A note on the recently published “UAE Guiding principles on sustainable finance”

General context

The world is struggling with systemic challenges including slow economic growth, lack of infrastructure, inadequate technological development and a growing youth population. The economic impacts of these developments are far-reaching, and require targeted responses if countries are to meet their Sustainable Development Goals (SDG) commitments. In fact, the huge financing requirement to implement the SDG has increased from billions to trillions of US$, exceeding the capacity of any single institution or state. The public sector alone will not be able to close such important gap.

UAE has demonstrated its commitment to the pursuit of a sustainable growth pathway, including addressing climate change, through signing the Paris Agreement in 2016 and championing a number of initiatives, such as the UAE Green Agenda 2015-2030, the National Climate Change Plan (2017-2050), the Dubai Declaration (2016), and the Abu Dhabi Sustainable Finance Declaration (2019).

The UAE Guiding principles on sustainable finance aim to facilitate the country’s transition to a more sustainable economy and help organizations to develop strategies which re-orientate and diversify the economy, help mitigate risks of reduced global demand for oil, adapt to the physical risks of climate change and explore the new investment opportunities it presents. These voluntary principles represent the shared views of the financial regulatory authorities in the UAE including the Central Bank of the, Dubai Financial Services Authority and the Insurance Authority.

Summary of the Guiding principles

Principle 1: Integration of ESG Factors into Governance, Strategy and Risk Management

Financial companies are encouraged to incorporate ESG factors into their governance, risk management framework and strategies by:

  • Identifying and considering opportunities, as well as any associated risks and threats, afforded by ESG-compliant investing.
  • Integrating consideration of opportunities and risks from ESG factors at all levels of organizations’ businesses, strategy and financial planning where such information is material; and
  • Enhancing the organization’s ESG performance through the development and enhancement of suitable products, services and otherwise promoting sustainability in all organizations’ activities.

Principle 2: Minimum Eligibility Requirements

This principle clarifies the minimum components that should be present in a product categorized as ‘sustainable.

  • Process for Project Evaluation/Selection
  • Use of Proceeds
  • Management of Proceeds
  • Recording, disclosing and reporting:

Principle 3: Promotion of Appropriate ESG-Related Reporting and Disclosures

This principle seeks to encourage financial organizations to produce timely and relevant information on key ESG metrics. Such reporting would aim to disclose ESG-specific risks, processes, initiatives and performance, in accordance with internationally recognized reporting standards of financially, environmentally or socially material information

The way forward

UAE Sustainable finance taxonomy

The Guiding Principles encourage issuers to rely on internationally recognized standards and taxonomies such as the Principles for Responsible Banking, the Principles for Responsible Investment and The Green Bonds Principles. In the future, the UAE Authorities shall adopt a specific taxonomy Sustainable finance for in the country.

Moving from voluntary to compulsory

The Guiding Principles are so far voluntary. Next steps may include more compulsory guidelines and policies, to encourage the UAE financial firms to develop strategies to incorporate ESG considerations into their core business activities.

Ideas for Action 2019 : Financing and Implementing Sustainable Development

Source : World Bank

The Ideas for Action competition is an initiative in which young people submit their proposals for implementing SDGs. The attached report presents the 2019 winner projects that were selected from more than 3,000 proposals, which included over 21,000 participants from 142 countries.

The six winning (and mind blowing) ideas are:

  • Fetosense and U- Act: Novel Solutions for Monitoring Fetal Heart Rate and Uterine Activity to Reduce Neonatal Morbidity and Mortality
  • Using Location Intelligence to Solve the Urban Sanitation Crisis
  • WellPower: A Sustainable and Scalable Approach to Addressing the Water Crisis in Kenya Using an Innovative Smartphone App– Based Clean Water Delivery Network
  • The Eco Panplas Solution
  • Ekomuro H2O+: Collecting Rainwater in Used PET Containers in poor urban areas
  • DamoGO: Implementation of Mobile app–based Technology to Tackle Food Waste in the Republic of Korea and Southeast Asian Countries

The ideas are presented through the following perspectives:

  • Problem and context
  • Solution
  • Implementation and application
  • Scaling up the solution
  • Challenges and mitigations

For more details, kindly download the report “Ideas for Action 2019 Financing and Implementing Sustainable Development” by the World Bank

Station de dessalement d’Agadir : Nous n’avons pas le choix mais … !

De quoi s’agit-il ?

  • Une station de dessalement de l’eau de mer avec les caractéristiques suivantes :
    • Capacité totale à terme : 400 000 m3/jour 
    • 50% sera destinée à l’agriculture (irrigation de 15000 ha)
    • 50 % sera destinée aux ménages
    • Investissement de 4,4 milliards de DH à travers un partenariat public-privé
    • Date prévisionnelle de mise en production : Juillet 2021
    • Alimentation de la station à partir des énergies renouvelables
  • Il existe déjà des stations opérationnelles au Maroc. Mais celle-ci se distingue par sa taille même à l’échelle du bassin méditerranéen

Pourquoi nous n’avons pas le choix ?

  • Ressources hydrauliques insuffisantes dans la région du Souss-Massa
    • Irrégularité des précipitations
    • Niveau très bas des nappes à cause de la surexploitation
  • Augmentation de la demande au niveau des ménages et des exploitations agricoles
  • Projet déterminant pour préserver les activités économiques implantées dans la région ainsi que les emplois

Quels challenges ?

  • Le principal défi est celle du coût du m3 eau produite pour le secteur agricole (5 DH/mètre-cube) qui de toutes les façons serait plus cher que le coût d’exploitation des nappes ou ceux des rivières / pluies
    • Implication : Est ce que les cultures d’agrumes et maraîchères, gourmandes en eau, seront toujours rentables ?
    • 3 options s’offrent à nous :
      • 1) Rationalisation de l’utilisation de l’eau à travers des technologies modernes d’irrigation
      • 2) Recours à des cultures moins gourmandes en eau avec plus valeur ajoutée sur le marché local et à l’export
      • 3) Augmentation des rendements des cultures pour absorber le surcoût en approvisionnement en eau
  • Le défi écologique est également un point à clarifier pour ce projet. En effet, Le dessalement implique des rejets de saumure (solution avec forte concentration de sel) en très grandes quantités dans les océans. Sachant que la région de Souss est connue pour son potentiel halieutique, il est légitime de se poser la question de l’impact du projet sur les écosystèmes marins de la région

Climate change deniers should watch this!

A New research in AGU’s journal Geophysical Research Letters finds ice in the Arctic Ocean north of Greenland is more mobile than previously thought, as ocean currents and atmospheric winds are likely transporting the old, thick ice found there to other parts of the Arctic. As a result, ice mass in the area – the last place researchers think will lose its year-round ice cover – is declining twice as fast as ice in the rest of the Arctic, according to the new findings.

This visualization shows the age of the Arctic sea ice between 1984 and 2019. Younger sea ice, or first-year ice, is shown in a dark shade of blue while the ice that is four years old or older is shown as white. A graph displayed in the upper left corner quantifies the area covered by sea ice four or more years old in millions of square kilometers.

More info on the research

Points clés de mon intervention lors de la rencontre organisée à la chambre des représentants intitulée « Bilan de la banque participative au Maroc après 30 mois du lancement »

Il n’est pas possible de réaliser une évaluation objective du bilan des institutions financières participatives marocaines car nous ne disposons pas d’une stratégie nationale de ce secteur avec des objectifs mesurables.

Cependant, nous sommes en mesure d’apporter une première lecture du bilan à la base des réalisations commerciales des banques participatives depuis plus de 2 ans. Il est à noter qu’à ce jour, les parts de marché des banques participatives au niveau des dépôts et des financements ne dépassent pas 1% du total du marché bancaire marocain. Par ailleurs, les banques participatives, n’arrivent pas à régler la problématique du taux de couverture des financements par les dépôts non rémunérés, ce qui impacte leur compétitivité sur le marché. Finalement, pour l’instant, le positionnement des banques participatives et orienté vers les particuliers avec une concentration très importante sur le secteur immobilier.

A la lumière des expériences internationales et à la base de l’analyse des résultats des banques participatives marocaines, mes recommandations ont porté sur les points suivants :

  • Il est impératif de développer une stratégie marocaine de finance participative au Maroc et en Afrique.  Cette stratégie couvrirait l’ensemble de l’écosystème de la finance participative (banque, assurance, marché des capitaux et social) et veillerait à la coordination et la cohérence entre ces différentes composantes. Sans une stratégie pareille, le pays ne tirera pas profit du potentiel de cette industrie au niveau national e continental. Il est à rappeler que tous les pays qui ont réussi dans ce domaine disposent d’une vision stratégique de la finance participative
  • Les banques participatives devraient placer les entreprises, en particulier les petites et moyennes entreprises, au centre de leurs intérêts et ce pour deux raisons. Premièrement, les services à l’entreprise génèrent une rémunération plus avantageuse et des encours plus importants que ceux adressés aux particuliers.   Deuxièmement, l’impact économique, social et environnemental de la finance participative ne se réalise qu’à travers le financement des entreprises
  • En continuité par rapport au point précédent, les banques participatives devraient disposer d’un positionnement leader sur la finance éthique dite également durable et responsable. En effet, depuis la crise financière de 2008, les paradigmes fondateurs du monde financier sont remis en question. Par exemple, la finance est-elle un moyen ou une fin en soi ? Quels types d’intégration la finance devrait-elle avoir avec l’économie réelle ? La finance participative dispose des fondamentaux nécessaires pour non seulement répondre à ces questions mais aussi pour être un acteur de premier plan sur ces thématiques
  • Dans un monde marqué par la quatrième révolution industrielle, le positionnement sur les Fintechs (technologies financières) n’est pas un choix mais plutôt une obligation dans un marché financier tiré désormais, notamment, par l’intelligence artificielle, le mobile, les plateformes et la blockchain. Ce positionnement est d’autant plus pertinent pour les banques participatives car elles sont plus agiles car elles sont plus jeunes
  • D’une manière transversale, le marketing reste une pièce maitresse pour la réussite des initiatives présentées ci-dessus

Book review : The age of knowledge by Idriss Aberkane

Idriss Aberkane, a French essayist, is known for his writings and lectures on the knowledge economy and neuroscience. His lasted book “L’age de la connaissance / the age of knowledge “is worth reading. The book seeks to dismiss two contemporary paradigms: “Produce or flourish” and “Nature or employment”.

The key takeaways from his last essay are the following:

  • Knowledge is more valuable than natural resources. This statement is clear when looking at the evolution of global companies ranking in the last two decades.
  • Fostering a knowledge economy should be the priority of any government: To support his argument, the author frequently uses the example of South Korea who own little natural resources yet is one of major global exporters globally thanks to Korean technological powerhouses. However paradoxical it may appear, South Korea exported 45 Billion USD worth of Processed petroleum oils in 2018 even though the country does not have oil reserves !
  • All revolutions / radical innovations go through three stages:  They are firstly considered ridiculous, secondly as dangerous and finally obvious. Think of slavery abolition and labor rights for instance.  
  • Knowledge dynamics follows three principles :
  1. The exchange of knowledge is positive sum : “When we share a material good we divide it, when we share an intangible good we multiply it”
  2. The exchange of knowledge is not instantaneous : Unlike physical good, the transfer of knowledge requires more time and energy
  3. The combination of knowledge is not linear : “The Whole is Greater than the Sum of its Parts”
  • Nature as a source of inspiration and one of knowledge economy applications : Nature is the largest deposit of knowledge on earth. The author is a strong supporter of Biomimetics, which is the imitation of the models, systems, and elements of nature for the purpose of solving complex human problems in locomotion, construction and architecture, structural materials, optics and agriculture to name a few.

The first ever Global Muslim Philanthropy Fund for Children

On 26 September 2019, UNICEF and the Islamic Development Bank (IsDB) launched an innovative fund that aims at reaching millions of children currently in need of humanitarian support in OIC countries. The idea of the fund was first announced last April during IsDB’s 44th Annual Meeting of Board of Governors in Marrakesh (Morocco).

Today, global humanitarian needs are at critical levels and children are especially vulnerable as they face the highest risk of violence, exploitation, disease and neglect. To address this need, the Global Muslim Philanthropy Fund for Children (GMPFC) will mobilize Islamic giving, including philanthropic and Zakat resources, towards humanitarian and resilience development programs that ensure the well-being of children. Projects include support for children in education, health and nutrition, water and sanitation, early childhood development, protection and youth empowerment. The fund will benefit from UNICEF’s on-the-ground presence and experience in all OIC countries.

This move from IsDB did not come as a surprise. It confirms IsDB’s President past commitments to position the bank as a catalyst in the achievement of SDG in OIC countries. The launch of GMPFC is a good news for the Islamic finance industry for two reasons. First, it sends a strong signal about the importance of Islamic finance active involvement in social issues. There no doubt that Islamic social finance has developed during the current decade, however, the industry achievements in the social sphere so far are not enough to address current social issues. Second, the GMPFC initiative confirms the Interest of large international organization such as UNICEF in Islamic finance and demonstrates that synergies with Islamic finance can play an important role in the achievement of SDGs. In the past, UNHCR (United Nations High Commissioner for Refugees) established a Zakat fund to alleviate the suffering of forcibly displaced people in OIC countries.

The fund, that will be administered by IsDB, seeks to raise US$250 million from private and public foundations, Zakat agencies and individuals. Although the fund purpose is clear, operational details have not been disclosed so far. In the coming weeks, the Islamic Finance industry and will be waiting for clarifications on the following questions:

  • What marketing approach will IsDB use to convince individuals to donate to the fund knowing that historically, IsDB has been dealing more with governments and businesses?
  • Which Fintech technologies will IsDB leverage to ensure transparency and efficiency?
  • What would be the fund priorities in the first years and what are the fund commitments in terms of impact (SDGs targets)?
  • What synergies will be built with the impact investing ecosystem in order to make the philanthropic funds more sustainable and more focused on income generating activities for beneficiaries rather than on simple cash transfers?

This article was first published in Islamic Finance news Volume 16 Issue 41 dated the 16th October 2019.

ESG, SRI, Impact investing…: Lost in terminology?

Source : http://www.lupuschick.com/terminology/

Despite all the dire consequence of the 2008 financial crisis, it did help to question the paradigms of modern days’ finance especially its role in addressing economic, social and environmental issues. As a result, multi-lateral development institutions, think tanks, academic institutions, regulators and financial players have undertaken various initiatives aiming at integrating sustainability and finance into a unified business model. The central focus has been to move beyond the “do well and then do good” approach as in corporate social responsibility to a “do well while doing good” approach that views sustainability as a strategic competitive advantage. Nowadays, concepts like ESG (environment, social and environment) investing; Socially Responsible Investing (SRI), Impact investing, mission-driven investing and responsible finance are gaining traction both in developed and developing countries and are even promoted by “traditional / orthodox” large financial players !  However, the finance and sustainability hype brought also confusion to investors looking for “double bottom line returns”. Are these concepts similar? If not, what are the differences between them? These questions are critical because the proliferation of terms related to financing and sustainability creates fuzziness that ultimately leads to inertia among investors and other market players. Therefore, clarifying the different concepts is key to the development of the impact finance industry.

In this post, I will focus on explaining the difference between ESG, SRI and Impact investing terms. Although, there are many others similar concepts used in the financial markets, the chosen terms are the most common.

ESG refers to the environmental, social, and governance practices of an investment that may have a material impact on the performance of that investment. The integration of ESG factors is used to enhance traditional financial analysis by identifying potential risks and opportunities beyond technical valuations. However, the main objective of ESG valuation remains maximizing financial performance.

Socially responsible investing goes one-step further than ESG by actively eliminating or selecting investments according to specific ethical guidelines. The underlying motive could be sharia compliance, personal values, or political beliefs. Unlike ESG analysis, which is valuation-centered, SRI usually uses ESG factors when applying negative screens on the investment universe. For example, an investor may wish to avoid companies engaged in firearms production, child labor or gambling.

Similar to SRI, impact investing also considers social and environmental effects. However, the difference is that impact investments are only made in companies, organizations or funds where the main purpose is to achieve positive impacts, alongside a financial return. In general, SRI is more concerned with negative screening whereas impact investing is more concerned with positive screening.

As part of the current initiatives to bring finance to its natural orientation, stakeholders (especially regulators) should not omit to take active steps to clarify the different concepts under the impact finance umbrella. Although, this effort looks pretty basic but it is much needed to transform the enthusiasm on impact finance into a more meaningful transformation.

This article was first published in Islamic Finance news Volume 16 Issue 39 dated the 2nd October 2019

Lessons learned from UNHCR Zakat fund

UNHCR (United Nations High Commissioner for Refugees) issued two months ago a landmark report on the potential of Zakat funds to alleviate the suffering of forcibly displaced people in OIC countries. The report aims at establishing the importance of giving Zakat to displaced people and at raising awareness of UNHCR’s role and aspirations in directing Zakat to its populations of concern.

In 2017, there were 68.5 million forcibly displaced persons globally, of which an estimated 40.8 million are Muslim. Unfortunately, conflicts and resulting displacements have led to a surge in poverty levels (SDG1), to a spike in malnutrition (SDG 2) and to the deterioration in the health and well-being of displaced populations (SDG3). Moreover, displaced refugees face educational barriers (SDG4) and are confronted with a lack of job opportunities in hosting countries (SDG8).

The UN has estimated the current Zakat given worldwide at $76 billion, which is modest in context of $1.7 trillion in wealth held by high net worth individuals in the Middle East, and separately, $2.5 trillion in assets held globally by the Islamic finance Industry. According to the UN, the global Zakat potential is around $356 billion.

75% of Zakat donations are commonly transferred directly from donor to recipient without the involvement of any Zakat collecting organizations. Hence, Zakat is an important source of philanthropic funds and Zakat industry has tremendous potential in addressing the funding requirements needed to achieve SDGs and humanitarian assistance programs, especially that refugees fall under at least four of the eight stipulations required by recipients of Zakat funds.

There are many lessons learned from the UNHCR zakat fund:

  • Adopting digital innovation: The UNHCR Zakat Fund recipients are registered and their iris scans are taken and used for cash distribution. Moreover, text messages are sent to beneficiary confirming that cash is available
  • Broadening the scope of collaboration across stakeholders: The Zakat fund is providing an important avenue for stakeholders (financial institutions, individuals, philanthropic organizations…) to direct their funds to address acute humanitarian needs
  • Improving the link between Zakat and humanitarian needs: The UNHCR zakat fund clarifies the link between Zakat and the most pressing humanitarian funding needs by relying on a transparent reporting and tracking system of Zakat funds destination
  • Leveraging effective distribution channels: If Zakat industry is to reach its full potential, partnerships with trustworthy organizations are a necessity. The involvement of leading organizations such as UNHCR in distributing funds enhances the impact of contributions, minimizes overhead allocations and improves efficiency

UNHCR zakat fund experience can be leveraged in addressing other social issues like education, economic empowerment and healthcare through specific zakat funds. More importantly, such initiatives can build synergies with impact investing funds in order to make zakat funds more sustainable and more focused on income generating activities for beneficiaries rather than on simple cash transfers.

NB: This article was published on page 17 of IFN Volume 16 Issue 24 dated the 19th June 2019.

J’ai lu : Vers une économie à trois zéros (Zéro pauvreté, Zéro chômage & Zéro émission carbone) du Pr. Muhammad Yunus

L’économiste Muhammad Yunus, prix Nobel de la paix en 2006, commence son livre par la critique du système capitaliste qui en dépit de ses apports est la source de plusieurs externalités négatives notamment l’amplification des inégalités sociales et économiques ainsi que le dérèglement climatique. De ce fait, pour Muhammad Yunus, il est nécessaire de repenser le modèle capitaliste afin de réconcilier les intérêts personnels et collectifs.

Le véhicule mis en avant dans le livre pour repenser le modèle capitaliste est l’entreprise sociale. L’entreprise sociale est définie comme une étant une entreprise qui fonctionne exactement comme une entreprise normale mais qui se distingue par deux caractéristiques :

  • Le but premier de l’entreprise sociale est de résoudre un problème social ou environnemental
  • Contrairement aux organisations caritatives, une entreprise sociale génère des bénéfices et vise à être financièrement autonome. S’affranchir du besoin constant de lever des fonds (comme dans le cadre des organisations philanthropiques) permet aux entreprises sociales de réinvestir leurs bénéfices pour générer un impact durable.

Ainsi, ce type d’organisation, à cheval entre le business et la philanthropie, ne vise pas à enrichir les investisseurs mais à améliorer durablement la vie des gens et à rendre le monde meilleur.

Dans le livre, Muhammad Yunus présente plusieurs exemples d’entreprises sociales opérant par exemple dans les énergies renouvelables, le recyclage, l’eau et plus généralement la capacitation économique. Il insiste par ailleurs sur trois moteurs pour permettre à l’entreprise sociale de transformer le monde : Les jeunes, la technologie et la bonne gouvernance & les droits de l’Homme.

Au-delà des concepts très intéressants évoqués dans ce livre en relation avec l’entreprise sociale, je retiens personnellement trois conclusions :

  • Quel intérêt du savoir si nous ne l’appliquons pas pour améliorer la vie des gens ? Avant de fonder Grameen Bank (littéralement la banque du village) Pr. Yunus était un professeur d’économie à l’université de Chittagong au Bengladesh. Le déclic s’est produit quand il a remis en cause l’intérêt d’enseigner à ses étudiants des théories économiques alors que des villages avoisinants souffraient d’une extrême pauvreté et n’avaient aucun accès aux services financiers
  • Les défis économiques, sociaux et environnementaux que nous affrontons sont complexes, interdépendants et transfrontaliers. Puisque l’intervention des gouvernements n’est pas et ne sera jamais suffisante, il est plus que jamais nécessaire de mobiliser l’ensemble des parties prenantes pour relever les défis y compris les sociétés civiles et les entreprises (sociales et conventionnelles)
  • Comme le dit Muhammad Yunus dans son livre, si nous imaginons un monde idéal, il y a une chance qu’une partie de cet idéal soit réalisée.  Si nous n’imaginons rien, il y a très peu de chance que les choses changent !  Aussi évident cela puisse paraitre, l’espoir est non seulement une cure psychologique mais aussi une condition sine qua non pour espérer de nous en sortir un jour