Substantial financing is required to respond to today’s sustainable development challenges of poverty, social inequality and environmental degradation, which exceed the capacities of governments to solve. Even before the COVID-19 pandemic, governments were facing a US$2.5 trillion annual financing gap for achieving the UN Sustainable Development Goals (SDGs). The pandemic exacerbated this financing gap, especially for developing countries, by reducing external financing to these countries by US$700 billion in 2020. According to the OECD’s latest estimate, the annual SDG financing gap in developing countries thus increased to US$4.2 trillion in 2020. Reallocating just 1% of global capital to the SDGs would be sufficient to fill the gap, but this requires the effective use of available resources and the exploration of innovative sources of funding for the SDGs.
Alternative sources of financing SDGs: Islamic finance and impact investing
Islamic finance can be an important non-traditional source of financing for the SDGs, with global assets of US$3.4 trillion in 2020 and a projected aggregate growth rate of 8% per annum until 2025. Given its widening geographic reach in Asia and the Middle East, and high growth potential in South America and Europe, Islamic finance is a promising but untapped source of financing for the SDGs.
Impact investing is another valuable source of funding for the SDGs. According to the International Finance Corporation’s latest estimate of global impact investing markets, US$2.3 trillion was invested for impact in 2020, and this figure has the potential to reach US$26 trillion in the future. Being a part of the Addis Ababa Action Agenda, impact investing is widely recognized by the G8, the OECD and the EU as an alternative global development financing instrument.
The convergence of Islamic finance and impact investing
Islamic finance adheres to high ethical standards, as set forth in Islamic law (otherwise known as Maqasid Shariah), and considers the well-being of all stakeholders, the broader society and the environment when making financial decisions. It supports overall public interests through the minimization of harm — a key guiding principle for Islamic finance transactions.
According to Shariah, unethical assets used to finance businesses in certain areas or industries are prohibited since they harm the well-being of individuals or the well-being of other living creatures. As the purposes of Shariah include preservation of the environment, destruction or harm to the environment is not permitted. Therefore, impact investing, sustainability, socially responsible investing and green investment fall within the mandate of Shariah complaint investment. Islamic finance has always supported purposeful investments, but now the ethical aspects of social impact are becoming more commonplace.
Islamic finance and impact investing adhere to similar principles. Both promote value-based investments with a broad understanding of society–business relationships, which contribute to the development of an inclusive financial system. Islamic financial institutions are increasingly supporting socially responsible investments and ethical financing.
Green Sukuk are a particularly suitable and impactful Islamic capital market instrument, reducing carbon footprints, preserving the environment while contributing to the supply of renewable and green energy. Given their complementary nature, bringing Islamic finance and impact investing together can create a promising avenue for financing sustainable development, fostering inclusive economic growth and contributing to the achievement of the 2030 Agenda for Sustainable Development.
Global Islamic Finance and Impact Investing Platform
The United Nations Development Programme Istanbul International Center for Private Sector in Development and the IsDB established the Global Islamic Finance and Impact Investing Platform in 2016 to position Islamic finance and impact investing as a leading enabler of financing the global SDG implementation. Engaging the private sector, governments and key stakeholders operating in the Islamic finance and impact investing markets, the platform promotes market-based solutions to sustainable development challenges by creating a collaborative working space among these players.
Fatma Cinar is the Islamic Finance Portfolio Lead, Istanbul International Center for Private Sector in Development (IICPSD), United Nations Development Programme. She can be contacted at [email protected].