How Islamic Finance Facilitates Green Investment
Today, many different societies have the same interests at heart. We seek to “green” the world. We seek to conserve resources. And we would like to invest in industries that will ultimately be beneficial to humanity. Many new industries aided by cutting-edge science and technology are helping businesses point in this direction. So too are some of the most basic principles of Islamic finance. How do they intersect and why is this significant for the world to consider?
In many Islamic nations, Sharia, which is the moral code of Islamic law, provides the legal framework for regulation of many aspects of public and private life. Islamic finance encompasses those aspects of Sharia pertaining to business and economics. In the broadest sense, individuals are expected to balance their needs with those of the community at large. This concept is put into practice in several ways.
First, within Islam there is a religious duty—an ethical duty, if you will—to invest in projects and enterprises that are moral and wholesome. This precludes investment in many types of businesses (e.g. gambling, pornography, alcohol, etc.) that promote crime and/or anti-social behavior.
Second, Muslims are encouraged to invest resources for the welfare of the community, especially the destitute. It is, therefore, expected that Islamic financial institutions provide special services to those in need. This is does not exclusively mean providing charitable donations but also certain forms of profit-free loans.
Third, in the Qur’an, one is dissuaded from extravagance and waste, and importance is placed upon taking care of and being responsible to the environment. The Qur’an states “Eat and drink, but waste not by excess; Verily He loves not the excessive” (Qur’an:7:31) and “There is not an animal in the earth, nor a creature flying on two wings, but they are nations like you” (Qur’an 6:38).
How does Islamic finance translate these ideas into action? The key financial instrument is the sukuk, or Islamic bond. Green projects funded by sukuk include clean energy, mass transit, water conservation, forestry, and low-carbon technologies. These green financing initiatives also include socially responsible investments designed to improve the lives of people and communities. They are also designed to encourage investors to move capital into companies that instill high governance standards for diversity, accountability, and transparency.
A recent report by the Malaysia International Islamic Financial Centre Community, Islamic Finance: Ready to Finance a Greener World, explored how initiatives in Islamic finance are driving sustainable, environmentally-friendly development around the world. As the World Bank and other institutions are pioneering green bond initiatives, Malaysia, one of the most active centers of Islamic finance, is taking the lead to provide a marketplace to fund similar green projects through sukuk.
The Islamic Development Bank (IsDB) is a key player in clean energy sector investments, investments that total approximately $1 billion USD from 2010 to 2012, per Responding to Climate Change. Clean energy projects are also on the rise in Muslim-majority nations—the top five beneficiary countries of IsDB’s renewable energy sector financing were Morocco, Pakistan, Egypt, Tunisia, and Syria.
In the Gulf region, The UAE is expected to issue the world’s first Sharia-compliant bond aimed at financing green energy projects this year, possibly as early as next month, according to industry experts.The UAE is expected to issue the world’s first Sharia-compliant bond aimed at financing green energy projects this year, possibly as early as next month, according to industry experts.he United Arab Emirates is expected to issue the first Sharia-compliant bond designed for financing green energy products in 2015, according to a recent report in The National. This initiative is anticipated to open up the regional Gulf market and allow smaller corporations to pursue “green sukuk” as a means for financing their products and services.
Sukuk is also being used to address public health improvements. Last December, Reuters reported that the International Finance Facility for Immunization Co. will use the proceeds of its sukuk to finance projects for the Global Alliance for Vaccines and Immunization (GAVI). Since its founding in 2000, GAVI has financed immunization efforts in 73 countries, with half of its investments directed to 33 Muslim-majority countries, including Yemen, Mali, and Indonesia.
In the West, conscientious investment is moving along a similar course. Increasingly, investors have options for “green investing,” “eco-investing,” and “social investing.” There are, however, fundamental differences. Sukuk are not intended to carry the same degree of risks and complexities as do Western financial instruments. Also, sukuk does not utilize the concept of interest as usury is forbidden by the Qur’an. Investors generally share greater risk and are more closely tied to the ownership and outcome of their investments. In Islamic finance, the acquisition of wealth is intended to arise from effort as opposed to chance or gambling. In this sense, it can be argued that the Western-style investor is further removed from both the enterprise and the development of their investment.
Despite these differences, the end-result—a greener, cleaner, and perhaps more humane world—is an important emerging incentive for both Islamic and Western-style finance. How we get there is still a matter of systemic design. The question that remains is which system will have greater impact on the other. Can the traditional, spiritual example of Islam motivate a more principle-driven model to emerge in the West?