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.
