SUSTAINABILITY & CLIMATE CHANGE

Beyond Climate: Turning the SDGs into an Investment Strategy

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2 years ago

October 29, 2021

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SDG-related listed equity indexes are within reach and can offer attractive financial and impact returns, write Alexander Bassen, Mathieu Verougstraete and Sander Glas

In 2020, the Global Investors for Sustainable Development (GISD) Alliance, convened by the UN Secretary General, created for the first time a common definition of sustainable development investing (SDI). The definition establishes a credible norm for investment products marketed as sustainable. Research by Alexander Bassen and others at the University of Hamburg now concludes that the definition’s simple decision tree can be operationalised using existing sources of data.

Passive investment strategies that replicate sustainability indexes offer considerable opportunities for both institutional and retail investors interested in aligning their money with their values without necessarily compromising on financial returns.

The Paris Agreement holds clear advantages as a framework for passive investment strategies. It rests on a common foundation of science, articulated by the Intergovernmental Panel on Climate Change (IPCC); and progress in its implementation can be measured using a single indicator, namely carbon dioxide (CO2) equivalent.

While the importance of the climate struggle cannot be denied, our failure to achieve other sustainability goals – environmental but also social – equally threatens our society, and as such the viability of companies misaligned with tomorrow’s reality.

The UN Sustainable Development Goals (SDGs) may not offer the above simplicity of the Paris Agreement, but they can also be used in similar ways for passive investment strategies. The SDGs are the only globally agreed framework that cover both people and planet.

While the use of SDGs as an investment framework has been slower to materialise, we are increasingly seeing an interest in moving beyond climate-only. This interest is materialising from regulators (e.g. the proposed Social Taxonomy of the International Platform on Sustainable Finance) as well as investors (e.g. Taskforce on Nature-related Financial Disclosures).

With this in mind, we sought to understand the degree to which the SDGs could be translated into a listed equity index – using existing data solutions alone. Because an assessment of the firms’ alignment with the SDI definition on a case-by-case basis is not feasible for passive investors with broad, diversified portfolios, it is necessary to rely on commercial solutions developed by major data providers.

In this context, we analysed the suitability of numerous data providers of ESG and SDG measures to match the approach put forward in the SDI definition developed by the GISD Alliance. The approach follows a simple decision tree for determining whether an investment is aligned with the SDGs and the degree of adherence to this decision tree was used to generate an SDI, or sustainability, score for every company.

Based on this, we constructed hypothetical stock indices and compared their risk, return, and SDI performance with the MSCI ACWI benchmark, which encompasses stocks from 23 developed and 27 emerging markets. For all indexes we found similar risk-return profiles as for the benchmark but higher sustainability scores. We concluded that the optimal SDI value of constituents is around 15 [on a scale that ranges between the lowest score, 0, and the highest score, 20]. Beyond this threshold, the concentration of asset weights increases significantly, resulting in higher risk.

It is hopeful that this exercise was possible with the data already available – something which we could not have said as recently as a couple of years ago given the lack of SDG-related data at the time. That being said, there is considerable room for improvement. It would be desirable if data providers were to expand the coverage of their SDG-related measures, especially in developing country equities, and deepen their assessment on SDG alignment. The lack of data in developing countries should definitely not result in having sustainable financing flows bypass countries where the needs are the highest.

Much of the data is also behind significant paywalls, which limits its usage to sophisticated investors. Many promising approaches, of which some such as the World Benchmarking Alliance will be offered as a public good, are still being developed. While time will tell whether these approaches can fill the aforementioned gaps, they hold promise.

We hope that the research, which is now available online, will convince investors to develop impactful investment strategies that better integrate the SDGs. This obviously remains a work-in-progress area that will hinge on enhanced data and methodologies to measure the impact of companies on the SDGs. Yet, we should not allow perfect to be the enemy of good, since this research demonstrates that it is already possible to act now.

Prof. Alexander Bassen is the chair of capital markets and management at the University of Hamburg and was the principal investigator for the report. Mathieu Verougstraete and Sander Glas work in the UN’s Financing for Sustainable Development Office of UN/DESA, where they coordinate the development impact work of the GISD Alliance.

Courtesy: Environmental Finance

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SUSTAINABILITY & CLIMATE CHANGE

Nairobi’s Climate Summit Seeks External Funding Amid Geopolitical Challenges

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1 week ago

September 11, 2023

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By Kester Kenn Klomegah

The historic gathering on Climate Change inside Africa, clearly portrays efforts at spearheading towards finding sustainable solutions to existing challenges. But African leaders are still standing at a crossroads as they try hard to balance their geopolitical positions, this time with raising the needed funds for controlling the effects of climate change in Africa.

Majority of these African leaders consistently barked at Western and Europeans for the their excessive control, frequent interference in their internal affairs and shout over aspects of democracy, human rights and hegemony, and yet look forward for their invaluable investment in the economy.

This summit held under the theme, “Africa Climate Summit 2023: Driving Green Growth & Climate Finance Solutions for Africa and the World” attracted a host of African and external guests, and including representatives of civil society and non-state organizations. The governmental leaders met for three days while the entire week was dedicated to the current situation and potential solutions.

With high optimism, the first summit held in Nairobi, Kenya, early September was primarily to review and systematize possible options African nations have to finance climate change, and on the other way, nature and its inherent resources in the continent. Kenyan President William Ruto made the summit’s aim very clear his speech – to discuss how to fund the challenges posed by climate change.

Ruto further envisioned a “future where Africa finally steps into the stage as an economic and industrial power, an effective and positive actor on a global arena” and unreservedly boasted the availability of the young population, to take advantage of the vast renewable potential and natural resources.

Ruto’s narratives at the conference dealt with the fact that Africa is acutely vulnerable to the growing impacts of climate change, and consequently made a strategic call for accelerating funding in Africa. At the end of the summit, the narratives appealing to the international community to help achieve that goal by easing the continent’s crushing debt burden and reforming the global financial system to unblock investment was finally incorporated into the final declaration.

Prior to the declaration, it was broadly noted that Africa has an “unparalleled opportunity” to benefit from the fight against global warming but needed massive investment to unlock its potential as Nairobi hosts a landmark climate summit focusing on the continent. “The overarching theme… is the unparalleled opportunity that climate action represents for Africa,” Ruto said in his opening address, while further stressing for trillions of dollars from the international community to unblock financing for Africa.

It is always puzzling, Africa has all the resources. Africa needs external funds. African leaders have savings in foreign banks. Yet, Africa is poor to the bone-marrow, complaints of dearth of finance, and despite the abundance of natural resources in the continent. In order to rebuild confidence, African Union Commission head, Moussa Faki Mahamat, was straight to the point in his demand – wielding his French tongue and some tiredness or frustration – on behalf of the 54-member states, that the international investment must be “massively scaled up to enable commitments to be turned into actions across the continent of Africa.”

While demanding sweeping changes to the global financial system, Moussa Mahamat also announced that the summit would become a regular event and be held every two years.

Among most of the speakers, Eritrean President Isaias Afwerki’s remarks seemingly carried different weighty significance. “Climate change poses, by all accounts, one of the most pressing challenges of our times. Its impact in Africa will be immensely aggravated; compounded as it is by a host of other major hurdles,” he said.

“The policies we articulate, and implementation mechanisms we map out, at the individual national level will not provide the primary panacea to this global challenge,” noted Afwerki, but added that, in this context, Africa can tap and incorporate the numerous scientific measures undertaken by global players in the field to bolster its purposeful mitigation measures.

While concluding his talk at the gathering, he reminded the necessity for Africa to mobilize its own resources rather than extend hands for handouts that may aggravate the existing situation by inviting interference and corrupt practices, mobilizing inside resources will be enabling and motivating creativity at the level of the continent.

Isaias Afwerki urged everyone to not be attracted by the billions that are being promised by so called donors. Rather, better to mobilize resources and get away from this dependency that will definitely compromise everything at the level of the continent.

Despite potential internal and external hurdles to scaling up funds, one report co-authored by Executive Secretary at the UN Economic Commission for Africa, Vera Songwe, concluded that multilateral development banks’ climate finance must triple within five years, from US$60 bln to US$180 bln, to help developing economies globally cope with global warming. Annual climate finance flows in Africa stand at only US$30 billion at the moment, however.

In another report released by Oxfam, for instance, said the devastating drought has gripped Ethiopia, Kenya and Somalia — which scientists say has been made more severe by climate change — as well as floods in South Sudan, have caused losses of between US$15 billion and US$30 billion in the two years to 2022, or around two to four percent of the region’s GDP.

It estimated that between 2021 and 2023, the four countries lost about US$7.4 billion in livestock alone. “Millions of already struggling people saw their animals die and lost their ability to grow, sell or eat nutritious food, plunging them into even greater poverty and hunger,” the report said.

There so many reports detailing various aspects of the climate change, specifically with regards to Africa. The International Monetary Fund (IMF) also estimates that 34 of 59 developing economies most vulnerable to climate change, many or which are in Africa, are also at a high risk of fiscal crises.

The summit has raised approximately US$23 billion in funding pledges. There are daunting challenges for the continent where hundreds of millions lack access to electricity. The oil-rich United Arab Emirates (UAE), in complete recognition of the Africa’s potential offered the financial pledge of US$4.5 billion as it competes to get hold of Africa. United States’ climate envoy John Kerry also announced US$30 million in new funding to accelerate climate-resilient food security across the continent.

United Nations Secretary-General, Antonio Guterres, at African Climate Summit, pointed to an injustice burns at the heart of the climate crisis. And its flame is scorching hopes and possibilities in Africa. This continent accounts for less than four per cent of global emissions. Yet it suffers some of the worst effects of rising global temperatures: Extreme heat, ferocious floods, and tens of thousands dead from devastating droughts. The blow inflicted on development is all around with growing hunger and displacement. Shattered infrastructure. Systems stretched to the limit.

All these above aggravated by climate chaos not of Africans’ making. It is still possible to avoid the worst effects of climate change. But only with a quantum leap in climate action. The people of Africa – and people everywhere – need action to respond to deadly climate extremes.

Notwithstanding all that he mentioned above, Antonio Guterres explained that reaching these targets requires climate justice. Developed countries must present a clear and credible roadmap to double adaptation finance by 2025 as a first step towards devoting, at least, half of all climate finance to adaptation.

Referring to multinational development banks and othe foreign financiers, Antonio Guterres added in his speech: “They must keep their promise to provide $100 billion a year to developing countries for climate support. Every person on earth must be covered by an early warning system by 2027 – by implementing the Action Plan we launched last year.”

“Six out of every 10 Africans currently lack access to these systems. The Early Warning for All Africa Action Plan launched yesterday under the leadership of the African Union will be critical to addressing this need. More broadly, we need a course correction in the global financial system so that it supports accelerated climate action in the context of sustainable development. We can’t achieve one without the other,” accroding to the Secretary General of the United Nations.

It, therefore, means re-capitalizing and changing the business model of Multilateral Development Banks. This could make it possible to leverage private finance at affordable rates to support developing nations to build sustainable economies. The global financial system must be reformed to be an ally of developing nations as they turbocharge a just and equitable green transition that leaves no one behind, especially those in Africa.

But then, and but the point here is that African leaders must get down to their tasks. Interestingly, Africa produces and trades in critical minerals. Africa must be sustainable, transparent and just across every link of the supply chain, with maximum added value produced across Africa. So we are saying is that African leadership must strive to generate innovative green economies anchored in renewable power.

Without hyperbolic geopolitical slogans, now is the time to bring together African states with developed world, financial institutions and technology companies to create a true African Renewable Energy Alliance. With adequate access to financial resources at a reasonable cost and technological support, renewables could dramatically boost economies, grow new industries, create jobs and drive development – including by reaching the over 600 million Africans living without access to power.

Nevertheless, African leaders and the attendees, demand from external nations to honour long-standing climate pledges for poorer nations. Analysts in their several news reports also acknowledged that the summit unity generated momentum for making this demand. But consensus is still challenging across the diverse continent of 1.4 billion people, the 54 African leaders and the African Union and within the context of geopolitical situation around the world.

Kester Kenn Klomegah is an independent researcher and writer on African affairs in the EurAsian region and former Soviet republics.

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SUSTAINABILITY & CLIMATE CHANGE

Developing Countries Call for $100 Billion Loss and Damage Target

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2 weeks ago

September 4, 2023

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By Joe Lo

Developing countries want “at least” $100 billion a year by 2030 for the loss and damage caused by climate change.

The 14 developing country members of the committee drawing up rules for a new international loss and damage fund included the target in their joint proposal, ahead of a crunch meeting in the Dominican Republic last week.

Citing a UN-commissioned report that foresees climate-related loss and damages reaching $150-300 billion a year by 2030, the proposal says $100 billion “is not meant as a ceiling but rather as a minimum commitment”.

Adao Soares Barbosa is a member of the committee from the south-east Asian nation of Timor-Leste. He told Climate Home that ideally money should flow sooner. “We need it now,” he said.

ActionAid campaigner Brandon Wu told Climate Home $100 billion “is quite scant in contrast to the actual need” but is “at least the right scale to begin the conversation”.

A rival proposal by the US and European submissions does not include a target. In climate talks, $100 billion is a highly charged symbol as rich nations promised and failed to deliver $100 billion a year in climate finance by 2020.

Zoha Shawoo, a researcher from the Stockholm Environment Institute, said that while a target is “useful for accountability purposes”, it “has little meaning when it isn’t legally binding”.

Given that, she said, “I wonder if its’s more useful to have a target that actually reflects the full scale of the needs”. A 2019 study put it at $290-580 billion a year by 2030.

Tricky talks

Loss and damage refers to the destruction caused by climate change, that cannot be prevented or adapted to. After decades of pressure from vulnerable countries, rich countries agreed last year to set up a fund to address the costs of this destruction.

A group of 24 negotiators from around the world are meeting in Santo Domingo for the third of four meetings to hash out how the fund will work, ahead of Cop28 in Dubai in December. Talks will be held largely behind closed doors, to encourage frank and free conversation on thorny topics.

The documents published yesterday reveal the battle lines. The US and developing countries disagree over who should pay into the fund, who should get money from it, what the money should be spent on, how much money should flow, whether it should be delivered as grants or loans and how the fund should be governed. Even the name is controversial. While developing countries want it to be known as the Loss and Damage Fund, the US has suggested calling it the Resilient Futures Fund.

Who pays in?

The question of who pays into the fund is among the most contentious. When the European Union opened the door to a fund at the Cop27 climate talks last year, climate chief Frans Timmermans said large economies like China should also pay. But the EU eventually approved the fund without that condition. China and other developing countries remain opposed to asking any countries to pay in other than those the UN classified as developed in 1992.

The developing country proposal says that the fund will be given money by developed countries and “may also receive voluntary financial contributions from other parties”.

The US proposal just leaves a placeholder for the topic with a footnote explaining that “there are currently differences of views” so “this needs to be discussed”.

A shorter submission from the French government calls for funding from “high income/high emitting developing countries” as well as developed nations, the private sector, charity and possibly taxes on polluting sectors.

A joint submission from Germany and Ireland says that while “developed countries have historic responsibility, all countries with responsibilities for loss and damage and in a position to do so should contribute to the fund”.

Under these criteria, wealthy, polluting countries like Saudi Arabia, South Korea and Israel could be asked to pay in.

The case for China and India to contribute is far weaker, as their average incomes and historic emissions per person are much lower than developed countries’.

Who takes out?

The issue of who gets help from the fund is similarly controversial. Rich nations stipulated money should go to “particularly vulnerable” developing countries – language agreed at Cop27. The US proposes tasking the fund’s board “to develop a system for allocations based on vulnerability”. The developing country representatives argue they all suffer from climate impacts and should be eligible for funding “without discrimination or any form of exclusion”.

Board membership

This board, the US says, should have 29 members. Under the US’s proposal, 15 of the 29 are likely to be from developed countries with 10 from developing nations. The remaining four would represent civil society, the private sector, philanthropy and indigenous peoples. The developing country proposal says there should be an “equitable” balance between developed and developing countries and have one co-chair each from developed and developing countries. Harjeet Singh from Climate Action Network told Climate Home the US proposal “tilts power towards wealthy nations” and “represents an ethical failing”.

Debt traps

Developing countries are keen to receive money in a way that doesn’t add to their debt while wealthy nations would rather raise money in a way which doesn’t permanently deplete their coffers.

The developing country proposal says “the fund will be primarily sourced through grant-based public financing”. The US says the money should be grants and concessional loans, which are loans given on better terms than the market offers.

The US envisions that the fund will have three sub-funds. One for slow onset events like sea level rise, one for recovery and reconstruction after climate disaster and one for small countries with a population of less than five million. The board will be tasked with allocating money to each of these sub-funds “in a balanced way that takes into account factors that include vulnerability and demand”, the US proposal says. The developing country proposal does not address what the money should be spent on, saying they will outline their thoughts this week in Santo Domingo.

Both proposals want the World Bank to act as trustee for the fund, managing its finances. But the US one goes further in making the World Bank the host of the fund, providing the staff running the organisation. Developing countries want the fund to have a separate dedicated secretariat.

Wu said that getting the bank to run the fund would be a mistake because the fund “could be subject to aspects of [the World Bank’s] governance and policies that run counter to key climate justice principles, particularly around equity”.

“The Fund could be much more innovative and fit-for-purpose as a fully independent entity,” he added.

Courtesy: Climate Change News

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Green Finance for the SDGs: The Potential of Islamic Finance

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1 month ago

August 16, 2023

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An idea whose time has come: Green Politics

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By Dr.Dalal Aassouli

The financial industry can play a critical role in building a stable and prosperous economy when it is managed with accountability. This requires redirecting investments into economic activities that deliver a good balance between economic, environmental and social objectives in order to promote human well-being and mitigate global challenges such as climate change, biodiversity loss, or inequalities. Many analysts are now taking a closer look at a ‘green economy’, which promotes economic growth while also achieving sustainability objectives.

The 2030 Sustainable Development Goals (SDG) agenda and the Paris Agreement on Climate Change were two major turning points in advancing global action to promote the transition to a green economy and tackle climate change. Their implementation has contributed to the growth of environmental awareness and embedding sustainability in the financial industry, suggesting a paradigm shift in the way financial intermediation is conducted and monetary transactions are structured. In turn, new investment products and financial instruments labelled as green, climate-related or sustainable and responsible were developed. Among them are green bonds and green and Sustainable and Responsible Investment (SRI) sukuk.

Challenges and Opportunities in Implementing the SDGs

The United Nations Development Programme (UNDP) estimates a $2.5 trillion annual gap for achieving the SDGs while the implementation of renewable energy solutions requires an additional net investment of $1.4 trillion, or about $100 billion per year on average between 2016 (when the SDGs were adopted) and 2030 according to the International Renewable Energy Agency (IRENA).

On the other hand, a recent report by the Global Commission on the Economy and Climate highlights that the transition to a low-carbon, sustainable approach to growth could lead to an economic boost of $26 trillion up to 2030 and help create more than 65 million new jobs.

This rising awareness has promoted the development of new asset classes that could be classified under the umbrella of sustainable finance. Activities labelled under this category take into account environmental and social considerations. Other related or sub-categories include climate finance, ethical finance, responsible finance and green finance.

What is Green Finance?

The Organization for Economic Co-operation and Development (OECD) defines green finance as being finance for ‘achieving economic growth while reducing pollution and greenhouse gas emissions, minimizing waste and improving efficiency in the use of natural resources’.

For the past decade, the global green finance market has witnessed a rapid growth, with the development of financial instruments such as green labeled and unlabeled bonds; green loans; green investment funds; green insurance; and recently green sukuk. Although the first green bonds were issued in 2008, the market has significantly developed to mobilize financing for the 17 SDGs with more innovative structures, taxonomies and governing frameworks.

The Infrastructure Development Finance Company (IDFC) estimates green finance at $134 billion. According to Thomson Reuters, in 2019, a total of $185.4 billion in green bonds were issued, which are debt market instruments where the proceeds are allocated to green eligible projects that target climate mitigation and adaptation activities as well as other environmental issues involving energy, water, transport, water, waste, or construction.

Islamic Finance

Considered as an ethical, inclusive and socially responsible finance because it connects the financial sector with the real economy and promotes risk sharing, partnership-style financing and social responsibility, Islamic finance has emerged as an effective tool for financing development worldwide. This explains its increasing significance as an alternative mechanism in infrastructure financing. In an Islamic financial system, transactions must be asset-linked, which increases the financial sector’s stability, and be based on a set of Islamic legal contracts that promote profit and loss sharing. In addition, the principles of social justice, solidarity and mutuality are promoted and investments in sectors that are considered unethical are prohibited.

Islamic finance has the potential to bridge the finance gap required to achieve the SDG agenda and the transition to a green economy. This justifies its identification by participants of the third International Conference on Financing for Development in Addis Ababa in July 2015 as a promising alternative to traditional sources of funding and the recommendation for its utilization to realize the SDGs.

The Islamic financial industry comprises four key segments: Islamic banking, Islamic funds, takaful(Islamic insurance) and the sukuk market. While the four segments can contribute to financing the SDGs, the sukuk segment attracted greater attention recently with the development of green and SRI sukuk. Sukukalso enable the targeting of a wider, global investor base comprising both conventional and Islamic investors.

Sukuk

The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) defines sukuk as certificates of equal value representing undivided shares in ownership of tangible assets, usufructs and services or (in the ownership of) the assets of particular projects or special investment activity.

The sukuk market is one of the fastest growing segments in the Islamic financial industry with about 24.2% of the total global Islamic financial assets and new issuances amounting to $93 billionin 2018 according to the Islamic Financial Services Board (IFSB).

Often qualified as Islamic bonds, sukuk represents an innovative instrument for financing green projects. Their asset-backing requirement facilitates their link to the real economy and therefore widens the scope of environmental sectors that can be financed. In addition, sukuk can be structured in various ways using single or hybrid Islamic contracts such as agency, partnership and leasing contracts. This flexibility facilitates financial innovation in addressing specific financing needs.

Green sukuk can contribute to achieving nine of the SDGs. These are Good Health and Wellbeing (SDG3), Quality Education (SDG4), Clean Water and Infrastructure (SDG6), Affordable and Clean Energy (SDG7), Decent Work and Economic Growth (SDG8), Industry, Innovation and Infrastructure (SDG9), Sustainable Cities and Communities (SDG11), Responsible Consumption and Production (SDG12) and Climate Action (SDG13).

We first saw the impact of sukuk in 2017 when the world’s first green sukukwas issued by Malaysian-based Tadau Energy to finance a solar power project in Malaysia. Since then, the market has developed significantly with the amount of green sukuk issuance reaching$5.38 billion at the end of 2019, representing 58 issues by nine issuers, mainly led by corporates in Malaysia and the GCC.

The green sukuk market development was also supported by the implementation of enabling frameworks such as the Malaysian Securities Commission’s SRI Sukuk Framework and the recent Indonesia green bond and green sukuk framework.

Towards Green and Blended Finance

The OECD defines blended finance as the strategic use of development finance for the mobilization of additional finance towards sustainable development in developing countries. This requires reconsidering other sources of financing while leveraging the limited public and development finance funds.

A good example to consider is Islamic social finance. The Islamic social finance sector broadly comprises traditional Islamic institutions such as zakat (almsgiving) and waqf (endowments), as well as Islamic microfinance. These segments usually target the bottom of the pyramid populations, who lack access to basic safety nets such as education, appropriate health systems, food and other basic needs.

Zakat and waqf are at the heart of the Islamic economic system as they promote the principles of social justice, solidarity, brotherhood and mutuality whereas microfinance enables small businesses that usually cannot access traditional financing modes, to access financing for small projects that generate income and therefore reduces their reliance on charity.

Zakat and awqaf institutions have played a significant role in the cultural, socio-economic and religious life of Muslims for centuries. Today, many scholars are calling for the revival of these institutions to address contemporary development challenges including environmental issues. Zakat and waqf could be used in green blended finance transactions to address several SDGs and develop inclusive green solutions for smallholder farmers, rural access to clean energy and cooking solutions, water treatment and sanitation solutions, etc.

In conclusion, the widespread transition to a green economy will ultimately require a sustained focus on continuing the growth of the global green finance market and further development of these key financial instruments as promising alternatives to traditional sources of funding.

Dr. Dalal is Assistant professor of Islamic finance at Hamad Bin Khalifa University (HBKU).

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