SUSTAINABLE AND RESPONSIBLE INVESTMENT: AN OPPORTUNITY FOR ISLAMIC - - PowerPoint PPT Presentation

SUSTAINABLE AND RESPONSIBLE INVESTMENT: AN OPPORTUNITY FOR ISLAMIC FINANCE

by

Ahmad Hafiz Abdul Aziz Financial Sector Specialist World Bank Group

2

Global Policy Shifts Require Funding for SDGs and Climate Change

• 17 global goals to achieve integrated sustainable

development covering economic, social and environmental

• UN estimated between USD 5tn and USD 7tn

each year for the next 15 years to fund the 17 SDGs

Paris Agreement on Climate Change

• Global climate agreement to limit global warming

to below 2°C

• Will come into effect in 2020
• April 2016 – 177 nations signed the treaty,

including Malaysia

• US$100

billion per year by 2020 to help developing countries cope with climate change

3

Financing Needs to Realise the SDGs

Estimated Annual Investment Requirements by SDGs Sectors

Source: UNCTAD, 2014

US $ Billion

4

The Key Components of Financing Sustainable Development

Source: WBG, 2015

5

Growing Commitments Towards SRI

6.5 10 13 18 21 24 32 34 45 59 62 68.4 63 185 361 523 734 890 1050 1186 1251 1384 1501 1714

• 600
• 100

400 900 1400 1900 10 20 30 40 50 60 70 80 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Assets under management (US$ trillion) Number of Signatories

• No. of PRI Signatories and AUM

USD68.4 trillion assets managed by 1,700+ signatories to the UN PRI

Source: UN PRI

6

Growing Commitments Towards SRI

Source: Global Sustainable Investment Alliance

13.3 18.3 22.9 2012 2014 2016

• USD22.89 trillion assets professionally managed under SRI strategies (CAGR: 11.9%
• ver 2 years)
• SRI now stands at 26% of all professionally managed assets globally
• Negative/exclusionary screening is the largest approach with US$15.02 trillion or 65%
• f global SRI assets in 2016

Global SRI Assets (USD trillions)

• 5

5 10 15 20 25 30 35 40 2004 2006 2008 2010 2012 2014 2016 2018

7

Growing Commitments Towards SRI

Source: Sustainable Stock Exchange (SSE)

• 2015: Launched of SSE Model Guidance and global campaign to promote ESG disclosure

guidance

• The Task Force on Climate-Related Financial Disclosures (FSB TCFD)’s recommendations

highlight stock exchanges as one of the key stakeholders that can provide valuable contributions toward adoption of their recommendations

Number of Stock Exchange ESG Disclosure Guidance, 2004-2017

8

Trends in Green Bonds 2012-2017

Source: Climate Bonds Initiative

✓USD155.5bn - total green bond issuance ✓Over 1500 green bond issues ✓78% - growth on 2016 ✓37 countries from all continents ✓239 different issuers ✓146 new issuers ✓USD10.7bn – largest single green bond ✓4 Sovereign Green Bonds: Poland, France, Fiji, Nigeria

9

Total Islamic Financial Assets Now Exceed USD 2 Trillion

Global Islamic Finance Assets (USD Billion)

10

In Tandem, The Sukuk Market Has Also Expanded Substantially

Global Sukuk Supply & Demand (USD Billion)

Source: Thomson Reuters

Demand for sukuk has been surpassing the level of sukuk issuances worldwide

11

Global Sukuk Outstanding by Domicile as at End 2017

12

Global Islamic AUM by Domicile as at End 2017

Malaysia 36.5% Saudi Arabia 31.4% Jersey 11.2% Luxembourg 4.3% Pakistan 3% USA 3.1% Other 14%

Global Islamic AUM by Domicile 2017

13

Main Features of Islamic Finance

Source: IRTI-UNDP Report

14

Overlap Between the Objectives of Islam and the SDGs

Objectives

• f Islam

Life Wealth Protection

• f Faith

Intellect Progeny

15

Similarities: SRI and Islamic Finance

▪ A value-based investment universe

• Investment structures, investors associate themselves with a moral

purpose: “doing good and avoiding harm to others”

• Promote the wellbeing of all humankind – encourages investors to

create positive non-financial value alongside financial returns to support a socially concerned, environmentally-friendly system

• A broader understanding of the relationship between business and

society

16

Differences: SRI and Islamic Finance

SRI Islamic Finance General investment approach Holistic approach that aims to include any ESG information that could be material to investment performance. Values-based approach that mainly focuses

• n

exclusionary screens

• n

specific social and economic grounds. Active ownership Strong emphasis on being active owners and to engage with companies on ESG issues (including proxy voting). No widespread practice of engagement

• r active ownership.

Avoiding investments in highly leveraged companies Not widely considered. Sophisticated approach to analysing financial structures of corporate entities to understand cash flows and avoid investments in companies with excessive leverage. Impact Not widely considered, but there is a growing focus

• n

environmental and social impacts of investments (including contributions to the SDGs). Shariah scholars assess the compliance of financial products from a structural and legal perspective – the focus is not on actual impact or real economy outcomes.

Source: UN PRI

17

Opportunities for Islamic Finance

Non-SRI SRI Bond Conventional investors Conventional investors + conventional green investors Sukuk Conventional investors + Shariah- compliant investors ALL investors

• Expanding new sources of finance
• Developing new markets
• Enlarging the impact investing tools
• Asset-backed nature of Islamic finance
• Broadest investor base

18

WBG: Examples of Work in Islamic Finance

19

WBG: Greening the Financial Markets

MALAYSIA

INDONESIA

US$1.25 bn

FIJI 100 mil FJD

Kazakhstan Vietnam Morocco

Nigeria

NGN 150 bn

Next ….

PT SMI

IDR 3 tn

6 green issues valued at USD1.06bn were lodged at SC between 6 June 2017 and 20 March 2018

Thank You

Disclaimer

This document is prepared solely for the purpose of discussion only and shall not be shared with any third parties without written consent by both parties. The findings, interpretations, or recommendations expressed herein are those of the author(s), and do not necessarily reflect the views of the International Bank for Reconstruction and Development/The World Bank Group and its affiliated

• rganizations, or those of the Executive Directors of The World Bank or the

governments they represent.