Opening the floodgates for climate resilience & mitigation finance in Islamic markets

• One outcome of the recent Islamic Development Bank meetings was announcement of the first of what could become a flood of ‘reprogramming’ requests by member countries in response to accelerating climate change impacts
• Reprogramming funding towards resilience and mitigation will help make the Islamic Development Bank a more important green sukuk issuer
• If the IsDB can accelerate green finance capabilities in member countries, it will help financial institutions & investors to more easily identify and act on responsible finance opportunities

The growing incidence of climate change is having a significant impact on the sustainable economic, social and environmental development of Islamic economies. In response, member countries of the Islamic Development Bank may find value in increasingly aligning themselves to the bank’s climate change strategy. The effects could provide clear and convincing evidence of the value of responsible finance in Islamic markets.

At the IsDB’s annual meeting in Uzbekistan, it was reported that Guyana, a relatively new member country of the bank, requested a ‘reprogramming’ of its funding from the bank “to help Guyana strengthen its capacity to respond to any future extreme climatic events and to build more resilient infrastructure”. A separate media report showed that the country was requesting funding for two small hydroelectric plants to promote rural electrification.

This is unlikely to be the only such request made to the Islamic Development Bank. It is likely to see a flood of increased funding requests from member countries to respond to the changes that have been accelerating in relation to climate change. The impact of these requests will enhance the implementation of the IsDB’s strategy, and could also play a role in affecting how private sector investors and financial institutions in Islamic markets approach responsible finance.

One change could come in the type of sustainable sukuk that the Islamic Development Bank issues. These have been primarily sustainability sukuk since the bank’s debut €1 billion green sukuk in 2019. Its most recent issuance of $2.5 billion of sustainability sukuk was allocated 90% towards social project refinancing and just 10% towards green projects, possibly reflecting a shortage of such projects in the bank’s overall asset base.

The direct implication of this request is very small — Guyana has received only $35 million in total assistance from the IsDB since it joined in 2016, according to the 2020 IsDB report. Stronger member country interest in green projects — and projects that combine green elements with social or developmental objectives — will become a more significant part of the IsDB’s financing of member countries. This could allow the IsDB to become a more regular issuer of green sukuk over coming years.

The result of the shift in what member countries of the IsDB are requesting also has important implications for the developed climate change and sustainability financing policy from the bank itself. The IsDB’s Climate Policy outlines its approach to member country financing, including “significant financing for projects such as roads, power plants and water sewage systems, but also spending differently to transform the way infrastructure is planned, developed and operated [to] either contribute to or help mitigate climate change risks.”

The direct implication of this request is very small — Guyana has received only $35 million in total assistance from the IsDB since it joined in 2016, according to the 2020 IsDB report. Stronger member country interest in green projects — and projects that combine green elements with social or developmental objectives — will become a more significant part of the IsDB’s financing of member countries. This could allow the IsDB to become a more regular issuer of green sukuk over coming years.

The result of the shift in what member countries of the IsDB are requesting also has important implications for the developed climate change and sustainability financing policy from the bank itself. The IsDB’s Climate Policy outlines its approach to member country financing, including “significant financing for projects such as roads, power plants and water sewage systems, but also spending differently to transform the way infrastructure is planned, developed and operated [to] either contribute to or help mitigate climate change risks.”

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