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Blue finance could make a meaningful contribution to the SDGs
Blue bonds could cover 10% of the funding needed for SDG14 – which is partly focused on protecting life in the oceans – by 2030, according to a report by SystemIQ. Blue finance has received far less attention than green finance, the broader category of finance of which it is often considered a subset, but has grown meaningfully since the first blue bond was issued in 2018 by the government of Seychelles.
Among the regions in focus in the report, MENAT is notable because it has not seen any issued blue bonds to date, although Egypt is expected to follow a previous green bond issuance with a debut blue bond. There are many promising types of blue finance that could be used across the MENAT region. This is a key part of the global shipping market, including within it the Suez Canal in Egypt and the Jebel Ali port in the UAE (one of the world’s dozen largest ports by volume).
There are challenges in linking together the co-benefits from investing sustainably in one sector of the blue economy with other investments in other ocean-related sectors, but a lot of opportunities as well. Seeing a focus placed on opportunities for blue bonds and other forms of blue finance across the MENAT region and Asia – which includes many OIC countries – should be a call to action to consider blue finance among other developing approaches to responsible finance by financial institutions within these markets.
The RFI Foundation is involved in coordinating an “Oceans Flagship Laboratory” announced during COP 28 which is a part of the BC100+ initiative focusing on blockchain and the SDGs. The Oceans Flagship Laboratory is working to explore the role of technology to increase flows of blue finance, particularly within the MENAT region. Contact us for more information.
Islamic finance is creating opportunities to provide leadership in responsible finance
The Islamic finance market has demonstrated impressive growth in recent decades, with several waves of growth propelled by different global trends. There has been increasing convergence with the development of responsible finance that has occurred over the decade since the agreement on the Sustainable Development Goals and the Paris Climate, which was a principal objective of the RFI Foundation when it was established in 2015.
One success of Islamic finance in adopting responsible finance has been demonstrating the operational compatibility of ESG screening alongside the core mandate for Shariah compliance. A new position paper from the Malaysian International Islamic Financial Centre (MIFC) Leadership Council provides a vision for the next phase of growth and development of Islamic finance. This is one of several initiatives to more firmly establish responsible finance in its core.
There has always been a strong ground for Islamic finance to play a more active and leading role in addressing global needs to address concerns such as the climate and nature crisis. What has taken time since agreement around global goals for sustainable development and restoring balance in planetary systems has been to demonstrate compatibility of climate and ESG approaches with Islamic finance. By conclusively demonstrating this compatibility, Islamic finance has also illuminated opportunities for the sector to lean into its concern for equity and justice and provide solutions as the momentum of interest in responsible finance produces opportunities to feasibly put them into action.
What is holding back sustainable financial flows to lower middle-income countries?
At the end of April, the European Commission’s High Level Expert Group (HLEG) on scaling up sustainable finance in lower-middle-income countries (LMICs) returned their final recommendations. These build on the position that public sector funding is insufficient to fill the US$3.5 trillion of annual financing for climate and nature risks and achieving the Sustainable Development Goals (SDGs) and that private sector investment is required.
The volume of investment needed for these goals in LMICs in particular outstrips the public sector financial resources available either domestically or through international climate finance from developed countries. A large share of the international climate finance to meet climate and other sustainable development goals will need to come from private sector investors who have sufficient assets to fill the gap. However, these investors face numerous barriers that limit the flows of financing to LMICs that need it.
The European Commission’s HLEG on sustainable finance in LMICs acknowledged the gap between the current flows and what is needed and provided evaluation of several points where action could overcome them.
ICMA sustainable sukuk guidance brings flexibility and risks for issuers with limited green assets
The International Capital Markets Association (ICMA), Islamic Development Bank (IsDB) and LSEG have released guidance on sustainable sukuk, reflecting the growing contribution of Islamic capital markets to the wider sustainable fixed-income market.
Through the first quarter of this year, sustainability-labelled sukuk have been dominated by core Islamic finance jurisdictions including Malaysia, Indonesia, the UAE, Saudi Arabia and the IsDB, but the new guidance has been purposely developed for issuers coming from either sukuk or green bond markets to issue green, social, sustainable, transition or blue sukuk.
One of the areas on which the guidance is silent is the ESG/sustainability evaluation of the underlying asset, which is a structural difference between sukuk and bonds. The absence of guidance on ESG/sustainability screening of the underlying asset similar to what is required for the ultimate use-of-proceeds presents an area of risk that could be mitigated with clearer disclosure.
Even as it represents a risk to the sustainable credentials of the transaction if the asset's sustainability profile differs from investor expectations, it could be easily addressed with additional disclosure. This would mitigate the risks while providing flexibility for green and social sukuk where lack of green assets would otherwise create a barrier to issuers, especially in markets where a substantial share of financial assets are held by Shari'ah sensitive investors and financial institutions.
The transition teething process often means two steps forward and one step backwards
The development of frameworks and supporting policies to guide more finance towards the green transition (both into green projects and to enable energy transition in line with global Net Zero 2050) is a positive, but there remains uncertainty about which policies will be effective and which will be counterproductive. In addition to the policy uncertainty, there is also substantial doubt about whether the financial system as a whole – comprised of regulators, management and staff at financial institutions, investors, capital markets (domestic and international) and ratings agencies – is able to row in the same direction at the same time.
One recent example of the pitfalls that lie close to the surface under the structures being built to transform the financial and non-financial corporate sectors was when the Science Based Targets Initiative (SBTi) outlined a proposed change to its net zero targets that would allow companies to use carbon credits to abate Scope 3 emissions, which quickly sparked a significant backlash.
At issue is where to draw the line about responsibility for emissions within a value chain. One argument in favor of allowing offsets for Scope 3 emissions is that they are generally outside of a company’s control, and the requirement for offsets retains a financial incentive to do more than disclose Scope 3 emissions. The mechanism of carbon credits provides a way to direct finance towards projects that could reduce global emissions.
The challenge – which ties into the process of experimentation in the way financial systems are being adapted – is that although companies don’t usually have operational control of their Scope 3 emissions, it could still influence their behavior in sub-optimal ways.
Funding Credible And Bankable Transition Finance After COP28
Following the conclusion of COP 28 last year, OIC financial institutions should now focus on how the final declaration points towards key risks and opportunities arising from climate transition risks, as well as the role they can play within the energy transition. One of the most important elements of financial institutions’ strategies across OIC countries will be the role of transition finance.
This has been a hotly debated issue, all but overlooked by binary green/not-green taxonomies. For emerging markets & developing economies it is a critical piece of amassing enough funding to be able to transform economies in a way that will over time promote economic growth while reducing emissions along science-based pathways.