to play a leading role in achieving net zero and honouring commitments made at previous COP summits to limit harmful emissions.

The deal will pay particular heed to the ‘Carney Test’ – set by former Bank of England governor Mark Carney – which implores financial institutions to take climate change into account when taking any financial decision.

GEFI, which is based in Edinburgh, said the Covid crisis also presented the financial sector with the opportunity to make changes that would bring long-lasting benefits to the environment.

Recently, the Scottish Government announced it would be a partner for GEFI’s ‘Path to COP26’ campaign in order to show Scotland was playing a key role in the global shift towards environmentally responsible and sustainable finance.

The organisation is holding a series of events in the run-up to COP26.

In a joint statement, Simon Thompson CEO, Chartered Banker Institute, and Dame Susan Rice, chair of the global steering group, Global Ethical Finance Institute, said:

“Global leaders have a stark choice about the legacy they want to leave our planet.

“Financing this transition will require the deployment of global capital on an unprecedented scale and a transformational shift in the banks and the bankers of the future.

“This important partnership is aimed at supporting bankers to be a force for positive change across the world.

“Merely talking about the scale of the problem climate change presents will not be enough – the banking sector needs to act too.

“Rebuilding the global economy after Covid-19 and delivering on the climate change challenge presents a unique opportunity. 

“That’s an opportunity for bankers across the world to be a force for positive change.”

Read more in The Banker: https://www.thebanker.com/Comment-Profiles/Viewpoint/Bankers-must-pass-the-Carney-test

The Chartered Banker Institute (CBI) and the Global Ethical Finance Initiative (GEFI) have announced a three-year strategic partnership to support bankers to be a force for positive change.

The UN’s 26th climate conference, COP26, taking place in Glasgow this November, presents global leaders with stark choices about the legacy we want to leave for our planet. The scale of change to achieve net-zero carbon emissions is bigger than any transition the global economy has ever seen; to meet the climate targets set in Paris in 2015 will mean an 11% reduction in carbon intensity every year from now to 2050. 

Financing this transition requires the deployment of global capital on an unprecedented scale, and a transformational shift in the banks and the bankers of the future. The Bank of England, under its former governor Mark Carney (now a UN special envoy for climate action and finance, and the UK prime minister’s finance adviser for COP26), set the objective in 2020 of ensuring that “every professional financial decision will need to take climate change into account”. In order to pass the ‘Carney test’, as it has been dubbed, we have identified the need for every finance professional to have the skills and knowledge to accurately assess climate-related risk and opportunities.

The UN Principles for Responsible Banking align banks and their lending decisions with the needs of our planet and its people. This work is well advanced in more than 200 banks worldwide; our two organisations have been helping bankers understand how to implement the principles and supporting the expansion into developing economies, for example, by supporting a group of Islamic banks who want to make this commitment. 

The CBI, the world’s oldest banking institute, launched a green finance education charter at the end of June 2020. It is now supporting its 30,000 members across the world — and its network of affiliated organisations, such as the Asian Institute of Chartered Bankers and Finsia in Australia and New Zealand — to get the skills they need to pass the ‘Carney test’. GEFI has grown in scale and reach over the past decade, as more and more bankers from different disciplines have sought out the expertise they need for the herculean task ahead. It has launched a ‘Path to COP26’ campaign that brings together 40 financial institutions, managing more than £2tn in assets, who are committed to make finance work in support of COP26 and on the road to net-zero. In line with our efforts, we are pleased to see UK banks such as NatWest, a sponsor of COP26, strengthening its climate policies.

But we all need to do more. Knowing how to measure the size of the climate problem and the risks that banks face is not enough. The explosion in fintech and the recovery from the global financial crisis has demonstrated the powerful forces of innovation and adaptation that reside within banks. Leaders in banking must make it clear that they want to see that power mobilised and channelled in this direction. We should expect our banks and individual bankers to be at the forefront of developing solutions and enabling a transition to a greener, fairer and more sustainable future. However, the impact and timing of decisions in the short, medium and long term must also consider how change can provide a socially just transition for customers, communities and society through responsible lending and inclusive, customer-centric services.

Rebuilding the global economy after Covid-19 and delivering on the climate challenge presents a unique opportunity. Now is the time for bankers to be a force for positive change. 


Fashion & Finance: Funding The Change

With the fashion industry's pollution levels second only to those of the oil industry it is clear change is necessary[1]. The current industry model of fast fashion is inherently unsustainable with the norms of constantly rotating styles that quickly make clothes 'out of fashion'[2]. This fast fashion model is the cause of unimaginable damage to people and planet.

The industry is now a race to the bottom where optimising costs and efficiency in order to operate on narrow margins is a priority[3]. In order to undercut competition’s prices the race leads to the use of cheap, unsustainable materials, exploited garment workers, unsafe working conditions; and a devastating environmental impact caused by factors such as the use of pesticides and textile waste.

The fashion industry is late to the sustainability scene and has brought its fair share of unethical baggage, from greenwashing to a lack of transparency in never-ending supply chains. But the industry cannot make significant (or disruptive) change alone. It needs help from the public and private sector.

Crucially, the Financial Services industry needs to recognise the opportunities they stand to gain in through fashion. According to Fashion for Good and BCG, the Fashion industry requires $20-30bn of financing per year to develop and commercialise disruptive solutions and business models that will move the industry towards sustainability3. It is clear there is a huge financing gap, but the good news is that many viable solutions already exist, with Fashion for Good identifying 1,500 viable innovators within their first two years of operating3. The issue is there is a lack of capital to grow these innovations on a disruptive scale.

So, what can the financial sector do to help?

  • Venture Capitalists are being called upon to support, and fund, up and coming innovations within the fashion industry. Due to the technicalities of some innovative projects, particularly those aiming for hard-tech innovations (physical innovations such as the development of a new sustainable material) this is sadly not enough. Brands such as H&M and Patagonia are also investing in early stage hard-tech innovations through Corporate Venture Capital (CVC) investments3. But other fashion companies need to follow suit, and fast, as funding directly from the fashion companies contributes a limited source of capital to sustainable innovators in fashion.
  • Specialised funds have also emerged over the past few years to overcome limited experience and expertise preventing investors in pursuing sustainable fashion innovation. Funds such as the Textile Innovation Fund and the Good Fashion Fund provide the means to support 3D printing, chemical recycling and plant-based fibres.
  • Blended capital can act as an avenue to reduce the financing gap in fashion. However, public and private collaboration is required to create disruptive change. The Good Fashion Fund already follows this model using private and philanthropic capital from the C&A Foundation.
  • Growth capital and private equity investors can invest in growing start-up fashion brands that have big consumer draw and e-commerce distribution. For example in July 2019, Permira announced that it had acquired a majority stake in the ethical fashion brand Reformation.
  • Sustainably Linked Loans (SLLs) can provide general corporate financing tied to sustainability KPIs and are another option for the financial sector to help change fashion for the better. The market for SLLs rose from $5 billion in 2017 to $40 billion in 20183. In November 2019, Prada became the first fashion company to sign a five year €50 million SLL, with Crédit Agricole Group, under the condition that Prada could pay a reduced interest rate if it achieves various targets related to its sustainability.

These are just a few of the options the financial sector has when it comes to funding the change for fashion.  But should the financial sector simply stop investing in fast fashion companies? And is there really a lack of finance within this $3 trillion market that accounts for 2% of global GDP?

The answers to these questions will demand urgent attention in the lead up to COP26 in Glasgow, as the fashion industry covers nearly every UN Sustainable Development Goal in some shape or form. There is no denying that the fashion industry is massive and damaging, but it also presents an opportunity for change. However, in order to make the change the fashion industry is going to need help, and the financial sector has an opportunity and responsibility to do so.

References

[1] Suraci, O. (2021) ‘The Best-Dressed Polluter - Regulation and Sustainability in the Fashion Industry’, Hastings Environmental Law Journal, 27(2), pp. 225–242. Available at: https://search.ebscohost.com/login.aspx?direct=true&AuthType=shib&db=edshol&AN=edshol.hein.journals.haswnw27.21&site=eds-live

[2] Sara Greco, Barbara De Cock, Argumentative misalignments in the controversy surrounding fashion sustainability, Journal of Pragmatics, Volume 174, 2021, Pages 55-67, ISSN 0378-2166, https://doi.org/10.1016/j.pragma.2020.12.019.

[3] Financing the Transformation in the Fashion Industry (Jan, 2020) & Investing in Textile Innovation Report (Oct 2019): https://fashionforgood.com/news/resource-library/

 

Image credit: https://www.ecolife.zone/ethical-fashion/