30.4 C
London
Friday, July 19, 2024
HomeIBF & SDGsRenewable Energy: Islamic Finance And Sustainable Development Goals

Renewable Energy: Islamic Finance And Sustainable Development Goals

spot_imgspot_img

In 2015, all United Nations member states adopted “The 2030 Agenda for Sustainable Development,” intending to reduce inequality and make the lives of people livable through the provision of basic necessities of life.  At the core of the agenda are 17 Sustainable Development Goals (SDGs).

The following SDGs are linked to Renewable Energy:

•   Affordable and clean energy

•   Sustainable cities and communities

•   Climate action

AFFORDABLE AND CLEAN ENERGY

This SDG aims to ensure affordable, sustainable, and advanced energy from clean sources such as solar, wind, and thermal.  Efforts to encourage clean energy generation have resulted in the adoption of more renewable sources than fossil fuels.

Global financial assistance to the developing countries for the generation of clean and renewable energy reached US$14b in 2018. However, it was 35% less than the amount invested in 2017. The fluctuation is primarily due to variations in commitment to large hydropower projects such as, hydropower, solar, geothermal, and wind projects received 27%, 26%, 8%, and 5% financial assistance, respectively, in 2018.  Public financial assistance continues to be concentrated in a few countries.  For instance, Argentina, India, Nigeria, Pakistan, and Turkey received 30% of total commitments from 2010 to 2018. Compared to that, the 46 least developed countries received only 20% of the committed resources over the same period.  Countries with the lowest electricity generation capacity are the least developed countries, particularly in sub-Saharan Africa.  But they receive far less international public funding support when measured on a per capita basis.

SUSTAINABLE CITIES AND COMMUNITIES

Even before the pandemic, global economic growth had slowed down.  The COVID-19 crisis disrupted economic activities worldwide and caused one of the worst recessions since the Great Depression.  In 2020, 8.8 % of global working hours were lost, equivalent to 255 million full-time jobs – about four times higher than the global financial crisis in 2007–2009.  The pandemic has put the workers employed in the informal sector at risk, as they lack security protection such as medical allowances etc.  Young workers and women have been particularly affected by the crisis. With the roll-out of COVID-19 vaccines and continued fiscal and monetary support, the United States of America and China are expected to experience strong growth in 2021. However, for many countries, economic growth will remain below the pre-pandemic era for a prolonged time.

The SDGs are also impacted by the lack of growth in renewable energy that enables cities and communities to become sustainable from an economic and environmental perspective.

CLIMATE ACTION

In 2015, 196 entities/parties through the Paris Agreement committed to sustainable development and pledged to limit global warming to well below 2°C – ideally 1.5°C – above pre-industrial levels.  To meet these goals, global carbon dioxide emissions would have to be reduced by 45% by 2030 and reach net-zero emissions by 2050.  Greenhouse gas concentrations had reached new highs in 2020, with globally averaged mole fractions of CO2 exceeding 410 parts per million.  The COVID-19 pandemic significantly reduced human activities in 2020, leading to a temporary fall in CO2 emissions.  Developed countries saw the steepest declines, with an average drop of almost 10 %, while emissions from developing countries fell by 4% relative to 2019.  Despite the temporary reduction in emissions in 2020, real-time data from specific locations, including the United States US$4.6bn in 2020, boosted by large sustainable allocations.

 

As sukuk are directly linked with physical assets and use the profit-and-loss sharing arrangements, Islamic finance encourages financial support through it to enterprises that promote output and generate jobs.

A number of core principles of Islamic finance are aligned with the spirit of SDGs, such as:

• Promoting risk sharing

•  Avoiding excessive speculations

•  Islamic social finance tools – zakat (mandatory almsgiving), sadaqa (charitable giving), waqf (endowments).

MALAYSIA – AN EXAMPLE

There has been a growing interest in the global market for SRI instruments.  One of the areas usually associated with SRI is the environment and its preservation.  Green bond, therefore, becomes a common instrument to complement SRI in the global market.  For example, in 2007, the European Investment Bank (EIB) launched a EUR600m climate bond for the awareness of renewable energy and energy efficiency.  Subsequently, in 2008, World Bank issued a US$440m green bond to support a climate-focused program for the Scandinavian countries.  In 2013, the African Development Bank issued a US$500m green bond to finance climate change solutions in Africa.  As of June 2015, the and Tasmania, indicated that CO2, methane, and nitrous oxide concentration levels continued to increase in 2020. By December 2020, emissions had fully rebounded and registered 2% higher than the same month in 2019. As the world recovers from the pandemic, emissions are expected to rise further unless necessary steps are taken to shift economies to carbon-neutral projects.

A significant contributor to CO2 pollution (approx. 40% in the US) comes from fossil fuels. Moreover, even today, 80% of the world’s energy needs come from oil, coal, and gas- fossil fuel sources.

ISLAMIC FINANCE ROLE IN ACHIEVING RENEWABLE ENERGY-RELATED SDGS

Islamic finance supports a socially inclusive and development-oriented society that makes the pursuit of appropriate deployment 2030 Agenda achievable.

The entire Islamic banking sector as of 2020 is worth 1.99 trillion. It is growing at 14% annually. As per industry sources, global sukuk’s outstanding value stands at US$538b, on the back of strong sovereign and multilateral issuances in key Islamic Finance markets to support respective budgetary expenditures. This included debut entries into the sovereign sukuk market by Saudi Arabia and Nigeria and the pan-African multilateral development finance institutions such as Africa Finance Corporation.  (Mordor Intelligence). ESG sukuk issuance reached a record value of World Bank has issued over 100 green bond papers valued at US$8.5b.  To date, approximately US$65.9b worth of green bonds is available in the market.

A similar trend for SRI has been developed to promote the idea of SRI sukuk or green sukuk.  In 2012, for example, the Climate Bonds Initiative (CBI), in cooperation with the Clean Energy Business Council of the Middle East and North Africa (MENA) and Dubai-based Gulf Bond & Association, established the Green Sukuk Working Group to promote the idea of green sukuk.  In his 2014 budget speech, the prime minister of Malaysia announced Malaysia’s target to become a home for SRI.  In 2014, SC revised its sukuk guideline by incorporating the new requirements for the issuance of SRI sukuk. The new sukuk guideline explains that the proceeds of SRI sukuk can be used to preserve the environment and natural resources, conserve the use of energy, promote the use of renewable energy and reduce greenhouse gas emissions.

FOLLOWING ARE SOME INITIATIVES TAKEN BY MALAYSIA:

• First SRI (Sustainable and Responsible Investment) sukuk, valuing RM 250M, was issued to finance large-scale solar construction partly.
• Issuance of US$1.25b of green sovereign sukuk, whose revenues will be partly used to finance renewable energy projects.

ISLAMIC FINANCE ROLE IN PROMOTING SDGS ON RENEWABLE ENERGY IN PAKISTAN

Pakistan currently stands 129/193 in the global SDG Index, which means Islamic finance can make a significant difference in achieving the SDGs.  In terms of clean and affordable energy, 71.1% of the population in the country has access to electricity, while only 43.3% of the population has access to clean fuels.  Pakistan has also been deeply impacted by the global pandemic, which has caused its GDP growth to remain negative (-0.47%).

It resulted in increased unemployment.  On the other hand, Pakistan has gained recognition for its efforts to reverse climate change.  The 10 Billion Tree Tsunami project, is one example. It aims to restore the country’s fast-depleting forests.  (UN SDG Report 2021).

However, the country still has miles to cover before achieving the SDGs. The current installed power generation capacity in renewable energy accounts for 7%.  The Pakistani government aims to increase it to 30% bya 2030.  Islamic financing can bridge this bridge.  Pakistan has already taken various initiatives, in this regard, including the largest local sukuk issue of ~PKR 100b in 2017 for the Neelum Jhelum Hydropower Project.

In May 2021, Pakistan Water and Power Development Authority issued a USD 500M green bond to fund the hydroelectric project.  The issuance follows the publication, in March 2021, of WADPA’s Green Bond Framework, which spelled out the use of the proceeds:

•  Finance the development, expansion, and refurbishment of hydropower or wind energy generation projects.

•  Finance or refinance technologies supporting flood control and prevention measures

THE ABOVE CAN ALSO BE ISSUED IN AN ISLAMIC FORM

State Bank of Pakistan introduced in 2016 a scheme for financing power plants based on renewable energy at a concessional rate. The SBP also launched a Shari’a-compliant version of the scheme in August 2019. The scheme now comprises three categories.  Under Category-I, financing is allowed for setting up renewable energy power projects with capacity ranging from 1-50 MW for personal use or to sell the electricity to the national grid or a combination of both.  Under Category-II, financing is allowed to domestic, agriculture, commercial, and industrial borrowers to install renewable energy-based projects of up to 1 MW to generate electricity for personal use or sell it to the national grid or the distribution company under net metering. Finally, under Category-III, financing is allowed to vendors, suppliers, and energy sale companies to install wind and solar systems of up to 5 MW.

In recent times, local Islamic Banks, including; Faysal Bank and Meezan Bank, have spearheaded the arrangement for on-grid and off-grid financing for various renewable energy projects, including solar and wind.

Subscribe

- Never miss a story with notifications

- Gain full access to our premium content

- Browse free from up to 5 devices at once

Latest stories

spot_img

LEAVE A REPLY

Please enter your comment!
Please enter your name here