The Unlocking Islamic Sustainable Finance round table took place at the PwC Middle East office in Dubai on Thursday 23rd May 2024.

At the event, the Islamic Sustainable Investing Platform (ISIP) Application Guidelines were released and discussions with the UAE Central Bank were held on the implementation of the Central Bank’s Guiding Principles Regarding Islamic Sustainable Finance released just before COP28.

Participants included senior representatives of financial institutions and market makers such as the Mashreq Bank, Dubai Islamic Bank, S&P Group, Abu Dhabi Islamic Bank, London Stock Exchange Group, National Bank of Fujairah Islamic, Mashreq Bank, Ajman Bank, Dubai Islamic Bank, Emirates Islamic Bank, Standard Chartered Bank, Commercial Bank of Dubai, Abu Dhabi Islamic Bank, Emirates Islamic Bank, HSBC, PRI, and Emirates NBD.

Key discussion points from the session are summarised below:

Overview of Islamic Sustainable Finance

The opening remarks noted the growth of Islamic finance assets and the increasing issuance of green sukuk. Headline figures include:

  • Green and sustainable sukuk issuances have surged, crossing $10 billion last year
  • Islamic Finance Development report by ICD ELSEC, noted that the Islamic finance market is rapidly growing, with assets predicted to reach $6.7 trillion by 2027

Islamic finance and sustainability are critical areas that present challenges and immense opportunities at their intersection.

Global Ethical Finance Initiative (GEFI) and the Islamic Finance, Council, UK (UKIFC) highlighted their activities at the forefront of developing Islamic sustainable finance and mainstream sustainable finance ecosystems. Through collaborative efforts, they have launched several initiatives, such as the Global Task Force on Islamic Finance and UN Sustainable Development Goals (SDGs) and High-level Working Groups on Green and Sustainable Sukuk. These initiatives, alongside thought leadership, advocacy, and capacity building, aim to promote Islamic sustainable finance on a global scale.

Regulating Islamic Sustainable Finance – UAE Central Bank Approach

Discussions noted that despite being perceived as a natural leader in sustainability, Islamic finance initially did not take the forefront in this area globally. Historically, there was a misconception and a disconnect between the expectations of Islamic finance and the principles of sustainability. While Islamic finance inherently aligns with sustainability through its emphasis on ethical investments and social responsibility, it lacks a structured approach and clear guidelines. Recent developments, including the establishment of guiding principles and taxonomies, aim to bridge this gap. The UAE Central Bank recognised this gap and issued guiding principles in 2023 to encourage Islamic financial institutions to incorporate sustainability into their Sharia decision-making.

The guidelines are designed to prompt action and frame the concept of sustainability within shari’ah by reference to principles of socially responsible and ethical ownership and utilisation of wealth/resources (trusteeship, justice, equity, ihsan and adl). They utilise a framework derived from Sharia injunctions on permissible, recommended, obligatory, discouraged, and prohibited activities to evaluate investments through a sustainability lens.

Implementation considerations discussed include:

  • lack of a taxonomy at present
  • integrating this new layer into existing Sharia decision making processes without disrupting business flows and guiding the scholars through the process
  • banks are exploring how best to develop internal processes and controls to comply with the principles

A financial institution shared its experience of using a two-screen process in implementing the guidelines. There is one Shariah screening process and then a second green or sustainability screening process. It was emphasised that this was not a combined process but rather two separate perspectives, the Islamic and the sustainability. Banks also shared how they internally score their clients and assess how they can help them on that journey toward net zero. Other examples from the banking industry highlighted the role of giving incentives to clients who reduce their water consumption or add renewable energy sources to their operations. Where targets are met discounts are applied on their financing rate.

It was suggested that the Central Bank should allow implementation of the guidelines in phases considering the current system has been operating for over 50 years. Other discussion points included the importance of giving incentives to banks and other ecosystem actors to adopt enhanced sustainability approaches. A point was also raised about further regulation that will guide banks on how to support Shariah scholars in the process of implementing the guidelines.

Introduction of the Islamic Sustainable Investing Platform (ISIP)

The ISIP was initially announced at COP28 and the platform application guidelines formally revealed at the roundtable. ISIP provides a listing of independently assessed, validated and showcased Islamic investment products that are directly aligned to sustainability goals. The platform draws inspiration from the concept of “Tayyib,” (meaning pure, wholesome, and impactful) and aims to encourage the development of Islamic sustainable finance.

Rather than add another burden, the ISIP approach leverages existing market frameworks like the Principles for Responsible Investment (PRI) that major Islamic investors have already adopted. Islamic financial institutions can apply to have their Sharia-compliant products across asset classes like equities, sukuk, real estate, and private equity assessed for sustainability criteria by independent third parties.

Summary

The roundtable facilitated an excellent set of engaging and insightful discussions amongst financial institutions in the UAE to explore how the Central Bank’s Guiding Principles Regarding Islamic Sustainable Finance can be effectively implemented. GEFI/UKIFC plans to host a larger Islamic Sustainable Finance event in Dubai in Q4 2024. Organisations interested in partnering are invited to get in touch.