The COVID-19 pandemic has crystallized the economic impact of climate change and its impact on biodiversity on a global scale, with its repercussions being felt across health systems and economies globally.
The WHO and IPCC Health Committee have predicted a century of pandemics. A frightening thought given the sudden death toll, health implications and economic disruption we have seen being caused by COVID-19, a pandemic caused by a pathogen jumping between species as a result of environmental degradation and climate change.
It is predicted that the pandemic will be among a series of climate shocks to occur across the world, including fires, floods, droughts, typhoons and other negative climate events, evidence of which we have already seen in the last 12 months with the wild fires in California and Australia, to mention a few.
The challenge now globally is to build resilience and sustainability in order to meet the Paris climate targets by reducing greenhouse gas emissions. From a financing perspective, it is estimated that nearly 50% of the risk exposures of euro area institutions are directly or indirectly linked to risks stemming from climate change, according to the European Commission Action Plan.
There is a growing realization of the necessity and opportunity for sustainable finance globally and in particular in the EU where the infrastructure to support the growth of a sustainable finance ecosystem is being implemented with urgency in terms of the EU taxonomy for sustainable finance, and other aspects of the EU Green Deal. Of course, the principles of sustainable finance and ‘doing well while doing good’ are not new to Islamic finance and this new world order presents opportunities for Islamic finance.
Review of 2020
2020 saw the full-scale impact of the pandemic hitting Europe, as the levels of infection rose across European countries and entire economies ground to a halt overnight like never before. It has led to extraordinary stimulus packages being developed across the EU to try to mitigate the impacts to economies. The EU Green Deal, a package of measures announced to support green finance and climate change, had to be revamped with a Resilience & Recovery/NextGeneration EU COVID-19 Recovery package worth up to EUR750 billion (US$876.75 billion) launched.
In Ireland, both Bank of Ireland and Allied Irish Banks (AIB), who are signatories to the UNEP Finance Initiative Principles for Responsible Banking launched in 2019, have developed comprehensive sustainable strategies and green bond frameworks, with AIB raising EUR1 billion (US$1.17 billion) in its first green bond issuance in September 2020.
In late 2019, the Euronext Green Bond offering was launched in Dublin as its center of excellence with Dublin continuing to be the leading jurisdiction of choice for the listing of green bonds in 2019 and 2020, and with over 85 green bonds listed since 2012. This, of course, is not news to the Islamic finance industry as Dublin has long been a favored choice for listing Sukuk.
Preview of 2021
With the prospect of a crash-out Brexit now looking increasingly likely at the time of writing, Ireland as a location for finance in Europe remains a key alternative jurisdiction in the EU for companies and institutions to maintain their EU presence. Its strengths include being an English-speaking, common law jurisdiction, with an established and familiar legislative framework for corporates, a system of property registration and property rights.
The establishment of a joint implementation group to promote Ireland as a leading center globally for international legal services by the Law Society of Ireland and the Bar Council of Ireland reflects the opportunity and unique position Ireland will hold as the only English-speaking common law jurisdiction in the EU post-Brexit.
The continued rise and switch to sustainable finance is inevitable in order to address climate change which presents a unique opportunity for Islamic finance. The convergence of investment now directed toward green, ethical and sustainable investments plays to the strengths of Islamic finance and the Sukuk market with the potential for such products to be both green and Shariah compliant.
Islamic financial institutions through their Shariah supervisory board structures and oversight have a unique competitive advantage in terms of the key components of green finance, the UN Principles for Responsible Banking and the EU taxonomy in terms of directing the use of funds, monitoring and reporting on compliance and impact and screening income flows and governance principles in terms of products and institutional governance and culture. These issues have always been a key focus for Islamic finance and are strengths which it can use in deploying investment in the green economy.
The future can indeed be bright for Islamic finance in Europe and globally by harnessing its strengths and available capital in combination with the EU taxonomy, which could be very potent in delivering sustainable investment that delivers real impact.
Simon O’Neill is a partner at Philip Lee. He can be contacted at [email protected]