Stella Cox, CBE, Managing Director, Ddcap Group, writes about sustainability and investment opportunities that could lead to creating financial systems that are better suited to integrating the Halal economy to the broader economy.
Islamic financial market practitioners have long argued that forms of Shari’ah-compliant finance bring impact beyond conventional market alternatives. Their supporting logic is that funds are raised and invested in asset-backed and asset-based transactions through equitable, contractual arrangements that promote partnership and the sharing of profit and loss for the benefit of the wider economy. Following the global financial crisis, debate about culture and practice within global financial services, as well as their prospective impacts on global social welfare and environment, became a core agenda item for both private and public sectors.
Environmental, social and governance (ESG) focused determinants became increasingly numerous, with social (S) including crisis and conflict management, and community infrastructure services such as healthcare and education, employment and diversity. These determinants resonated further when asset owners, investors and institutions set objectives beyond risk and return to prioritise global social welfare within investment criteria. The descriptors applied to the various groups and focuses, within the responsible investment subset, are seemingly ever-evolving, encompassing not just considerations of social impact but those pertaining to the environment (E), including green financing and sustainable investing, and also to governance (G).
Frequently grouped together, whilst responsible investment practises incorporate environmental, sustainability and social welfare considerations and therefore have similarities, investors and beneficiaries who also adopt Socially Responsible Investment (SRI) values endeavour to combine financial return with moral or ethical return with the purpose of satisfying measurable social impact objectives. There is now a growing consensus that the objectives of generating profit and doing well (in whatever form, be it tackling environmental concerns, poverty alleviation, humanitarian crisis management or resourcing healthcare or education) are not mutually exclusive and, in fact, can be achieved in tandem.
On September 25, 2015, the General Assembly of the United Nations adopted a set of 17 sustainable development goals (SDGs), with specific targets to be achieved by 2030, as a universal call to action to end poverty, protect the planet and ensure peace and prosperity for all. With an inclusive agenda, the goals are interconnected and provide clear guidelines for adoption, as well as targets for all countries to unite them and address the root causes of poverty. Subsequently, an acceleration of themed funds and investment products targeting socially impacting assets have taken place.
The Islamic capital markets appear to have embraced the trend towards sustainable investing, particularly in Southeast Asia. Mirroring growing demand for green assets from conventional market investors, there is a similar trend developing in the Shari’ah-compliant space. This is small to date but undoubtedly growing, in parallel with investments that are made with reference to social considerations. The Malaysian sovereign wealth fund, Kazanah Nasional, launched the $282 million Sukuk Ihsan programme in 2015. Ihsan’s inaugural issuance became the world’s first social impact bond to be rated globally, with issuance proceeds disbursed to improve the accessibility of quality education in Malaysian government schools. In 2016 the IDB and its development partners launched the $2.5 billion Life and Living Fund (LLF), the largest development initiative of its kind in the Middle East. In a period extending from launch to 2021 the LLF will provide up to $2.5 billion of concessional financing aimed at saving and improving lives. At a supranational level, a noteworthy, global Islamic capital market transaction was the successful $500 million Sukuk issuance in November 2014 by the International Finance Facility for Immunisation Company (IFFIm). An AA rated obligor, IFFIm raises funds within the international capital markets to accelerate the availability of funds for immunisation programmes and health system enhancement by Gavi, the Vaccine Alliance.
IFFIm’s unique public-private partnership presents a compelling case study for financing with social impact; 79 per cent of Gavi’s funding is from the government with the balance from the private sector. Its financial base consists of legally binding grant payments (approximately $6.3 billion) from its nine sovereign donors, of which the UK is the largest in terms of funding amount and tenor of commitment, whilst the World Bank is IFFIm’s treasury manager. Prior to the 2014 Sukuk, IFFIm had raised some $5 billion equivalent from the conventional capital markets in support of Gavi over an eight-year period. Proceeds of the Sukuk funded children’s immunisation programmes in the world’s poorest countries.
The landmark transaction was the first socially responsible Sukuk and was the largest Sukuk al-Murabahah in the public markets at the time of issuance, as well as being the largest inaugural Sukuk offering by a supranational. In May 2016, the United Nations Development Programme (UNDP) entered a memorandum of understanding with the IDB to strengthen their bilateral relationship with the purpose of supporting the effective implementation and achievement of the SDGs. UNDP and IDB’s initial MoU was executed as long ago as 1986.
Since then, the IDB has extended more than $240 million over a ten-year period for projects relating to agriculture, electricity and housing under the UNDP’s programme of Assistance to the Palestinian People. Under the 2016 MoU concentration will be on upscaling ongoing initiatives and exploring new opportunities. The Life and Living Fund (LLF) is blending a $500 million grant of funding with $2 billion of the IDB’s own capital to enable the IDB to accelerate its concessional financing of health, agriculture and basic infrastructure for the IDB’s lower income member countries. Major LLF donors include the IDB’s own Islamic Solidarity Fund for Development, the Bill & Melinda Gates Foundation, the Qatar Fund for Development, the King Salman Humanitarian Aid and Relief Foundation and the Abu Dhabi Fund for Development. Most recently, the IDB, through a statement made at the IMF/World Bank meeting in Washington DC in October 2017, affirmed its intention to extend its Sukuk issuance programme in support of financing medium- to long-term projects that are principally focused on the SDGs objectives.
These are just a few illustrations of the impact that multilateral accords and high-profile public/private sector undertakings can deliver. They are of critical importance. The SDGs will not be achieved without effective social infrastructure for delivery. Sources of conventional, institutional funding do not have sufficient capacity to meet demand and the position is further challenged in emerging economies or those where financial markets remain underdeveloped.
Examples of benchmark transactions like IFFIm’s have been very limited to date but, over the years, financing and investment templates have evolved in response to investment requirements across a diverse set of infrastructure projects in numerous geographies and sectors. They have shown that most asset-backed or asset-based infrastructure is generally eligible for Islamic funding, that sources of Shari’ah and conventional finance can co-exist successfully and that funding can be delivered through public and private sector collaboration. In most instances of private and public sector funding being deployed, multilateral development banks and institutions have been pathfinders, but precedents have been created for commercial lenders to follow. In the next few years, millennials will inherit the largest transfer of generational wealth to date and are potentially set to control $24 trillion by 2020.
A changing dynamic in investor demand and stipulation is also now playing its part in shaping the funding of social infrastructure whilst diversifying sources of investment and prospectively adding capacity and scale. The scope and extent of that demand is not just apparent within the wholesale markets, either. In the next few years, millennials will inherit the largest transfer of generational wealth to date and are potentially set to control $24 trillion by 2020, according to Deloitte.
Millennials tend to be better educated, better informed and socially minded, and they are proactive investors in the SRI environment. More affluent Muslim countries each have significant millennial populations that are also proportionally greater than those of non-Muslim countries. Technology is increasingly a major contributor to evolving this investor group’s access to and engagement with funding of social infrastructure development, and that opportunity is resonating with entrepreneurs as well as investors.
Crowdfunding platforms focused on building funding capacity to foster sustainable and inclusive growth through aggregation of small scale investments are growing in number in recent years. Creating an environment conducive to the financing, creation, implementation and ongoing development success of these innovative, privately owned technology businesses and concepts is, however, a subject of Islamic financial industry debate, as the extent of public sector provision and commitment varies between geographies and startup businesses are challenged by the lack of access to capital or institutional funding.
Challenge and awards initiatives such as the Ethical Finance Innovation and Challenge Awards (EFICA), sponsored by Abu Dhabi Islamic Bank and Thomson Reuters, which will enter its fifth year in 2018, and the RFI Foundation’s Support Disruption for Good Challenge acknowledge the current disconnection between smaller, impact-focused businesses and the unsatisfied requirement to mobilise capital to meet the 2030 targets of the SDGs. These challenges provide a platform for small, innovative business to present and highlight to a broader audience, giving the opportunity to generate awareness, extend outreach, attract expert mentorship or even raise capital.
In 2018, the RFI Support Disruption for Good Challenge will focus on identifying technology companies whose products and services are gaining market traction and whose technology helps the financial sector to increase the scale of its financing and investment in the priority sectors of agriculture, healthcare and development of sustainable cities. The Islamic Development Bank (IDB) is also launching a fund which will provide seed capital to innovative start-ups and SMEs, helping them implement development projects related to certain of the SDGs. IDB’s Transform Fund, which has a target capital of $500 million, will run in tandem with a new online hub called Engage, designed to connect innovators to one another and assist them in developing their ideas. Both the hub platform and the Transform Fund will focus on projects related to six of the SDGs, being greater food security, healthier lives, inclusive and equitable education, sustainable management of water, access to affordable and clean energy, and sustainable industrialisation across the developing world.
The Fund will ensure that innovators, start-ups and SMEs with the best ideas get access to financing for those projects. It will provide up to $50,000 to $100,000 for individual projects, as well as funding partnerships between researchers and entrepreneurs that will tackle the world’s most pressing development challenges. There are many principles of Islamic financing and investment that are complementary in the way they influence investment decisions. Both focus on creating financial systems that are more responsive to the real economy and that provide a more holistic approach for all stakeholders.
Undoubtedly, the stewardship embraced by Islamic financial practitioners promotes social impact and governance but, as a financial industry subsector that has evolved from a commercial banking model within emerging markets, there explore opportunities to collaborate with Shari’ah-compliant partners and, within the Islamic financial marketplace, we are establishing our own industry organisations to foster a more evolved understanding of where our respective responsible focuses and values might complement one another.
This is taking place with the objective of originating practical and compelling financial solutions with measurable social and environmental impact, further supported by an investor base that is more socially conscious and committed to working towards the objectives of a fairer society.