With the upcoming 28th United Nations Climate Change Conference of the Parties (COP28) to be held in a Muslim jurisdiction for the second year in a row, the spotlight is very much on the Islamic finance industry on how it can contribute to the global decarbonization efforts.
ISFI spoke to Joe Clinton and Afsha Karim from Allen & Overy about some of the legal challenges Islamic financial institutions face in the green financing space.
Clinton is a project partner specializing in the financing aspects of energy, natural resources and infrastructure projects while Afsha is a senior associate from Allen & Overy Dubai’s banking team with a special interest in Islamic finance.
According to Afsha, we are seeing the Islamic finance space pick up momentum with regard to decarbonization efforts in the last couple of years, with the completion of multiple landmark sustainable Sukuk and financing deals.
With sustainably-linked financing taking the center stage of green financing in the market, particularly with the legislative push by regulators including Securities Commission Malaysia in its introduction of the sustainably-linked Sukuk framework last year, concerns over financial institutions financially benefiting from borrowers and issuers not meeting their sustainability KPIs thus triggering a higher cost of funds have arisen.
“In response [to concerns over financial institutions benefiting from bad sustainability performance of borrowers], some financiers have pledged to donate any gains that they make from this bad performance to charity,” Afsha shared.
Afsha further highlighted the parallel between donating financial gains received as a result of bad sustainability performance and Islamic financial institutions donating late payment fees.
While the Islamic sustainable finance space is a promising one to watch, Clinton noted that legal issues are a major challenge for the industry.
According to Clinton, the lack of international standardization for green financing and the added legal risks on green financing projects due to the rapidly changing regulations, which have the potential to render formerly green projects no longer green or sustainability compliant, are significant barriers to sustainable investment.
Another legal challenge is the ‘proxy trade war’ over green investments internationally through the introduction of national green legislation such as the US Inflation Reduction Act 2022, which has billions of dollars-worth of subsidies for green projects.
The introduction of this type of legislation is prompting other countries to enact similar competing legislation to attract green investment to their respective regions.
From a global perspective, enacting competing legislation may not be the best way to deploy investments in green energy and transition, Clinton warned.
“You’ll want to focus your investments much more in emerging markets, in markets which don’t already have a state program in place for renewable energy but the legislation on a national level can make that very difficult,” Clinton commented.
This is an excerpt from an interview with Joe Clinton and Afsha Karim from Allen & Overy. Listen to the full discussion on the legal challenges in Islamic sustainable finance on IFN OnAir.