RFI is supporting adoption of responsible finance as global common ground taxonomy work begins

• Evidence from regional surveys supports our approach of viewing responsible finance first as a business issue
• The unique features of prudent leverage and a focus on equity, combined with a business-oriented focus on ESG, deliver positive economic, environmental and social outcomes
• RFI Foundation’s upcoming research focuses on providing new information and practical recommendations on how to use it

The RFI Foundation has been in existence for five years, and during that time we have created significant awareness of responsible finance across many of the markets in which Islamic finance has a sizeable presence. A new survey from HSBC highlights the growth of awareness about responsible finance in the Middle East and Southeast Asia, where we’ve focused our awareness-building efforts.

Relative to Europe and the Americas these regions have been focused more on financially material topics and avoiding trade-offs between sustainability and financial returns. This has informed our approach, which has been aligned more to the business case supporting responsible finance, including its linkages to Islamic finance. What we’ve experienced is that the most relevant way for most financial institutions to view responsible finance is through their own business.

Looking at the range of ESG issues, some will be more important in some contexts than others, although there are systemic issues such as global pandemics and climate change that are relevant across-the-board. These are complex issues with multiple pathways for impact and for action. Both systemic and idiosyncratic ESG issues point financial institutions in a direction that is often aligned to the values embedded in Islamic finance.

Combining Islamic finance and ESG explicitly brings out the value of both. It offers the financial returns and risk mitigation that come from addressing ESG issues including climate change, as well as taking a more prudent approach to debt. The environmental and social impacts from responsible finance can provide a value addition for each financial institution’s stakeholders and the wider society. Its effects are magnified the more it is aligned with a longer-term perspective that a more prudent approach to leverage provides.

There is value in all of the different combinations, such as integrating ESG, adopting a more prudent approach to leverage, and formalizing practices to promote equity in financial transactions as does Islamic finance. As the world is facing more significant systemic challenges like the pandemic and climate change, the bigger picture connecting the economy and financial system will matter more in the short run. There is a strong inter-relationship between the environmental and social impacts of economic activities and the risk level for the financing that banks and investors provide.

That makes it more important to approach responsible finance from a multifaceted direction concerned about ESG, leverage and fundamental notions of equity. These issues have been a core part of RFI’s work for several years, and the pandemic’s impact has accelerated our efforts to strengthen the implementation of responsible finance in ways that aligns with Islamic finance.

For example, we’re releasing a report in a few weeks providing top-down data on the exposure of Islamic financial institutions to financed greenhouse gas (GHG) emissions in Malaysia (contact us for more information about the launch webinar). This report will be followed by others focused on five other large Islamic finance markets, as well as other complementary research linking Islamic finance with ESG. This type of information is becoming more important to facilitate action to complement government-led initiatives, such as new regulations around sustainable finance introduced in countries including Malaysia, Indonesia and the UAE.

On a global level, there is a developing effort for a ‘Common Ground’ taxonomy led by the European Union and China through the International Platform on Sustainable Finance (which includes only 3 OIC countries — Indonesia, Morocco and Senegal). With these global efforts to accelerate responsible finance convergence, information is only half the battle. Understanding how the knowledge can be used in practice makes RFI’s experience unique, and leaves our outlook for RFI and responsible finance bright for the next five years.

Want to learn more about how RFI Foundation can help you identify your biggest opportunities in responsible finance? Contact us for more information through our Membership Page or by email at info@rfi-foundation.org.

Republished from the RFI Foundation’s weekly newsletter. Subscribe for free here!