Sharia Finance: Clean funds for green ends

Roshan Madawela

Running parallel with the rapid growth in Islamic banking in recent times has been an equally swift increase in awareness on climate change and its impending consequences.
Whilst the goals of ethical financing that is Sharia compliant and efforts to shift development onto a more environmentally friendly path are compatible, sufficient collaboration is yet to take place. However, recent moves give cause for hope.

Environment to the fore

All eyes were on Abu Dhabi between 21 -23 of January as the National Exhibition Centre hosted the World Future Energy Summit (WFES). Labeled as a ‘carbon neutral event’ it witnessed a gathering that included many of the leading figures who are working to propel the environmental issue further to the fore.

One of the main attractions at the event was the unveiling of a model of the Masda city development, a joint collaboration between the World Wide Fund for Nature (WWF) and the government of Abu Dhabi. The project ‘Masda’, meaning ‘source’ in Arabic, is set to be the world’s most environmentally friendly city with zero carbon, zero-waste and free of motorized transport. The $15 billion development is expected to reach full completion in 2012.
Ironic or difficult to digest for some yet the city surrounded by oil fields is taking steps to make a real and positive contribution to developing an alternative future that is sustainable based on a realization of the finite nature of fossil fuels. The new city is expected to meet standards set out by the WWF under the ‘One Planet Living’ program who’s visions is of a world where people everywhere can lead happy, healthy lives within their fair share of the Earth's resources. On the practical side, key feature of the six kilometer-wide city will include Photovoltaic panels for electricity generation, cooling via concentrated solar power, water provision through solar-powered desalination plants and the irrigation of crops grown outside the city with treated waste water.

Green investments

Numerous clean energy projects are pipelined in the UAE region like a nation-wide network of carbon capture storage project to pump gases into oilfields, thus lowering emissions and increasing output. However, it is not clear at this stage as to what type of funding option will be utilized for these ventures.
One reason is that the response of the Sharia complaint finance sector to the challenges posed by the environment has been somewhat slow to date. However, some positive developments can be noted. Last year the Malaysian Amanah Raya Investment Bank teamed up with the Asian Finance Bank (AFB) to launch the Islamic green fund in order to leverage the two growth areas. The $294 million green fund was set up to invest in environmentally friendly projects that are also compliant with Shari laws like bio-fuel ventures.
This move was follwed-up later with an annuoncment that AFB and Amanah Raya plans to launch a second ‘Islamic Green Fund’ worth some $1 billion by June 2008 that will also focus on developing environmentally friendly projects in Asia and the Middle East. Incinerators and waste re-cycle plant projects are likely to benefit.
It is expected that Sharia compliant funds will have a role to play in developing projects like the Masda city development in the long-term due to their lucrative potential as well as attractiveness to ethical investors, both Muslim and Non-Muslim. The Abu Dhabi project is expected to build the worlds’ largest hydrogen power plan to supply 500MW of clean power as well as develop the world’s first 100MW concentrated solar power project.

The fully functional city is expected to meet the One Planet Living program's ten guiding principles related to sustainability. These are zero carbon, zero waste, sustainable transport, sustainable materials, sustainable food, sustainable water, habitats and wildlife, culture and heritage, equity and fair trade, and, health and happiness.

Sound far fetched? Perhaps, but the reality of global warming and climate change could lead mankind down the road of scenarios only depicted in sci-fi movies.

An unfolding crisis

Consider the Fourth Global Environment Outlook (GEO-4) compiled and published by the United Nations Environment Program (UNEP) which includes the contributions of 390 experts who have contributed studies, data and research. The conclusion reached in the report is an eye-opener. “Humanity is changing the earth’s climate so fast and devouring resources so voraciously that it is poised to bequeath a ravaged planet to future generations’

This most comprehensive publication cataloguing climate change since the Brundtland Report in 1987 comes in the wake of a year that has up to now been dominated by climate change. The latest in a series of disasters was the wild-fires in the US state of California. November 2007 witnessed the destruction of some 1,500 homes and burned down 674 square miles across five-counties from Ventura to Mexico and the property damage is estimated to have topped $1 billion in San Diego County alone.

One unique feature of these fires that distinguished them from other disasters such as hurricane Katrina, where the frontline victims were the poor, is that the rich have been disproportionately affected. The hardest hit areas this time around were up-market homes. All the more reason perhaps, for US policy-makers to take note of the latest UN report calling on them to ‘propel the environment to the core of decision-making’ in order to address an unfolding crisis. Failure to do so would undoubtedly jeopardize our future generations of all people. The impact on the US, the worlds’ leading polluter and a climate treaty offender and its less guilty climate offenders would not be easily disentangled.

For example, Chile’s 16 million population adds little to the green-house gas effect but is currently paying the price. According to sources, the country’s glaciers are vanishing whilst mudslides become common place and spring-time snow is replaced by tepid rains. Mc Clatch reports that last May, an entire lake in southern Chile disappeared almost overnight as the Tempano Glacier that had acted as a dam melted and destabilized. These rapid transformations are spurring the country’s scientists to attempt to solve the puzzle of the impact over the coming years. With over half of the 120 glaciers under observation reported to be shrinking, with many vanishing at twice the rate of last year, scientists will have to work over-time to find the answers.

However, the Chilean researchers are not alone as they scramble for solutions. Neighboring Argentina is facing drought on its side of the Andes due to falling rain levels whilst shrinking glaciers pose dangers to water supplies in Bolivia. They all agree that an era that they had become accustomed to in terms of their geo-physical environment is now over and the future is one of uncertainty.

The UNEP report claims that the global average temperatures rose by 0.74 degrees Celsius (1.33 Fahrenheit) over the past century and are forecast to rise by 1.8 to four C (3.24-7.2 F) by 2100, it said, citing estimates issued this year by the 2007 Nobel Peace co-laureates, the Intergovernmental Panel on Climate Change.

The report also addresses the issues arising out of a rise in the global population. The current total of six billion human earthlings is expected to swell to and peak at 9.7 billion by 2050. Thus, meeting the nutritional and survival needs of the people will throw-up new challenges that need to be factored-in now. Land degradation and deforestation in Africa is estimated to have reduced production of food by 12 per cent since 1981. Fish consumption is said to have tripled over the past 40 years whilst the catches have stagnated or declined. The report also claims that over 30 per cent of amphibians, 23 per cent of mammals and 12 per cent of birds are currently under threat while many other vertebrates may not even have been assessed.

Not seeking to paint a "dark and gloomy scenario", UNEP took note of some success in the areas of combating ozone loss and chemical air pollution. However, it warned that in some cases, progress achieved in pollution reduction in the developed world was at the expense of the developing world where the industrial externalities and its impacts had been effectively exported or outsourced.



The role of Islamic Finance

A Meed survey conducted in 2007 showed that the vast majority of Gulf Business leaders were in favor of claming down on unsustainable environmental practices with new legislation. The first effort to ascertain business option on climate change in the GCC found that 99 per cent of respondents believed that businesses have an obligation to behave in a sustainable way whilst 84 per cent wanted to make it a legal requirement.

Even in the non-business community many peoples views and expectations towards Islamic finance could perhaps be described as an alternative to the ‘dog-eat-dog style capitalism’ that has dominated the economic development in the world in recent decades. This approach bears the brunt of responsibility for the damage caused to the environment.

Islamic environment funds and Sharia compliant financing mechanisms need to seriously consider supporting projects that are involved in carbon trading, bio-fuel ventures, solar and hydrogen power plants, waste incineration and re-cycling projects. Such investments will be the need of the coming hour and so the serious alternative to un-checked capitalism be need to be ready.

Developments in technology also provide new and exciting opportunities for matching the dual goals of ensuring Sharia compatibility and environmental friendliness. For example, the Swedish motor manufacturer, Volvo, has developed a series of low CO2 emission vehicles as well as engines that run on a bybrid mix of the biolfuel ethanol and diesel. These cars have the added option of a ‘Alcoguard’ that prevents the vehicle from starting isis the driver is over the limit.

If Islamic finance simply becomes a parallel financing vehicle that allows investors to traverse along the same path as the rest of the industrialized world, with no consideration to the consequences on the environment, then its long-term creditability as a meaning full alternative will be seriously undermined amongst all communities. Whilst bankers will always pursue returns and profits on their investments, tunnel vision of this variety will only hasten a deterioration in the quality of life of future generations. Moreover, it would not be in keeping with the sprit of the faith.

A case in point, rain is said to be a blessing for mankind that rejuvenates the earth to make it fertile. However, due to mans unchecked pursuit of wealth and the consequent abuse the natural recourses that we have been blessed with, rain in many parts of the world has turned into ‘acid rain’ causing more damage than good. Thus, unchecked capitalism has turned a ‘blessing into a curse’ (Abdhul Hakim Quick).


Abu Dhabi News.Net, Himendra Mohan Kumar, Thomson Financial, M N Siddiqui, Meed,