Path to COP28 Highlights: Adam Smith and Ibn Khaldun at COP28- The Relationship Between Profit and Purpose

The Relationship Between Profit and Purpose

 

On the 5th of December in Dubai, GEFI hosted the last of the ‘Adam Smith and Ibn Khaldun at COP28’ evening lectures series at the Heriot-Watt University Climate Hub, exploring the perspectives of Scottish Adam Smith and Arab Ibn Khaldun on the relationship between profit and purpose.

Following an MC Welcome by Dr. Erika Anderson, GEFI Research Analyst, Prof. Adam Dixon, Adam Smith Chair in Sustainable Capitalism, Adam Smith’s Panmure House, Edinburgh Business School, Heriot-Watt University delivered a keynote on maintaining Adam Smith’s Legacy and Panmure House.

Dr. Frederic Samama, Head of Strategic Development, S&P Global Sustainable1, then took to the stage to deliver a presentation on Climate Macro-hedging. Dr. Frederic presentation addressed the challenge faced by investors committed to carbon neutrality, who represent $130 trillion. The proposed solution involved using IPCC-aligned equity benchmarks to implement a climate macro-hedge, minimising portfolio impacts. While carbon neutrality is currently feasible, the presentation highlighted time-sensitive issues, including the rapid decarbonisation rate, potential IPCC revisions of overall carbon budget, increased carbon tax impact, selling pressure on polluting companies, and rising physical risks. The urgency underscores the need for prompt action in macro-hedging strategies for climate.

 

The Ibn Khaldun Perspective

Lecture by Professor Mehmet Asutay, Professor of Middle Eastern and Islamic Political Economy & Finance; Director, Durham Centre for Islamic Economics and Finance, Durham University Business School, UK

In a world saturated with the buzzword “sustainability,” Professor Mehmet invited us to ponder a crucial question: are we all speaking the same language? Do our notions of sustainable development truly address the root causes of our most pressing challenges, from poverty and environmental degradation to social inequity?

Professor Mehmet’s analysis drew upon the insightful framework of Ibn Khaldun, a 14th-century scholar who revolutionised our understanding of human society and its economic underpinnings. Through his “ilm al-umran al-bashari wa-l-ijtima al-insani” (the science of the civilisation of mankind and human socialisation), Ibn Khaldun offers a powerful critique of economic models that prioritise profit over human well-being and environmental sustainability.

Current economic paradigms, often rooted in the understandings of Adam Smith’s theories, focus heavily on factors like capital and labor. However, as Professor Mehmet points out, this equation fails to account for the broader societal and environmental consequences of economic activity. Ibn Khaldun, conversely, emphasises the importance of factors like “Asabiyyah” (social solidarity) and “Rizq” (divine beneficence). He challenges us to expand our economic equation to include not just production and consumption, but also justice, harmony, and the ethical distribution of resources.

The Islamic moral economy, as outlined by Professor Mehmet, further distinguishes itself from the profit-driven models commonly adopted by the western hemisphere. Under the Islamic moral economy, the pursuit of “Falah” (individual and societal flourishing) takes precedence over mere profit maximisation. Mechanisms like Zakat (redistribution of wealth) and Ihsani governance (prioritising ethical resource allocation) aim to ensure equitable distribution and social responsibility.

Ibn Khaldun’s perspective also sheds light on the intrinsic value of labor, rejecting the notion of it as a mere commodity. He highlights the importance of “Kasb,” the surplus generated through effort and skill, but warns against its potential to create harmful inequality. His call for a wider distribution of “Jah” (social power and prestige) echoes the Islamic moral economy’s focus on empowering individuals and communities to share in the fruits of their collective labor.

Quotes:

“… and what earnings, living, sciences, crafts [and industries], etc. people acquire, by their works and efforts”- Ibn Khaldun
“farmers and traders rush to them while they sit in their home without moving an inch, meanwhile their wealth grows, and their accumulation (kasb) rises, and their riches are consolidated without effort”- Ibn Khaldun

 

The Adam Smith Perspective

Lecture by David Pitt-Watson, Global Steering Group, GEFI

Adam Smith, the father of modern economics, is often remembered for his championing of the free market and the “invisible hand.” However, a closer look at his work, particularly his lesser-known “Theory of Moral Sentiments,” reveals a more nuanced thinker who believed in the importance of empathy, social responsibility, and ethical considerations in economic life.

One of the most misconstrued aspects of Smith’s work is the idea that he viewed human nature as purely self-interested. While he did acknowledge the role of self-interest in economic activity, he also argued that humans are inherently social and moral creatures. The infamous quote, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner,” is often used to depict Smith’s economic vision as purely self-interested. However, David Pitt-Watson argues that this quote is a simplification of human nature and economic relations. Smith, in his Theory of Moral Sentiments, reveals a deeper understanding of human nature, recognising our inherent social and moral inclinations. He believed that empathy and concern for others, not just self-interest, play a crucial role in economic interactions.

In his “Theory of Moral Sentiments,” Smith explores the concept of sympathy, arguing that we have an innate capacity to understand and share the feelings of others. This sense of empathy, he believed, plays a crucial role in shaping our moral judgments and economic decisions. We are not only driven by self-interest, but also by a desire to act in ways that are considered fair, just, and beneficial to others. Smith believed that the ultimate arbiter of morality is not external authority, but our own internal conscience.

David criticised the reduction of economics to mere mathematical models, arguing that this ignores the crucial role of morality in Smith’s vision. David argued that Smith would be deeply uncomfortable with many of the institutions that have come to define our economy, such as limited liability companies and banks. These institutions, as David argued on behalf of Smith’s theories, shield individuals from the consequences of their actions and incentivise risky behavior.

Smith’s emphasis on empathy and moral considerations extends to his views on business and finance. He believed that businesses have a responsibility to consider the interests of all stakeholders, not just shareholders. This includes employees, customers, communities, and the environment.

Quotes:

“However selfish man may be supposed, there are evidently some principles in his nature which interest him in the fortunes of others and render their happiness necessary to him though he derives nothing from it except the pleasure of seeing it.” – Adam Smith, Theory of Moral Sentiments

“When I endeavor to examine my own conduct…I divide myself as it were into two persons …the first is the judge the second the person judged of.” – Adam Smith, Theory of Moral Sentiments

“What so great happiness as to be beloved, and know that we deserve to be beloved?” – Adam Smith, Theory of Moral Sentiments


Path to COP28 Highlights: Adam Smith and Ibn Khaldun at COP28- Unlocking Positive Systemic Change: Identifying Leverage Points for Sustainable Transformation

Unlocking Positive Systemic Change and Identifying Leverage Points for Sustainable Transformation

On the 4th of December in Dubai, GEFI hosted the 2nd of 3 engaging ‘Adam Smith and Ibn Khaldun at COP28’ evening lectures at the DIFC Academy, exploring the perspectives of Scottish Adam Smith and Arab Ibn Khaldun on unlocking positive systemic change and identifying leverage points for sustainable transformation.

In a keynote address, Amal Larhlid, Partner at PwC, reminded us that the path forward requires a bold reimagination, a world where “thinking outside the box” is redefined because boxes never existed. She emphasises the importance of societal cohesion and calls for a critical examination of how taxonomies and carbon taxation, as tools of market influence, can be harnessed for positive change. Her vision is one where companies become agents of good, investing in a future where profit and purpose coexist harmoniously.

“Finance goes beyond being a mere medium of exchange; it acts as a channel for meaningful initiatives…The journey is not solely focused on money making but on meaning-making,” said Amal.

 

The Ibn Khaldun Perspective

Lecture by Tan Sri Azman Mokhtar, Chairman, Leadership Council of the Malaysia International Islamic Finance Centre (MIFC); Global Steering Group, GEFI

The lecture delivered by Tan Sri Azman Mokhtar on unlocking positive systemic change seamlessly bridged the preceding lecture with the one to follow. Tan Sri Azman reminds us that the Asian financial crisis served as a stark reminder that there is more to life than just finance. It exposed the interconnectedness of financial, social, and political systems, highlighting the fragility of prosperity built solely on economic foundations.

Drawing upon the wisdom of two intellectual figures, Ibn Khaldun and Adam Smith, Tan Sri Azman highlights their shared wells of scholarship, despite their temporal separation. Both thinkers explored themes of Division of labour, specialisation in production and trade, labour theory of value, Free trade and free (but regulated) markets, personal and collective agency and social solidarity and harmony (invisible hand, within a moral economy of Smith, good assabiyah of Ibn Khaldun). Their insights have laid the foundation for classical and neoclassical economics, influencing future thinkers like Marx, Keynes, and North, Putnam, and Ostrom.

He emphasises the need for critical reflection and a willingness to learn from the past. Citing the concept of “loss of ijtihad,” he encourages us to revisit the “fork in the road” of history to understand the choices that led us here and avoid repeating mistakes. He argues that development necessitates a multidisciplinary approach, transcending the siloed perspectives of traditional academic disciplines.

His exploration of the relationship between profit and purpose is particularly relevant in today’s world. He posits that finance should not be an end in itself, but rather a tool to support the real economy and ultimately serve society. He envisions a “thoughtful economic man,” driven by wisdom and a sense of social responsibility.

Tan Sri Azman challenges the traditional pyramid structure of economic power, arguing for a more circular approach where finance and the real economy are interconnected and mutually supportive. He sees Islamic finance as a valuable model for promoting ethical and sustainable investments, but as it stands, it can occasionally be guilty of green flagging. Tan Sri Azman concluded by highlighting the enduring relevance of Ibn Khaldun’s insights he has drawn upon across his varied career to set investment strategies that consider both material prosperity and moral responsibility.

Quotes:

“To restrain our selfish, and to indulge our benevolent affections, constitutes the perfection of human nature” Adam Smith, The Theory of Moral Sentiments

“The natural state of man is a state of peace and security …Civilisations flourishes or declines according to the cohesion of its component parts …” Ibn Khaldun, Muqaddimah

 

The Adam Smith Perspective

Lecture by Prof. Adam Dixon’s, Adam Smith Chair in Sustainable Capitalism, Adam Smith’s Panmure House, Edinburgh Business School, Heriot-Watt University

Prof. Adam’s lecture offered a valuable counterpoint to the often-simplistic narratives surrounding the climate crisis. He reminds us that addressing this complex challenge requires a delicate balance between decisive action, respect for individual needs, and a deep understanding of the interconnectedness of social, political, and economic systems.

Prof. Adam delved deeper into the multifaceted nature of the climate crisis, emphasising that it is not just an ecological issue but also a social and political one. He urges us to read Adam Smith’s works as a whole, recognising the interconnectedness of his “Theory of Moral Sentiments” and “Wealth of Nations.” He argues that Smith, writing in a pre-capitalist era, envisioned a gradual, non-violent approach to societal change, where statesmen understand the limitations of imposing drastic reforms and respect the slow pace of societal evolution.
Prof. Adam challenges the notion of forceful change, emphasising the need for understanding the capacity and tolerance of the community. He acknowledges the diversity of human emotions, needs, and decision-making capabilities, suggesting that a one-size-fits-all approach is unlikely to succeed.

This led Prof. Adam to question the current state of the climate economy, critiquing the piecemeal approach to mitigation and adaptation. He expresses skepticism towards throwing money at the problem without a clear understanding of its effectiveness. He voices concern about the unequal impact of climate change, highlighting the disparity in costs faced by developed and developing countries.
Prof. Adam emphasises the need for a “just transition” that acknowledges the differing realities and priorities of different societies. He questions whether we are truly doing enough and criticises the lack of consensus on the path forward. He argues that addressing the climate crisis requires more than just an endpoint; it demands a clear understanding of the “how,” considering both adaptation and mitigation strategies.

Furthermore, Prof. Adam raised concerns about the unintended consequences of drastic policies, questioning whether revolutionary change is necessary or even desirable. He suggested that we can drive more sustainable forms of capitalism while respecting the individuality of different societies.

Finally, Prof. Adam highlighted the challenges facing the sustainable finance industry. He recognised the accusations of being both “man of humanity” and “man of system,” struggling to balance humanitarian concerns with the need for economic progress. He acknowledges the current focus of sustainable finance on the Global North and emphasises the need to bridge the gap with the Global South.

Quotes:

Adam Smith’s Man of Humanity approach:

“The man whose public spirit is prompted altogether by humanity and benevolence, will respect the established powers and privileges even of individuals, and still more those of the great orders and societies, into which the state is divided. Though he should consider some of them as in some measure abusive, he will content himself with moderating, what he often cannot annihilate without great violence. When he cannot conquer the rooted prejudices of the people by reason and persuasion, he will not attempt to subdue them by force; but will religiously observe what, by Cicero, is justly called the divine maxim of Plato, never to use violence to his country no more than to his parents. He will accommodate, as well as he can, his public arrangements to the confirmed habits and prejudices of the people; and will remedy as well as he can, the inconveniencies which may flow from the want of those regulations which the people are averse to submit to. When he cannot establish the right, he will not disdain to ameliorate the wrong; but like Solon, when he cannot establish the best system of laws, he will endeavour to establish the best that the people can bear.” TMS VI

Adam Smith’s Man of System approach:

“The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess- board. He does not consider that the pieces upon the chess- board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess- board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.” TMS VI


Path to COP28 Highlights: Adam Smith and Ibn Khaldun at COP28- Climate's Impact: The Rise and Fall of Economies and Nations

On the 3rd of December in Dubai, GEFI hosted the 1st of 3 engaging ‘Adam Smith and Ibn Khaldun at COP28’ evening lectures at the DIFC Academy, exploring the perspectives of Scottish Adam Smith and Arab Ibn Khaldun on the impact of climate on the rise and fall of economies and nations. The discussion unfolded through insightful presentations and discussions, shedding light on the relevance of their theories in the face of contemporary climate challenges.

Simon Thompson, Chief Executive of the Chartered Banker Institute, set the stage by highlighting the unique yet complementary views of Ibn Khaldun and Adam Smith. Moving away from the usual focus on new concepts, Thompson underscored the enduring wisdom of these radical and tried-and-tested theories.

Omar Shaikh, Managing Director at GEFI, stressed the importance of taking a break from the technical details of climate policies to address the broader issues of unchecked consumption, economic decline, and broader radical theories. Drawing inspiration from both Adam Smith and Ibn Khaldun, he called for a reevaluation of our relationship with nature, quoting Mahatma Gandhi: “The Earth has enough resources to meet the needs of all but not enough to satisfy the greed of even one person.”

In a keynote address on systemic risk, Saker Nusseibeh, CEO of Federated Hermes, connected the insights of Adam Smith and Ibn Khaldun to contemporary issues. He emphasised the urgency of addressing climate change, drawing parallels with historical events like the Roman Empire’s collapse due to migration, climate change, and plague. Nusseibeh also highlighted the need for a just transition, global collaboration, and responsible use of natural resources.

 

The Ibn Khaldun Perspective

Lecture by Dr. Aref Ali Nayed, Founder and Chairman, Kalam Research & Media

Dr. Aref Ali Nayed’s lecture unveiled Ibn Khaldun’s groundbreaking work, the Muqaddimah (the Introduction), revealing insights on climate and food security that remain relevant today.
Dr. Aref explained that there’s a muqaddimah to Ibn Khaldun’s Muqaddimah (an introduction to the Introduction), which is a chapter solely focusing on geography. In that chapter, many of the points Ibn Khaldun makes align with current discussions on climate.
Key points made in the geography chapter include:

  1. Temperate climate is conducive to economic prosperity and civilisational development.
  2. Intemperate hot climate is not conducive to economic prosperity and civilisational development.
  3. Climate impacts humans, physically and culturally.
  4. Food, its quantity and quality, impact humans physically and culturally.
  5. Food choices and consumption-levels are matters of habit, and habits can be changed.

Notably, in the Muqaddimah, Ibn Khaldun identified a cyclical pattern in the rise and fall of civilisations, proposing that societies oscillate between two phases: “natality” (badawa) and “civility” (hadara), with environmental factors playing a crucial role. This challenges the linear view of history, emphasising the dynamic nature of human societies adapting to changing environments.
Ibn Khaldun also recognised the fundamental importance of food security for the stability and prosperity of civilisations, emphasising the connection between the quantity and quality of food available and its impact on human health, culture, and societal development. Interestingly, he acknowledged the influence of habit and choice on food consumption, suggesting that dietary patterns can evolve over time.

Remarkably, while the concept of modern climate change was beyond his grasp, Ibn Khaldun witnessed firsthand the devastating effects of natural disasters and pandemics on systemic collapse. He vividly described scenarios of mass depopulation, weakened authority, and abandoned cities—scenarios mirroring our current concerns about the potential consequences of a warming planet, many experienced during the COVID-19 pandemic.

Dr. Aref also reminded us that it would be self-centered to think humans are inherently good for the world. During COVID-19 lockdowns, animals were observed roaming our busy streets, with several species showing up that we never knew existed.
Dr. Aref also urged a reevaluation of economic metrics to include the true costs of externalities, challenging industries to account for their impact on the environment.

Quotes:

“This was the situation until, in the middle of the eighth [fourteenth] century, civilisation both in the East and the West was visited by a destructive plague which devastated nations and caused populations to vanish. It swallowed up many of the good things of civilisation and wiped them out. It overtook the dynasties at the time of their senility, when they had reached the limit of their duration. It lessened their power and curtailed their influence. It weakened their authority. Their situation approached the point of annihilation and dissolution. Civilisation decreased with the decrease of mankind. Cities and buildings were laid waste, roads and way signs were obliterated, settlements and mansions became empty, dynasties and tribes grew weak. The entire inhabited world changed. The East, it seems, was similarly visited, though in accordance with and in proportion to (the East’s more affluent) civilisation. It was as if the voice of existence in the world had called out for oblivion and restriction, and the world had responded to its call. God inherits the earth and whomever is upon it.” The Muqaddimah, Ibn Khaldun

“When there is a general change of conditions, it is as if the entire creation had changed and the whole world been altered, as if it were a new and repeated creation, a world brought into existence anew. Therefore, there is need at this time that someone should systematically set down the situation of the world among all regions and races, as well as the customs and sectarian beliefs that have changed for their adherents, doing for this age what al-Mas’udi did for his. This should be a model for future historians to follow.” The Muqaddimah, Ibn Khaldun

“(There also is disregard of the fact that the physical circumstances and environment) are subject to changes that affect later generations; they do not necessarily remain unchanged.”- Ibn Khaldun

 

The Adam Smith Perspective

Lecture by David Pitt-Watson, Global Steering Group, GEFI

David Pitt-Watson’s presentation shifted the focus to Adam Smith, a key figure in classical and neoclassical economics. Smith’s Wealth of Nations laid the foundations for economic thought, emphasising the benefits of specialisation, trade, and open markets. David summarised that the key message of the Wealth of Nations argued that specialisation leads to increased productivity, prosperity, and the accumulation of capital.

David also extracted from the works of Adam Smith that while Adam Smith did not anticipate a climate crisis, he recognised the need to invest in natural resources for sustained human civilisation. The modern challenge, as David pointed out, lies in our failure to account for natural capital in economic calculations.

Adam Smith also advocated for responsible resource management and warned against practices that depleted them. While not explicitly addressing climate change, he acknowledged the finite nature of resources and the need for their sustainable utilisation.
Adam Smith further emphasised the importance of accounting for externalities, the hidden costs of economic activity on the environment and society. Adam Smith would argue against policies that subsidised unsustainable practices and advocated for capturing the true value of goods and services, including their environmental impact, to guide decision-making.

David urged a shift in perspective and policy. Acknowledging the looming climate crisis, he emphasised the need to tax bad externalities and reconsider financial practices. Adam Smith, he argued, would have advocated for recognising the limitations of resources, urging the finance industry to finance the climate crisis responsibly.

David Pitt-Watson also suggested that had Adam Smith still been alive to witness climate change, he would wholeheartedly agree with David Attenborough’s quote here:

“During the space of a single human lifetime—my lifetime—we have changed the planet so much that the benign stable conditions which underpinned both the growth of our civilisations and the trade and financial systems that you preside over, have ended. The value we place on a stable natural world will ultimately determine its future. Do we invest in the practices which take us deeper into this crisis, or the solutions that could get us out of it?”

Quotes:

“ When the natural tendencies of royal authority to claim all glory for itself and to acquire luxury and tranquility have been firmly established, the dynasty approaches senility. ” Kitab al ‘Ibar, Ibn Khaldun

“ [Great nations are… impoverished when]… unproductive hands may consume so great a share of their whole revenue and [they are] thereby obliged… to encroach upon their capital…[on] the funds destined for the maintenance of productive labour. ” Wealth of Nations, Adam Smith

“ after all their labour [planting and tillage], the great part of the work always has to be done by [nature] ” Wealth of Nations, Adam Smith


GEFI's Pre-COP28 Climate Finance Stocktake: Key Insights and Calls to Action

On 23 October, GEFI’s Pre-COP28 Climate Finance Stocktake exclusive session, held at the DIFC Academy, gathered renowned experts in the field, including Dame Susan Rice, Peter Smith, Cara Williams, Christian Kunz and Omar Shaikh. The event provided a platform for impactful discussions and insightful remarks on climate finance. Here, we highlight the key takeaways from the session.  

  

Opening Keynote: Leadership and the Role of Finance at COP28 

Dame Susan Rice, Chair of the Global Ethical Finance Initiative, delivered a compelling keynote address. She emphasised the crucial distinction between culture and values statements, stating, “Avoiding greenwashing sits in our culture and not the values statements that sit on our walls.” Dame Susan underlined the significance of international standards and raised critical questions about reporting and data validation.

While she recognized the need for a clear regulatory framework to navigate complex issues of materiality, supplier reporting, and data validation, she emphasised that regulations alone could take us only so far. It is an organisation’s ESG culture that can genuinely integrate ESG considerations into the fabric of finance.

  

Climate Finance: Global Landscape 

Cara Williams from Mercer presented a comprehensive overview of the global climate finance landscape and regional commitments compared to the international scene. Cara’s insights also focused on the role of blended finance in providing solutions to climate challenges.   

In addition, Cara highlighted the significance of the Corporate Sustainability Reporting Directive (CSRD) in encompassing the entire ESG ecosystem, stating that meaningful connections are being formed through commitments, not just financial resources. While she noted the increasing adoption of the Task Force on Nature-related Financial Disclosures (TNFD) by countries, she emphasised the difficulty of gathering comprehensive data for reporting. 

The launch of Mercer Green Infrastructure in Africa during Climate Week reflects a commitment to shifting funds from the global north to the global south, where sustainable initiatives are in dire need. Sustainable finance training for thousands of staff further underscores the growing commitment to ESG principles. 

 

Climate Finance: Regulatory Developments in UAE and Dubai  

Peter Smith, representing the Dubai Financial Services Authority, shed light on regulatory developments in the United Arab Emirates (UAE) and Dubai. While he acknowledged significant progress in strengthening sustainable finance, he emphasised that the journey is only beginning. The DFSA’s focus is on creating an environment where sustainable finance can make a meaningful impact, anchored by a clear and pragmatic regulatory framework. 

Efforts are underway to bolster sustainability taxonomy, with regulatory and supervisory expectations communicated to the finance sector. These expectations will soon be translated into official supervisory guidelines. The goal is to adopt principles before COP28, aligning with sustainable bond and sukuk issuance expectations. Peter Smith highlighted ongoing vigilance against greenwashing, employing a proactive messaging approach. The future appears promising, with an anticipated increase in green and ESG sukuk issuances and growing interest from investment funds.

  

Panel Discussion: Transforming Climate Finance Fireside 

The panel discussion delved into the critical role of organisational culture and leadership in promoting sustainability. Participants emphasised the need to understand the tools used to assess culture and the importance of leaders demonstrating sustainable practices through their actions, not just their words. 

The panel discussion also touched on the actions regulators and financial centers can take to drive progress. Key points include the importance of communication between regions and avoiding duplication of efforts. Cooperation through taxonomies is essential, but recognising the unique priorities of emerging markets is vital.

The tension between local and international regulatory approaches is acknowledged, with responses largely driven by national boundaries. While a global approach is challenging, it was encouraged to consider commonalities for more consistency. The panelists also recognised that the focus is currently on the environmental (E) aspect of ESG, but the social (S) and governance (G) elements should not be overlooked.

As COP28 approaches, the speakers expressed their expectations. Cara called for more investment in adaptation, Peter anticipated a COP of action led by the COP presidency, and Susan urged that the opportunity of a COP in one’s hometown should not go to waste. 

The sentiment expressed is that COP28 is an opportunity to seize, not merely an occasion for virtue signaling. The world awaits concrete and impactful steps towards addressing the climate crisis.

For additional information about the Path to COP28 Campaign and our events during COP, please click here


Reflections from the Future Sustainability Forum, DIFC

Over 1,000 industry leaders and changemakers from 30 countries came together at the Dubai International Financial Centre (DIFC) Future Sustainability Forum to engage in crucial discussions aimed at driving collective action in preparation for COP28. 

“With great wealth comes great responsibility,” a modified statement borrowed from Spider-man’s books, and eloquently put by Satya Tripathi (Secretary-General of the Global Alliance for a Sustainable Planet), encapsulates the Forum’s spirit.  

Over the course of the 2 days, we heard the role of sustainable finance being mentioned a handful of times at every session. During the Forum’s inauguration, his Excellency Essa Kazim, Governor of DIFC, hinted that several sustainable investment announcements are lined up for COP28. The DIFC’s recognition of finance as an accelerator for positive change was reiterated by Arif Amiri, CEO of DIFC. Additionally, H.E. Mariam Almheri from the COP28 Presidency team announced her ongoing collaboration with the private sector to mobilize financing for the COP28 Food Security Agenda, led by the Emirates Declaration on Resilient Food Systems, Sustainable Agriculture, and Climate Action.  

The Forum underscored the importance of finance as the missing catalyst for various initiatives, from sustainable infrastructure development to technological solutions for compressing data used to support sustainable disclosure obligations. However, a major takeaway was the region’s dedication to addressing the finance gap.  

Regarding Islamic finance and the region’s strides in sustainability, Abdelilah Belatik, Secretary General of the General Council for Islamic Banks and Financial Institutions, highlighted an impressive 25% growth of the sustainable Islamic finance sector (with green sukuk making up 20% of all sukuk issuances), outpacing the growth conventional sustainable finance. We also heard DP world FZE sharing the news of the issuance of their first $1.5 billion green Sukuk last month to transform their shipping assets in order to facilitate a greener logistics business. 

Another significant takeaway from the event was the clear demonstration by the speakers of a comprehensive understanding of the necessity for a holistic sustainability transformation. The discussions have not only fixated on climate-related issues, but they also equally focused on the preservation of nature and biodiversity and addressing social concerns. To justly transition to net zero, there was a crucial understanding of the interlinks between people’s objectives, resources, and existing technologies and addressing them accordingly. 

H.E. Mariam Almheri spoke with optimism about Dr. Sultan Al Jaber, COP28 President’s commitment to negotiating with the global North to fulfill their $100 billion dollar commitment to the Global South well before COP28. However, a critical question arises: is further indebting developing countries a positive step forward? While it’s commendable to see efforts from the public sector, there’s a growing recognition that financial innovation led by the private sector has the potential to offer better scale and management in addressing climate finance challenges. 

In a captivating fireside chat centered on financial innovation aimed at bridging the finance gap and rethinking debt and interest models, James Fierro, representing ECO Capacity Exchange, delved into an intriguing concept: the evolution of money. He articulated how money transformed from being a simple medium of exchange into an instrument for generating wealth. ECO, an enterprise-backed credit obligation, introduces a compelling alternative to traditional money—a means to return money to its foundational purpose while harnessing untapped capacity, all without the burden of interest (an opportunity for Islamic finance?). Such innovative models have the potential to provide a more accessible means of financing climate adaptation and mitigation while also unlocking latent trade opportunities. 

Having launched the Path to COP28 campaign in partnership with the DIFC in October 2022 and having been engaged in the sustainability conversation for several years, it is great to witness the region’s progress. We eagerly anticipate all the announcements and developments that will unfold at COP28. 

For additional information about the Path to COP28 Campaign and our events during COP, please visit: https://www.globalethicalfinance.org/our-work/path-to-cop28/  


Wildfires and Floods - a climate Minsky moment triggered by mispriced assets

Amidst unprecedented climate events, a "Climate Minsky Moment" looms on the horizon.

In the 1960s and 1970s, the American economist Hyman Minsky developed his “financial instability hypothesis”, which explained financial and economic crises as natural consequences of financial capitalism. Rather than follow mainstream economists in modelling these crises as the result of external shocks, Minsky theorized that (*to borrow a horror movie cliché*) the true threat of financial instability wasn’t lurking outside; instead, it resided within the very walls of the financial system.”

For Minsky, periods of sustained economic growth numb investors to the risks associated with their investments, as positive financial conditions mask losses. This leads to ever more speculative investments being made, as in the 2007-08 subprime mortgage crisis, where a sustained period of calm allowed investors to convince themselves that packages of barely-viable loans were an essentially risk-free investment. The point where this all comes crashing down has been dubbed the “Minsky moment”.

In 2015, former Bank of England governor Mark Carney cautioned the finance industry about the risks of a “climate Minsky moment”. This refers to a rapid breakdown of the financial system that might be initiated by a sudden and sharp correction in asset values as investors realize that these values are unsustainable and misrepresentative of climate change risks.

Such a scenario could prompt the offloading of assets in sectors vulnerable to climate change impacts, such as fossil fuels, insurance, and real estate. This chain reaction of market collapses may subsequently reverberate throughout the broader economy, leading to a recession or, in more extreme cases, a full-fledged financial crisis.

A substantial climate-related catastrophe, like a superstorm or an extreme heatwave, stands as a catalyst to a climate Minsky moment. Equally influential could be a major governmental policy shift, such as the implementation of a carbon tax or the prohibition of new high emission energy plants.

With recent news of aggressive wildfires and floods aggravated by climate change, it is clear that the financial risks of climate change are significant and growing. During this summer, the evacuation of hundreds of thousands of tourists from fire-ravaged islands served as a stark reminder of the perils that climate change poses to the tourism sector.

In the US, analysis of the costs of wildfires and floods to real estate investors highlighted that US flood-exposed residential properties are overvalued by $121B to $237B due to outdated federal flood maps and government-subsidized insurance. In addition, a prominent “Big Short” investor has noted that in 2021, wildfire damages exceeded premiums by sixfold, creating a potential risk of $495B property value drop should insurers address this gap.

Research from economist Steve Keen and Carbon Tracker has found that the financial sector may be dramatically underestimating physical climate risk by assuming that it has a relatively linear relationship with temperature rises, and failing to price in non-linear risks such as a breakdown of the Gulfstream. In addition, a recent FT article argues that businesses and investors have paid less attention to the physical effects of climate change and more to the costs and risks of decarbonising.

The UK Pensions Regulator recently expressed worry that the impacts of climate change in financial modelling “seem relatively benign and appear to be at odds with established science.” The Financial Stability Board warned in November that the scenarios used to assess the financial system’s risks may underestimate climate vulnerability. In addition, a growing number of financial institutions, ranging from BlackRock to the Bank of England, have warned that markets may not be accurately incorporating climate change-related risks into asset prices.

Some scholars have even argued that the undervaluing of corporate climate risk amplifies the adverse consequences of climate change. This stems from the current undervaluation of risk causing a misguided allocation of investment capital, impeding future adaptation efforts, and inadvertently supporting future fossil fuel usage.

Mispricing at the individual asset level

An article titled “Market Myopia’s Climate Bubble” draws upon scholarly insights in corporate governance and market (in)efficiency mechanisms to showcase the prevalence of mispricing at the individual asset level. The study revealed the following causal factors:

  • Insufficient availability of fine-grained asset-level data necessary for accurate risk assessment.
  • Persistence in using outdated means of assessing risk.
  • Discrepancies in incentives leading to climate-specific agency costs.
  • Distortion of judgment due to myopic biases, intensified by misinformation about climate change.
  • Impediment of pricing due to captured regulators distorting the market.
  • Furthermore, the trends in institutional share ownership exacerbate indifference towards the evaluation of firm-specific fundamentals, particularly over long term-horizons.

There is effort from the International Monetary Fund to measure and raise awareness of these risks. Notable is the integration of climate risk analysis into their scenario-based stress tests to assess its effects on bank stability and the broader economy. However, the IMF has acknowledged challenges in this pursuit, including complexities of modeling climate risk and its economic impacts over very long horizon, and major data gaps.

To mitigate and reduce the financial losses caused by climate change, financing investment into climate-resilient infrastructure, such as flood defenses and drought-resistant crops, is encouraged. According to research, spending $50bn a year on flood defences for coastal cities could reduce expected losses of $1tn to some $60bn in 2050. We are also seeing once-skeptical European nations now embracing gene-edited crop varieties engineered to withstand extreme temperatures and drought, with Brussels even proposing the relaxation of restrictions on certain gene-edited crops.

As the lifeblood of the global economy, the financial sector has a responsibility to take these risks seriously as it is essential that it is resilient to the challenges posed by climate change. To avoid the risk of a climate Minsky moment, it is imperative that the finance sector develops better data and metrics for assessing climate risk to help enhance the understanding of risks and develop tools that better quantify and price these risks into asset prices. However, this cannot be achieved unless businesses and investors are more transparent about their exposure to climate risks.


Corporate Sustainability Due Diligence Directive Progresses but Misses the Opportunities in Financial Undertakings

The EU Corporate Sustainability Due Diligence Directive proposes to enforce human rights and environmental due diligence procedures for corporations, aiming to improve their impact on society and the environment. However, the exceptions proposed for financial undertakings overlook a significant opportunity to achieve corporate compliance outside the realm of public and judicial enforcement. 

In February 2022, the European Commission (EC) released a draft of the proposed Corporate Sustainability Due Diligence Directive (CSDDD), also known as the Mandatory Human Rights and Environmental Due Diligence Directive. This directive aims to enforce human rights and environmental due diligence procedures for corporations, covering their global operations, including supply chains, to identify and mitigate (or eliminate) the impacts on human rights and the environment. The proposal is expected to apply to approximately 13,000 EU companies (about 1% of all EU companies) and 4,000 non-EU companies. It was largely influenced by a 2020 study by the British Institute of International and Comparative Law, highlighting the inadequacies of voluntary due diligence initiatives. 

Despite its intentions, the draft of the CSDDD appeared to be a diluted version of the EC’s initial promises. Understandably, it has been facing significant criticism from practitioners, activists, NGOs, and affected stakeholders who expressed concerns about its limited application to companies and value chains, inadequate mechanisms for victims seeking redress, and other deficiencies in effectively addressing human rights impacts caused by businesses. 

 February 2022: EC Proposal for the Directive 
Scope – Applies to very large EU companies with >500 employees and turnover >€150 million 

– After a two-year transposition period, expands to large companies (>250 employees, turnover >€40 million) in high-impact sectors 

– Also includes certain non-EU companies in the EU’s internal market (turnover >€150 million for large companies, >€40 million for high-impact sectors) 

 

Human Rights and 

Environmental Standards 

– Due diligence covers all adverse human rights and environmental impacts under international human rights and environmental conventions 

– Compliant with UN’s guiding principles on business and human rights, OECD guidelines for multinational enterprises, and OECD due diligence guidance for responsible business conduct 

Climate Change Obligation – Requires certain large companies (EU and non-EU, excluding high-impact sectors) to adopt a plan for a sustainable economy 

– The plan should address climate change risks and impacts, and include emissions reduction objectives 

– Remuneration policy should consider fulfillment of these obligations if variable remuneration linked to directors’ contribution to sustainability and long-term interests 

For Financial Institutions – Financial undertakings required to conduct due diligence before providing credit, loan, or other financial services to large corporations 
Directors’ Duty of Care – Directors of EU companies responsible for overseeing due diligence actions and policies 

– Directors should consider input from stakeholders and civil society organizations 

– Member States to amend laws to include consequences of directors’ decisions on human rights, climate change, and environmental issues 

February 2022: EC Proposal for the Directive

Scope

  • Applies to very large EU companies with >500 employees and turnover >€150 million
  • After a two-year transposition period, expands to large companies (>250 employees, turnover >€40 million) in high-impact sectors
  • Also includes certain non-EU companies in the EU’s internal market (turnover >€150 million for large companies, >€40 million for high-impact sectors)

Human Rights and Environmental Standards

  • Due diligence covers all adverse human rights and environmental impacts under international human rights and environmental conventions
  • Compliant with UN’s guiding principles on business and human rights, OECD guidelines for multinational enterprises, and OECD due diligence guidance for responsible business conduct

Climate Change Obligation

  • Requires certain large companies (EU and non-EU, excluding high-impact sectors) to adopt a plan for a sustainable economy
  • The plan should address climate change risks and impacts, and include emissions reduction objectives
  • Remuneration policy should consider fulfillment of these obligations if variable remuneration linked to directors’ contribution to sustainability and long-term interests

For Financial Institutions

  • Financial undertakings required to conduct due diligence before providing credit, loan, or other financial services to large corporations

Directors’ Duty of Care

  • Directors should consider input from stakeholders and civil society organizations
  • Member States to amend laws to include consequences of directors’ decisions on human rights, climate change, and environmental issues

Since proposed, the CSDDD underwent various stages of discussion and refinement. The European Council’s general approach, proposed in December 2022, suggested raising the directive’s thresholds to limit its scope, while MEPs are considering expanding its coverage to include more companies. 

Notably, the European Council disagreed with the Commission’s proposal to include financial undertakings in the directive’s scope and recommended it as a discretionary matter for Member States to decide. On the other hand, MEPs supported the inclusion of financial undertakings and suggested encouraging institutional investors and asset managers to adopt the due diligence procedures. 

The European Council has also rejected the provisions related to making due diligence a part of directors’ fiduciary duty of care and linking variable directors’ remuneration to sustainability performance. Instead, they suggest integrating due diligence processes into risk management systems and company policies.  

The CSDDD is now expected to undergo trilogue negotiations later in 2023, with the aim of adopting the directive by 2024. However, the rules will not be enforceable before 2025 at the earliest. 

 Proposed directive amendments according to Parliament JURI Committee Report (April 2023) Proposed directive amendments according to Council general approach (December 2022) 
Scope – Lower employee and turnover thresholds: 

– EU Companies: ≥ 250 employees and turnover ≥ €40 million or ultimate parent of a group with ≥ 500 employees and 

≥ €150 million net worldwide turnover 

– Non-EU Companies: ≥ €150 million turnover with at least €40 million generated in the EU, or ultimate parent of a group with ≥ 500 employees and group turnover as defined above 

– Abandon the concept of high-impact sectors 

– Phase-in approach for application of the directive- First three years: Applies to very large EU companies (>1,000 employees, €300 million net worldwide turnover) and non-EU companies with €300 million net turnover 

generated in the EU 

– Four years: Applies to EU and non-EU companies in group 1 

– Five years: Applies to EU and non-EU companies in group 2 

– Group 1 and group 2 companies subject to CSDD if Commission thresholds met for 2 consecutive years 

Definitions – Adverse human rights and environmental impacts clarified with reference to international conventions and instruments 

– Broader definition of value chain, including additional activities like sale, distribution, transport, storage, and waste management 

– Expanded scope of affected stakeholders, including workers’ representatives, trade unions, subsidiaries, entire value chains, and vulnerable stakeholders 

– Abandons ‘established business relationship’ concept and uses only ‘business partner’ definition 

– Replaces ‘value chain’ with ‘chain of activities’ 

 

Single market clause – Member States required to coordinate efforts for full harmonization during transposition to prevent fragmentation  
Regulated financial 

undertakings 

– Regulated financial undertakings remain within scope 

– Institutional investors and asset managers encouraged to influence investee companies on addressing adverse impacts 

– Member States decide on applying the directive to regulated financial undertakings 
Due diligence – Risk-based approach for due diligence policies 

– Proportionate and commensurate policies based on potential adverse impacts, specific circumstances, and risk factors 

– Identification of individual higher risk business relationships 

– Companies asked to take appropriate measures and increase leverage with responsible parties to prevent or mitigate potential adverse impacts 

– Concepts of prioritization and remediation added to due diligence actions 

 

– Strengthens the risk-based approach 

 

Directors’ duty of care  – Deletes the two articles dedicated to directors’ duty of care 
Climate change – Companies obliged to develop and implement a transition plan in line with CSRD reporting requirements 

– Directors’ variable remuneration linked to the company’s transition plan for companies with > 1,000 employees 

– Aligns CSDD text with CSRD amendments 

– Deletes provision linking climate change obligation to variable part of directors’ remuneration 

 

Sanctions – Member States to define rules on sanctions for infringements 

– Pecuniary sanctions with a minimum of 5% of net worldwide turnover in the year preceding the fining decision 

 
Civil liability – Access to justice and effective compensation for victims 

– Member States required to establish rules on civil liability with a limitation period of at least 10 years 

– Mandated organizations can bring actions on behalf of victims 

– Company not liable if damage caused solely by business partners in its chain of activities 

– Expressly mentions right to full compensation for victims without over-compensation 

 

Proposed directive amendments according to Parliament JURI Committee Report (April 2023)

Proposed directive amendments according to Council general approach (December 2022)

Scope

  • Lower employee and turnover thresholds:
  • EU Companies: ≥ 250 employees and turnover ≥ €40 million or ultimate parent of a group with ≥ 500 employees and≥ €150 million net worldwide turnover
  • Non-EU Companies: ≥ €150 million turnover with at least €40 million generated in the EU, or ultimate parent of a group with ≥ 500 employees and group turnover as defined above
  • Abandon the concept of high-impact sectors
  • Phase-in approach for application of the directive- First three years: Applies to very large EU companies (>1,000 employees, €300 million net worldwide turnover) and non-EU companies with €300 million net turnover
    generated in the EU
  • Four years: Applies to EU and non-EU companies in group 1
  • Five years: Applies to EU and non-EU companies in group 2
  • Group 1 and group 2 companies subject to CSDD if Commission thresholds met for 2 consecutive years

Definitions

  • Adverse human rights and environmental impacts clarified with reference to international conventions and instruments
  • Broader definition of value chain, including additional activities like sale, distribution, transport, storage, and waste management
  • Expanded scope of affected stakeholders, including workers’ representatives, trade unions, subsidiaries, entire value chains, and vulnerable stakeholders
  • Abandons ‘established business relationship’ concept and uses only ‘business partner’ definition
  • Replaces ‘value chain’ with ‘chain of activities’

Single market clause

  • Member States required to coordinate efforts for full harmonization during transposition to prevent fragmentation

Regulated financial undertakings

  • Regulated financial undertakings remain within scope
  • Institutional investors and asset managers encouraged to influence investee companies on addressing adverse impacts
  • Member States decide on applying the directive to regulated financial undertakings

Due diligence

  • Risk-based approach for due diligence policies
  • Proportionate and commensurate policies based on potential adverse impacts, specific circumstances, and risk factors
  • Identification of individual higher risk business relationships
  • Companies asked to take appropriate measures and increase leverage with responsible parties to prevent or mitigate potential adverse impacts
  • Concepts of prioritization and remediation added to due diligence actions
  • Strengthens the risk-based approach

Directors’ duty of care

  • Deletes the two articles dedicated to directors’ duty of care

Climate change

  • Companies obliged to develop and implement a transition plan in line with CSRD reporting requirements
  • Directors’ variable remuneration linked to the company’s transition plan for companies with > 1,000 employees
  • Aligns CSDD text with CSRD amendments
  • Deletes provision linking climate change obligation to variable part of directors’ remuneration

Sanctions

  • Member States to define rules on sanctions for infringements
  • Pecuniary sanctions with a minimum of 5% of net worldwide turnover in the year preceding the fining decision

Civil liability

  • Access to justice and effective compensation for victims
  • Member States required to establish rules on civil liability with a limitation period of at least 10 years
  • Mandated organizations can bring actions on behalf of victims
  • Company not liable if damage caused solely by business partners in its chain of activities
  • Expressly mentions right to full compensation for victims without over-compensation

The Case for Finance

Regarding the proposed directive, specific exemptions have been granted to financial undertakings by restricting their monitoring responsibilities. Their due diligence requirements apply as a one-off process before the offering of credit, loans, or other financial services, and only when they are offered to large corporations. 

The caution around disrupting corporate access to the financial sector is relatively understandable. However, by limiting the due diligence exercise for financial undertakings, the directive overlooks a significant opportunity to achieve corporate compliance outside the realm of public and judicial enforcement.  

With finance understood as an ‘enabler’ of business operations and growth, financial undertakings are well-positioned to influence corporate governance practices. There are leverage points identified within the financial system, including project finance screening, loan terms, and public listings, where small shifts across them can create effective and positive systemic change across entire value chains.  

Project finance screening stage: If financiers deliberately set corporate social responsibility preferences during the project finance screening stage, dependent recipients of funds would be compelled to amend their business practices to ensure unhindered access to finance. 

Loan term: During the loans term, loan covenants- as legally binding contractual terms- are capable of steering borrowers away from HR adverse activities more effectively than shareholder activism, where divergent positions and interests can hamper efforts. 

Public listing: The finance sector can leverage corporate transitions into responsible business practices during the company’s private-to-public transition by enhancing corporate responsibility listing requirements on stock exchanges. This is also significant when considering that listing failures have traditionally created reputational costs to businesses. 

 

By controlling financing options and subjecting businesses to increased market scrutiny regarding corporate sustainability performance, financial undertakings can impact corporate competitiveness, internalize human rights and environmental violation costs, and improve informational symmetry across value chains.  

In pragmatic terms, financial undertakings have a unique advantage in leveraging their existing due diligence processes, project screenings, and risk management solutions, given their proximity to companies’ investments, activities, and project designs compared to any other sector. Additionally, with increasing corporate social responsibility and environmental litigation risks, there are significant commercial incentives for financial undertakings to monitor the human rights and environmental risk management of corporate fund recipients. With such cost efficiencies and commercial incentives, a limited application to the financial sector seems rather difficult to justify. 

As the directive navigates the currents of negotiation, there is scope and opportunity for the binding legislation to precisely capture and reflect the pivotal role of financial undertakings in propelling corporate responsibility forward- and it should not be overlooked.