OPINION PIECE
The Path from COP26 – Facilitating the Transition Stella Cox CBE, Managing Director of DDCAP and Jennifer Schwalbenberg Chief Governance Officer provide some practical clarity on what needs to be considered and done when divesting from heavy emitting sectors
Stella Cox CBE Managing Director and Jennifer Schwalbenberg Chief Governance Officer
I
ntroduction
E S G - fo c u s e d c a p i t a l m a r ke t activities are often synonymous with portfolio divestment from heavy emitting sectors such as oil & gas, cement, steel, aviation and mining. However, by divesting, ESG-principled investors effectively abandon control to those who may not share the same concerns and who may not exert their influence in furtherance of a sustainable agenda. Equally, by refusing to provide financing to these sectors the capital markets leave these industries without
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the necessary resources to transition to more sustainable practices. Divestment does not result in lower emissions. The capital markets need to focus on decarbonising the real economy, not their portfolios. Conscientious investors and financiers need to identify those companies making the ambitious commitments, setting strong goals and taking action. If concerned investors support these sectors to transition to new technologies and, where possible, retool to accommodate renewables, they enable these sectors to convert intent
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into action. The global finance community, and in particular the Islamic Capital Markets (ICMs), have the responsibility to help accelerate this change and become stewards of said change.
Recent examples of transition sukuk and other commitments Many of these currently high-emission sectors will be sectors the real economy still needs in 2050 and viable low or no carbon alternatives do not yet exist at the scale required. Some sectors face significant hurdles to achieve decarbonisation whether they be economic, technological or rooted in other considerations. Other sectors may not be able to completely achieve decarbonisation but still need to be included in the global economic transition and need assistance to develop effective offset programmes for residual emissions. Estimates suggest that an annual USD6.9tn in infrastructure investment and between USD1.6tn and USD3.8tn for energy transition is required to meet the Paris Agreement targets.1 As there are not sufficient public funds to satisfy this, private capital is vital, and this presents a considerable opportunity for the ICMs to mobilise funding. To date, there have only been 18 transition bonds globally, and far fewer transition sukuk, but it seems momentum may be growing. In 2020, the Islamic Finance sector saw the first ever transition sukuk by Abu Dhabi’s Etihad Airways, which raised USD600m for investment in sustainable aviation and carbon reduction targets. In March 2021, the Islamic Development Bank (IsDB) raised $2.5 billion with its Sustainability Sukuk, the proceeds of which will be allocated to eligible projects under the IsDB’s Sustainable Finance Framework, which incorporates supporting the transition to
